Derailing Auckland - Unravelling the Assumptions

Public spending and productivity

Economic commentators call increasingly for the private sector to lift productivity  to compete in trans-national markets.  However, we hear less about the need for wise public investment as a condition of productive nations, cities, and business.  Maybe we need to hear more.  

In particular, ill-considered infrastructure imposes unnecessary costs on producers, consumers, and taxpayers. It does so directly through excessive spending and racking up liability for the maintenance and depreciation of poorly performing assets, and indirectly through the impact on credit markets. 

Governments at all levels need to take a highly rigorous approach to investment if they are to avoid undermining the competitiveness of regions.  Yet all too often major public projects are based on weak assumptions. Ideally, no public spending of substance would be undertaken without considering  the risk of getting it wrong and the regret that follows bad decisions – fiscal, economic, and political.

Risks – and the regrets

That does not appear to have been the case with the latest report justifying spending up large on a central rail link/loop (CRL) to enhance public transport in Auckland.

This post considers some of the assumptions about employment that underpin the latest argument for the $3bn or thereabouts needed to improve rail-based commuting into and around central Auckland. It compares the employment numbers projected to justify rail with recent  history.

Of course, recent history is not necessarily a guide to the future.  But forecasting significant shifts to justify the CRL calls for more convincing arguments than we have seen to date. The contingencies - events or behaviours that vary in practice from those projected - need to be analysed.  And the regret arising from getting the assumptions  wrong (which include wasted funds, reduced revenue, foregone opportunities, and fiscal blowout) need to be fully assessed.  

In this case, there is every chance that these assumptions are too weak and potential regrets too big to justify proceeding with the CRL.

 

Weighing up alternative outcomes

Assessing risk does not simply mean drawing high and low variants around a central projection.  This inevitably favours adoption of a single central forecast which, by definition, will be a compromise and countenances little departure from trend.  And if there is one thing we know about the future of our cities, it is that the events and technology we don’t expect will play a big part in shaping it.

Assessing risk means weighing up the probabilities of different events and outcomes and appraising the costs they might impose.  At the very least, a risk-averse approach would review downside rather than upside risks as a basis for sensible investment.

Projecting past mistakes

There is no sign of risk analysis in the documents promoting the Auckland CRL.  And this is a critical shortcoming with respect to the key employment projections on which the promise of unacceptable congestion without the CRL rests. 

The growth assumptions that underlie the most recent arguments about inner city congestion derive from a model developed by the now-defunct Auckland Regional Council. Projections from the model published in 2009 suggested total employment growth of 41,000 jobs between 2006 and 2011, a 6.8% gain (for a projected city total of 642,800). In fact, Statistics New Zealand’s Business Directory show just 12,500 jobs gained (from 616,230 to 628,780 – based on the new Auckland City boundaries). 

In other words, the projection published just two years earlier overshot actual growth to 2011 by over 300%!  How can we have confidence in this model, especially when in its latest incarnation the 2011 estimate is 682,000, or 53,700 (7.9%) more than the actual Business Directory count.

 

Forecasting future employment – or simply wishful thinking?

The 2031 projection on which the case for the CRL is based requires  an annual increment of 12,500 jobs a year: in the five years to 2012 the equivalent figure was just 2,600.  True, it was much higher over the preceding five years (19,000 a year) but the questions that need exploration today are (1) are we are faced with a ground shift in the economy as a result of the GFC, a complete restructuring for which the outcome remains a mystery and, if not, (2) when  might we expect the return to business as usual implicit in the model.  Because the later that happens the further astray the model projections will be and the greater the regret from overinvesting in rail infrastructure.  

In fact, there are still too many risks on the international economic horizon to have confidence that an early correction might offset the current shortfall in actual compared with projected employment.  Why risk funding a marginal increase in Auckland’s public transport capacity and patronage based on what are demonstrably over-optimistic employment growth assumptions? 

(And it is a marginal increase: according to the study, 45% of commuters into Auckland already use public transport - 8% rail.  Boosting that high level of public transport dependence, especially if at the same time we are pushing cycling, walking, and inner city dwelling as responses over-dependence on the private car is a tough challenge.  How much do we need to spend just to get a slightly bigger rail share and not, at the same time, cannibalise an effective bus system? Executive Summary, p45).

 

Where will business – and employment -- grow?

The case for the CRL depends heavily on assumptions about business growth and location.

According to the study employment in the city centre was 90,940 in 2006 (Supporting Report p.22). It projects this to reach 147,000 by 2041 (1,600 more jobs per year).  This  62% growth contrasts with  51% projected for the rest of the City. It bears little resemblance to what has gone before.

 

Between 2000 and 2012 employment in the CBD grew by 25% (660 per year) and in the rest of the City by 24% (9,460 per year).  So where is the analysis or logic to support the fundamental shift assumed, especially if it contributes, as the report suggests, to increasing congestion?  The likelihood is a return to declining CBD employment share (the long-term trend) in the interim as more firms opt for localities elsewhere. 

