No light at the end of this tunnel - reflecting on failed infrastructure

The big risk and high cost of thinking big.
I flagged a concern in the last post about the fiscal and productivity impacts of projects that don’t stack up economically. The risk is that the post-Covid recovery leads to indiscriminate infrastructure spending which would compound the already severe fiscal effect of essential deficit spending on public health, household incomes, and business support .

Given their dismal track record here and overseas, it is likely that large infrastructure and especially transport projects will dig the fiscal hole deeper without delivering the benefits that might help the country climb out of it. We know that the Think Big energy projects of the early 1980s precipitated a foreign exchange crisis.  Had they been economically sound the ten hard years of economic restructuring that followed may have been moderated. 

Looking back to go forward
There is no sense in trying to replicate the past.  But it does make sense to learn from it.

In this case, it seems the lesson was not learned. I posted several critiques of Auckland’s Central Rail project back in 2011 and 2012. Today we can see just how big a cost ignoring past infrastructure failures has imposed - so far - in the case of the CRL if only to temper a new found enthusiasm for thinking big.

Auckland’s Central Rail Link, 25c in the dollar?
How ever long it takes to finish and however much it gets used, Auckland's CRL is an economic disaster.

The first cost estimate for the tunnel was $2.3bn, released by Auckland Council in 2011. That did not account for the prior expenditure of $500m on electrification to make the tunnel environmentally acceptable, or the consequential costs of purchasing new rolling stock, extending and updating existing stations, and compensating business owners badly impacted by prolonged civil engineering works. 

Even with those omissions, though, the project was deemed unworthy of government support by Transport Minister Brownlee, with “a decidedly weak benefit:cost ratio of just 44 cents in the dollar”. 

In any case, the estimated tunnel benefit:cost ratio turns out to have been on the high side.  That the project was under-specified is evident in the 2018 announcement that platforms had to be lengthened, adding around $250m to the costs. 

And it was under-costed.  By April 2019 the cost estimate was up to $4.4bn.  This covered construction cost increases of $327m, “non-direct costs” of $130m, and a new provision for escalation and contingencies of $310m.

Converting the original budget and additional costs to December 2019 dollars (using the price index for construction inputs) reveals an over-run of around $1.7bn, 70% ahead of the original budget after accounting for inflation.  Given that there has been no suggestion that the projected benefits will increase, the potential economic return now sits at around 25c in the dollar.

We can expect further cost escalation given that completion date (prior to Covid19) was pushed out from 2021 to 2024. This is likely to be extended further by pandemic-related constraints including disruption to contractors, labour, and supply chains, and by increased competition from local and international “shovel-ready projects”. That's more bad news for those central city businesses that have seen revenues plummet in the face of ongoing disruption by the prolonged street works.

Strong growth rates are misleading
Let's consider potential benefits in light of the past ten years' public transport performance.  The introduction of electric units in 2014 and station and service improvements across the network saw strong relative growth in rail patronage. It seems the benefits of improved service levels on the network are already being reaped without the $4.4+bn CRL.

However, this needs to be kept put in perspective. While rail boardings almost tripled over the ten years to February 2020, the real gains were in bus use (70% of the total):

     Source: https://at.govt.nz/about-us/reports-publications/at-metro-patronage-report/

Significantly, 87% of gains in bus patronage were in “frequent, connector, local, targeted” services according to Auckland Transport.  This strengthens the argument for flexible bus services rather than high cost, fixed route rail. 

It is also likely that gains to rail included a transfer of some passengers from buses so that the impact on car use and the increase in public transport use will be less than indicated by increased trips by rail. 

How important is rail to central city commuting?
According to the 2018 Census, a relatively low 55% of work trips by the 159,000 people working in the Waitemata Local Board Area were by private or company vehicle. Of those, 6% of were made by passengers.  Company vehicles accounted for 11% of the total. As these vehicles are most likely required for work purposes their occupants are unlikely to transfer to PT. 

