End of the line for Auckland light rail?

Rethinking the future
While New Zealand has restored modest levels of domestic activity following the Covid19 outbreak, prospects for full recovery are undermined not just by continuing border threats, by the twin blows of falling global trade and rising global indebtedness. Even if the country remains largely virus-free, it faces ruptures to the economy and employment, migration and housing, commuting and travel. Under these circumstances many of the shovel-ready projects placed before Government for funding may be of minimal long-term value, leading instead to additional fiscal strain and lower productivity.

It is time for a real rethink.

Rethinking Auckland’s Public Transport

This post suggests that Auckland can no longer afford to indulge in think big public transport projects. First, it again flags the need to shelve Auckland’s Central Rail Link. 

It then lists the documents supporting various light rail rapid transit options, which led to the questionable government commitment to light rail, reflected now in the postponement of the Minister’s decision on who might build light rail to the airport.  But if that decision is made in due course, this would lead to a greater fiscal disaster than the CRL. LRT should now be jettisoned.

Instead, it may be time to revisit the prospect for a modern, bus-based transit system to better respond to major shifts in demand and reduce the exposure of ratepayers and taxpayers to a fiscal black hole.

Back track on this one first
For starters, it makes sense for Auckland to follow economist Tim Hazeldine’s advice and pull the plug on Auckland’s Central Rail Link. The cost of shelving it should be far less than the cost of completing it.

As for LRT, do not even get started
It also makes sense to abandon plans for light rail transit. A solution in search of a problem, there was never a robust case for it.  And even if investment funds are willing to front up with the dollars, ratepayers (and taxpayers) will struggle to meet the returns they will require to justify such a high-cost, high-risk project. 

It appears that LRT has been shunted aside by the government for the moment, athough evidently officials continue to work on it. 
Now, though, is the time to finally lock it away.

Tracking light rail proposals
I intended to review the economic rationale for the LRT but could not pin down exactly what we are going to get, for how much, and why. So, all I can offer are conclusions based on reviewing as much of the associated documents as I could find.

Here is what I covered (with links).

·         The Auckland Transport Plan (Auckland Regional Transport Authority, 2009) suggested rapid transit would be needed in the long-term to relieve commuting congestion on four cross-city routes.

·         The Auckland Regional Land Transport Strategy 2010-2040 (Auckland Transport) firmed up on these prospects with proposed construction between 2031-2040.

·         The Auckland Regional Land Transport Plan 2015-2025 (Auckland Transport) switched tracks, promoting LRT to fill the gap in services between the inner suburbs and the CBD. 

·         The Auckland Central Access Plan (CAP) Programme Business Case (Auckland Transport, March 2016) proposed “higher capacity rapid transit” services on the isthmus.

·         A Peer Review (April 2016) supported the CAP but noted that it was based on a heavy focus on public transport; reliance on land use assumptions from the 2011 Auckland Plan (Auckland Council), and most significantly, ignored affordability, which “should be addressed as soon as possible” (p2).

·         The South-western Multi-Modal Airport Rapid Transit: Draft Indicative Business Case (SMART, Jacobs NZ Ltd, June 2016, for Auckland Transport) compared the economic and financial performance of heavy rail, light rail, and bus-based rapid transit for the CBD to Auckland Airport route.  While LRT was favoured, further investigation of Bus Rapid Transit was also recommended.

·         The Advanced Bus Solution (LEK, January 2017, for NZTA) specified a more advanced system offering a higher level of service over a larger catchment. It indicated an incremental B:C ratio of 1.28 from the improvements proposed. While different discount rates prevent detailed reconciliation with the SMART report, the analysis suggests that a bus option could match LRT in economic terms.

·         The Advanced Bus Solution Report (Auckland Transport, February 2017) suggested the LEK solution may only be sufficient until the 2040s, and involved technical uncertainties and transition risks. It instead proposed staged transition from bus to light rail.

·         The Auckland Transport Alignment Project (ATAP), a collaboration between Auckland Council and central government, advanced rapid rail to Auckland Airport and Westgate as part of the rapid transit package in its 2018 report.

·         The Auckland Regional Land Transport Plan 2018-2028 confirmed these routes.

·         The final ATAP report (2019) called for a $8.4bn investment in rapid transit over ten years (excluding the western line).  This included heavy rail, busways, and light-rail. The cost of light rail, scheduled post-2024, was not identified.

Government gets on board
In 2015 the government and Auckland Council agreed to align transport spending for projected growth of 700,000 people over 30 years. The government committed to $18.5bn of $28bn total funding called for by 2028. The Minister of Transport then proposed prioritising the CBD-Airport link from this “indicative package” (Cabinet Economic Development Committee, July 2018).  He requested NZTA to prepare a business case, and called for measures to accelerate the project.