This means that the market for improved rail and bus services is just 46% of possible commuter trips .  Public transport already has a high penetration rate of 29% of commuters working in Waitemata.  However, less than a third of these were by rail, despite the relative growth in numbers. The prospects of getting many of the remaining private car users to shift to rail are low. Rail patronage may have to grow mainly through trips transferring from buses.

Narrowing the focus , there were 18,000 commuters to the inner city in 2018. Only 19% relied on a private or company vehicle (between 3,100 and 3,200 vehicles) in 2018. The likelihood of getting a significant reduction in this number is slim. 

A surprisingly high 50% said they walked to work, while 22% used public transport (only a fifth of those by rail).  The strategy of getting more inner city workers living there seems to be working. Ironically, it’s a success that raises questions over expectations that investment in the CRL will influence travel in the inner city. 

Will CRL even deliver a significant mode shift?
The Council wants people out of cars.  Whether or not that's achievable - or even reasonable  - was the CRL the way to achieve it?

Apart from the fact that the project is uneconomic and fiscally damaging, the fact is that over three quarters of Auckland’s labour force works outside Waitemata Local Board area, with 77% of them relying on private or company vehicles to get to work.  

Even if the billions invested into the CRL were to effect a significant lift in public transport patronage, it is a spend that could have been much more effectively directed towards offering  more flexible bus-based transit serving the wider urban area.

And that was before Covid19.
Today, the lack of flexibility of rail comes into even sharper focus in light of the potential changes in working practices, the diminished appeal of high density living, commuting, and working, possible land use changes, and the imposition of social distancing for the foreseeable future. These prospects, along with post-Covid19 delays in constriction, mean that the CRL is likely to fall even further short of helping to achieve “Government’s plans for higher economic productivity and the Auckland Plan vision of being the world’s most liveable city” (City Rail Link, Business Case 2015).

Spending $4.4bn (and climbing) on lifting the capacity of rail patronage by building the  CRL tunnel looks like an economic and and fiscal fail. It is also looking like a major policy fail.

Which brings us to the even bigger white elephant in the room, Auckland's proposed light rail. This is the subject of my next post.

The Costs of Consolidation - Watching a Slow Train Wreck

The perils of Thinking Big
Creating a single city to administer Auckland’s local affairs was always going to be an expensive exercise.  Efficiencies were possible, but by no means guaranteed, and unlikely to exceed the increase in costs.  As decision making becomes more centralised, it becomes less sensitive to the needs of those it is meant to serve.  Auckland is well down that track.  And announcements of cut-backs around the Mayor’s latest budget – and the coincidence of ever-expanding rates and debt – highlight the fallacy of chasing efficiency by creating large administrative and governance structures that become remote from the community.

Administrative efficiencies?  It doesn’t appear so

Let’s revisit that prognosis.  First, administrative efficiencies are not guaranteed by consolidating councils as the tiers of administration build up and channels of communication proliferate (along with opportunities for miscommunication) in a large council. The need for internal alignment begets managers and higher employment costs, impedes external alignment, and slows processes. Its interesting that according to Statistics Auckland local government employment in February 2013 was 38% higher than in 2010.  So much for the much heralded reduction in jobs.

Technical efficiencies – for whom?

Second, consolidating councils suggests that technical efficiencies can be pursued by way of economies of scale from consolidating the delivery of some local services like supplying water, maintaining roads and road corridors, and looking after parks.  But not if competition diminishes, labour markets are diluted, and monopolists (council owned or otherwise) come to dominate local services and utilities.  All too often possible technical gains from consolidation in the slow-moving, predictable, and unchallenging market for local government services get captured by the suppliers in higher wages, fancier buildings, glossier PR budgets, and bigger dividends, not the public. Increasing costs suggest that something like this is happening in Auckland.

Misdirected spending?  Too right

Third, there is a risk that the consequences of inefficient resource allocation will have further reaching effects in a large council than a small one. 

A local council investing, say, $30 or $40m in what may become an under-utilised sports stadium, for example, is less damaging than a larger council spending many more millions on super projects or major infrastructure of doubtful merit.  The risks of getting it wrong and the regrets from doing so are much higher.  A council with a larger revenue base may be subject to less fiscal discipline than a council with a small one.  It may favour larger “regional” projects with lower pay-back than the same sort of resources allocated to more,  smaller local projects.