Treasury and the Ministry of Transport reported on an early draft of the business case in November 2018. They noted expectations for “balanced and robust” economic analysis, a “rigorous process” for considering risks to government, “clearly articulated financial implications”, and “appropriate” governance arrangements. While their advice was redacted, the report said that the NZTA Board was unlikely to be “in a position to resolve all issues that a business case requires as a minimum” at its November meeting.

And off again?
It appears that the rigorous analysis recommended by Treasury[1] was sidestepped. Instead, in June 2019 two potential suppliers were announced for the City-Airport LRT, with proposals received in August from NZTA itself and from NZ Infra, a joint venture between Canadian investors CDPQ Infra and the NZ Superannuation Fund. The NZ Infra pitch raised the prospect of funding it off the books.

A decision on the preferred partner was not made, although $1.8bn was committed to seed funding.  However, the total cost of just this link was estimated at $6bn, suggesting earlier estimates were wildly out and that LRT would never be economically rational, and throwing doubt on delivery of ATAP’s $8.4bn full rapid transit package.

In October 2019, it was revealed that the NZ Infra proposal was likely to provide for grade separation (including undergrounding) at a significantly higher cost than the at-grade NZTA proposal (costing perhaps $10bn). While this has the advantage of retaining capacity on existing corridors for other modes and might lead to lower long-term operating costs, it is impossible to see it stacking up in economic terms.  Add in likely cost over-runs and it is surely a fiscal step too far.

Hence, reported splits in the governing coalition over the issue in May 2020 are hardly surprising. Labour is reportedly leaned towards the NZ Infra PPP proposal while junior partner New Zealand First appeared unwilling to commit to any LRT.

LRT at any cost?
Despite changing technical and financial parameters, and the uncertainties of a post-Covid19 world, the NZ Super Fund remains “enthusiastic about” Auckland LRT. That is not surprising: securing long-term, government-guaranteed returns is commercially clever in an uncertain, recessionary economic environment in which equities so much riskier and bonds so much less rewarding. But it wouldnot work for Auckland and Aucklanders.

So, what can we take from this history?
There is considerable variation in the policy trail regarding what LRT services might be required, and in what order: long-term cross-regional commuting? linking the inner Isthmus suburbs and the CBD? lifting capacity between the outer Isthmus suburbs and the CBD? or linking other employment centres (Westgate, the airport) with the CBD? This makes it difficult to trace the costs – and economics – of even the version currently being advanced, the CBD-airport LRT.

After more than a decade of official deliberation, we have no idea what the configuration of regional LRT will be, or of the costs, but we can be confident that they will be a lot more than the figures bandied around at present. (With four years to go before completion, the CRL is already 70% over the original budget). One way or another ratepayers and taxpayers will be footing a substantial bill if LRT development proceeds. [2] If nothing else, uncertainty over the future of international travel and the recovery of aviation mean that the time has come to dump the proposal for a CBD -airport line.

The public has been sold the sizzle but there is no sausage.

Time to take the bus?

Just as disturbing as undue preoccupation with LRT is the failure to fully evaluate advanced bus transit. This would offer the ability to invest incrementally to cater for short and medium-term shifts in public transport demand.  It provides opportunities to:

·         Adopt new technologies as they evolve, continuously advancing service levels;

·         Respond to major changes in land use and patronage;

·         Fashion a network that provides wide-ranging connections across Auckland’s distinctive geography; and

·         Align investment and funding more clearly with benefits. 

At the same time, a bus-based transit system would substantially lower economic and fiscal risk compared with large scale, fixed-track solutions.

If nothing else, the shock of Covid19 provides the opportunity – and excuse –to avoid repeating the Central Rail Link experiment. The future is more likely to be about demand-responsive rolling stock using largely existing corridors to serve communities and commercial activities across Auckland, rather  than carving out new routes or reducing the flexibility and accessibility of existing arterials to favour limited corridors of residents and prop up values in selected commercial destinations.

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[1]    “Given the size of the project, the fiscal risks and the build and operational challenges, we consider a strong examination of the implementation choices is essential” Treasury report T2018/1002

[2]    The CRL experience, Treasury advice, and global experience all point to the likelihood of costs blowing out, this in a period when it is almost inevitable that patronage will be less than projected.

Bigger City, Bigger Bills

In brief ...
The last posting outlined rapid spending growth by Auckland Council since created by amalgamating seven units of local government and one regional council.  This post demonstrates that while rates increased only a little ahead of population growth, the boost in investment by the Council since it was created has been funded by growing charges for services and by borrowing. While the finances have been well-managed and debt remains reasonable, there is a question-mark over how long the rapid growth and cost of council activities can outpace the growth of the community and economy.  

This raises a number of questions. The key question: at what point will excessive council spending begin to limit the growth it aims to cater for? 

Keeping rates down

Auckland Council costs have gone up by around 26% over just six years by my estimate. Surely the ratepayers will be rebelling against that? 

Well, not necessarily. Over the same period, rates collected only went up 17% (in 2018 dollars), or 2.6% per year, roughly in line with population growth of 15%.  (That’s not to say they didn’t go up by more in some areas as the Council sought to equalise them across the newly formed city [1]).

But total council revenue went up a lot more, by 51% (in 2018 dollars, based on council annual reports). So, rates accounted for a falling share of revenue, dropping from almost half of the total in 2012 to 38% in 2018 (Figure 1).

Figure 1: Auckland Rates and Other Income, 2012-2018

Citizens are paying in other ways

Charges for local services went up by 44%, or $385m. Most of this is also paid by residents, who have little choice when it comes to water and waste or transport charges.  At the same time, development and financial contributions went up $108m or 150%. While this reflects city growth (and maybe some catch-up from development delayed while the Council was trying to sort out where growth might go), these are paid for mainly by home buyers (especially first home buyers): current and future city ratepayers. 

Figure 2: Main Components of Revenue, 20-12-2018

Building assets – and liabilities

Interestingly, vested assets accounted for 33% of revenue growth reported and 13% of total revenue in 2018 ($510m), up from just 2% in 2012.  Roads, sewer and water pipes (and pumps), reserves and parks, and so forth are transferred to Council at “fair value”as development proceeds .  They are reflected in the balance sheet as a component of non-current assets.

Vested assets are ultimately funded from new property purchase (in addition to development fees, also passed on in property prices).

One way or another, residents pay.

Vested assets are also an ongoing liability given the commitment to maintain them and fund their depreciation.  It is critical that they are well-placed and of a standard that will carry them well into the future if rates are not to escalate indefinitely.

Lifting investment

The Council’s accounts tell a story of recent growth. To better understand how growth is funded, and sidestep accounting conventions which see, for example, expenditure reflected in a reduction in the value of assets and vested assets recorded as revenue, it is useful to look at cash flow figures (Figure 3).

Figure 3: Auckland Council Cash Flow, 2012-2018

They indicate a 36% increase in revenue from rates, grants, fees, and charges between 2012 and 2018, supplemented by borrowings.  Annual borrowing declined significantly over the period, from 26% of cash in 2012 to only 6% in 2018. Presumably increased fees and charges have facilitated this, together with adoption of more diverse financial instruments, the latter reflected in the growth of the Other category (including dividends, interest, and $218m from the Crown in 2018). 

Keeping the lid on – so far

At the same time, the ongoing business of the Council is reflected in just 6% growth in the costs of suppliers and employees, compared with 21% growth in investment.  The fastest growing costs have been interest payments, more than doubling, although at this stage they account for only 10% of total spending (Figure 3). Annual borrowings (net of repayments) have trended down. 

Figure 4: Annual Borrowing and Interest Payments, 2012-2018

Long-term debt was up by $3.3bn (70%) in 2018, to $7.9bn, and total borrowings up $4.3bn to $10.8bn.  Increased indebtedness is reflected in the increased value of assets, up $13bn (35%) including revaluations,  to $50.2bn. Overall, ratepayer equity remained a relatively high 67% in 2018, although well down from an even healthier 74% six years earlier.

It’s not clear, though, whether this debt is doing much for the community. It needs to be.  Total borrowing per head of population (using StatsNZ June population estimates) grew by 76%, from $3,631 in 2012 to $6,384 in 2018. 

One way of charting the value of debt is to plot it against GDP, with the expectation that any improvements in public infrastructure and services might be reflected in output some time later.  The time span considered and a lag in the availbality of regional GDP data limits such an assessment.  However, short-term movements offer no evidence of a productivity benefit yet. Comparing June council debt with regional GDP 21 months later (possible only from June 2011 for debt to the four years to March 2016 for GDP) shows a 62% increase in debt compared with a 20% increase in GDP .  As measured by Stats NZ, Auckland's GDP growth was strong, but not as strong as the growth in the Council’s indebtedness.

Where to from here? 

The Council has kept the lid on its finances, despite the growth of debt, through moderately higher rates and sharply increased fees and charges.  This year it introduced even more ways to pay.  It is set to selectively tax income (on properties providing tourism accommodation) and mobility (levying road user charges over and above road costs which are already funded by the Government’s Road User Charges).