And region-wide projects are likely to be subject to greater debate and scrutiny if they impact on multiple local councils areas than if they are conceived and delivered without the same level of debate by a large single council.  The delays and deferrals associated with contestability by constituent councils in a region may deliver better outcomes than the full-steam ahead approach of a single agency.

So is Auckland still on track?

Unfortunately, Auckland has been hit by a triple whammy. Council employment has been growing.  The costs of utilities and services have been increasing.  And the city is getting itself into some debatable capital commitments, lifting long-term liabilities. 

The central rail link is one of these.  And even as council costs continue to rise, it seems that this uber-project is sacrosanct.  Yet the case for it is constructed on highly debatable assumptions about where we might live and where we might work 10, 20, or 30 years hence. 

All aboard?
We are assured, though, that planned stations will double the number of people with access to the rail. Let’s think about that.  For a start, these stations are planned mainly in inner city areas already well served by bus and with relatively high public transport patronage. 

 

Further, even assuming that passenger numbers double as a result of better connections in 2013 that would have lifted rail commuters by 9,500 to 19,000.  According to Census figures this would be equivalent to just 4% of private transport users in 2013 (a gain of 2%) and less than 60% of the 33,000 bus users. 

There is a limit to the possible gains because of the rail focus on the CBD where already one third of commuters use public transport.  In 2013 another 13% walked or biked to work.  That’s a pretty good penetration rate of non-car modes.  Spending $2-3bn is not going to lift it significantly.

 

All at what cost???

And I’m not sure that the bill for the rail link will stop at $3bn.  Large, complex projects have a habit of running over time and budget.  The estimates for this one keep changing, highlighting the uncertainty and consequent fiscal risks around it. 

Given an uneconomic investment to start with, we are faced with raising funds elsewhere.  The taxpayer has already been lobbied, and now we are looking at alternative taxes (or tolls) simply because we know that charging users for the true cost of services is a fast track to running on empty. 

As well as additional charges on ratepayers and commuters (whether on public transport or in cars) we will further ramp up city debt.  Alongside the resulting interest commitments will be a raft of recurring costs – operations, maintenance, and depreciation – which we know will never be met by users.  This is a very real threat to a fiscally sustainable Auckland.

The CBD: going for bust

On top of all that, the rail connection is justified primarily as a service to the CBD, where much of the Council’s planned capital spending is already concentrated. But only 2% of the city’s population actually lives there, and 12% of its workforce works there.  The residents tend to be young, often immigrants, and transient.  The employees tend to be better paid and potentially more mobile than many of their counterparts in the suburbs. 

This vision of a city defined by its CBD raises major resource allocation questions for Auckland.  The CBD is the geographical choke point of the Isthmus, a regional bottleneck.  It is an area of ageing infrastructure, reclaimed land, and high building densities served by arterial roads that are increasingly congested, with critical roads subject to occasional inundation. 

I note that the driver of this singular vision, the Mayor, was elected into office by only 24% of eligible voters, or 17% of the population.  That, I would expect, should lead to a more measured approach than one that seeks a place on the world stage with a strategy that calls for sacrifices from the many to pander to the gratification of a few.  The CBD is already a great place to visit, but how much more must we mortgage as a community to pursue this particular vision. 

The risks grow 

To sustain the vision of a city defined by its CBD we are cutting back on the quantum and quality of works and services that have a more direct impact on the majority of Aucklanders. Deferral of drainage works for example, reduction of maintenance of our suburban corridors, a failure to expedite completion of critical roads not focused on the CBD, or a lower level of care of suburban parks and reserves are all more likely to impact on most Aucklanders on a daily basis. 

Can a strategy of spending, growing indebtedness, and increasing rates to finance the nice-to-have, me-too adornments (and liabilities) of much bigger cities really offset the reduction in the liveability that will come from cutting back on the basics while boosting the long-term cost of living in Auckland?