The Super City is delivering for the moment – at least in volume – but at what long-term cost? An appetite for increasing charges and growing debt to support rapid spending growth raises questions.  For example:

·        How much of the spending addresses the Council’s core business and how much is discretionary? And how is spending prioritised?

·       What is the quality of investment, both by the Council and by developers in new public infrastructure ? What are the long-term implications of the new wave of infrastructure for long-term spending on maintenance and funding depreciation?

·       What happens if population-based demand falls below expectations?  The high population projections justifying much of the current spending are by no means guaranteed.  If growth in resident numbers falls short, the surge in civic investment could stymie growth through the costs it imposes on households and businesses.

·      How well will current investments meet the expectations of future Aucklanders about how and where they will live, work, and play?.  Or, are we cementing current preferences into a future about which we have far-from-perfect knowledge?

·        At what point will residents and ratepayers resist rising monopolistic charges for public services? And how will such charges impact on the rest of the economy? 

·        In what ways is council spending impacting on regional productivity and output?

It is only eight years since the Council was formed but if a rapid increase in council costs is placing growth at risk, it may be timely to revisit the question of how Auckland is, or should be, governed. 

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[1]              In Auckland the property rate charged is based on capital value -- land plus improvements -- and the consolidated council has been seeking to eliminate variations in the rate per dollar across the region

Changing the Game in Australia: Federal Government Looks at Local Infrastructure

Commonwealth Government looks local
A report in the Sydney Morning Herald this morning raises some interesting possibilities, with Malcolm Turnbull indicating that the Commonwealth government is ready to deal direct on projects for urban development.  If they are economically sound it will consider assisting with favourable funding over a time period in keeping with their effective life.

The grounds for following our neighbours

New Zealand should take a lead from this on several grounds. 

(1)   Grandiose plans and projects that bear little heed to need, geography, or, in particular, to basic economic principles (don't spend more than you are going to get back by way of benefits!) continue to be promoted in both Christchurch and Auckland.  The Auckland heavy rail project is so bad that it would be a joke if it was not such an economic misfit.  The notion of throwing ratepayers’ money at a stadium locking away much of the waterfront is just as  silly.

(2)   The infrastructure spending of councils seems geared towards preserving a dated conception of the city as mono-centric. Modern cities aren’t.  They may have interesting and fun CBDs, but the bulk of life takes place outside the central city.  The suburbs are no longer undifferentiated swathes of housing, but include their own distinctive and often large centres, entertainment and recreation precincts, restaurants, and medical centres and specialists. Cities of scale have much more employment outside the city centre than inside.  Economic projects are those that fit the needs and capacity of their various communities, not some me-too dream of CBD grandeur.

(3)   Short-term funding of infrastructure through development charges is a sure way to push up costs and does not reflect the useful life of urban infrastructure.  If public monies are going into it, then that should only be on the basis of demonstrable economic benefits, not wonky, unrealistic and consequently defunct business cases.

The productivity impact
The Grattan Institute report on which the Australian Prime Minister was drawing confirms that many local and state government infrastructure projects are hopelessly uneconomic. 

Uneconomic infrastructure is a sure way to undermine national and local productivity. 

And, despite the New South Wales government's determination, there is scant evidence that amalgamation will solve the problem.  Just look at Auckland's experience.   

Beyond ageing urban form
Turnbull’s response sees grandstanding infrastructure and civic obsession with spending to preserve the CBD and sustain ageing urban form regardless of the economic consequences as contributing to the failure to achieve more sustainable urban form and the affordable housing that would follow.  

He espouses the vision of the 30-minute city –

one in which, "no matter where you live, you can easily access the places you need to visit on a daily basis". Mr Turnbull believes such cities will allow people to live further from the centre, making housing more affordable.
 

The plan
To help bring that about, the Prime Minister talks about commonwealth partnerships with private interests and issuing long-term, low interest government-backed bonds to fund approved projects and perhaps some form of charge on businesses that benefit.  Approved projects will be those that can demonstrate their economic worth thereby contributing to faster economic growth and a lift in tax revenue.  

Changing the game

We may or may not agree with the mechanisms proposed.  However, the Turnbull initiative confirms that central government can play a significant role in urban form and housing affordability when local government consistently gets it wrong.

That's not saying that central government consistently gets it right!  But it recognises the game changers that support decentralised urban form and the benefits that can bring. 

The Turnbull initiative may well prove a game changer in its own right.  And it highlights the question of when - or whether - central government in New Zealand will get off the sidelines and into the game.

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