Or is the plan simply to reduce the location choices available to business?  Because it won't work.  If it gets too hard to locate where they want to go, or the cost of favoured land -- and rates -- get too high, then businesses may exercise their choice to leave Auckland altogether, relocating some or all of their functions elsewhere in New Zealand or overseas.  Why adopt spending policies to accelerate this process?

Back to the assumptions: when the city fringe is added, inner city employment is projected in the report to reach 203,100 in 2041.  This is 25% of an already optimistic forecast for the entire City .  This substantial gain in inner city employment share is based primarily on the CBD growing from 12% to 18% of the total – another overdose of optimism on the part of the proponents of the CRL.

So what’s the starting point?

How these figures are derived is difficult to follow in the published reports.  However, a quick analysis of whether different parts of the city are gaining or losing employment share illustrates why we should be wary of assumptions about a substantial increase in centralisation.

Between 2000 and 2012 the CBD, CBD fringe, and inner suburbs (Rest of Isthmus) all lost share to other parts of Auckland in manufacturing, retailing and wholesaling (see table, below). Production, distribution, and lower-order business services are decentralising, especially into the southern corridor. Retailing and hospitality services – considered drivers of CBD growth– have also been decentralising.  The CBD is losing share in health and social services and professional and scientific services, although some of these are still gaining on the fringe and inner suburbs. 

Changes in Shares of Auckland City's Jobs by area, 2000-2012
(Source: Business Directory, Statistics New Zealand)

Some sectors are becoming both dispersed and centralised at the same time.  Logistics, information services, and financial services gained share in the CBD and further out in the city, perhaps hiding emerging sub-sector specialisations.   Others certainly favour the CBD.  Various business services and education stand out, but these, and arts and recreation services, have not necessarily been the big movers in  the past decade and there are no strong grounds for expecting them to be so in the future. 

A self-defeating case?

The fact that the proposed CRL does not stack up  on economic grounds makes reliance on the ill-founded projections of central city employment on which it is based all the more worrying. 

If we narrow our "recent history" to just the last two years there is some evidence of a gain in CBD jobs relative to the rest of the city.  But such  centralisation is simply an outcome of recession, the geographic expression of companies consolidating in difficult times, and the rate of growth slowing slightly faster outside the CBD.  However, projecting this state of affairs forward raises interesting questions about  how far we  expect the New Zealand economy to stagnate – and what the long-term consequences will be for Auckland of it doing so.  The conditions favouring centralisation may also be the conditions that undermine the city's growth. Equally, healthy growth across the city is a precondition to a healthy CBD.

At this time of  uncertainty it is manifestly unwise to  promote substantial capital expenditure that may well lower capital productivity and incur the ongoing taxpayer and ratepayer liability  this imposes when it is more important to promote sustainable growth .  If nothing else, addressing economic and employment growth by overspending on a project of dubious merit will guarantee that the exaggerated demand projected to justify the CRL does not come about. 

Irresponsible inner city behaviour

The latest in urban design - new public spaces for the dispossessed

In my last blog I raised the question of whether purchasing land for a possible rail link through the city would reduce the attractiveness of the inner city living by laying waste to a corridor cutting through it – shades of the motorway madness of the 1950s and 60s.  I suggested that this will increase the anti-social behaviour after dark that so worries CBD residents and visitors.

So it was interesting to see in the New Zealand Herald today the concern over the use of vacant city sites as places of refuge for people deemed anti-social and particularly as sites for binge drinking.  These are, of course, informal public spaces, simply being used as such.  And with the purchase of 280 properties in the central city for construction works or sites for rail-related development in support of our “sometime-maybe-never?” underground rail link, we are creating more of the same.  This will no doubt make inner Auckland more liveable for the homeless, dispossessed, impoverished, and underemployed.  Paradoxically, we could claim from this that laying waste to inner city sites contributes to the vision of increasing inner city living.

Getting rail up and overrunning

By the way, the $240 million set aside for acquisition of 280 properties sounds just a little light.  I haven’t searched the records, but I suspect few of those properties would be valued at under $1million.  And what about the compensation for relocation and loss of revenue and goodwill among the  many businesses that currently occupy them, and of course the relocation costs of displaced households?  

To me it looks suspiciously like we have taken the first step down the budget blow-out track.  But then, that tends to be the way of big civic projects utilising public funds, which are almost inevitably subject to optimism bias and waste, partly resulting from confused accountability.

(On accountability, it is not quite clear whether the train driver is the Council, the Mayor, or Auckland Transport.  And any expectation that the Government should shoulder much of the cost or should legislate to tax motorists points to further potential confusion in accountability, in this case between central and local government.  This is particularly significant for a project destined to make  a big a hole in public finances).

Of course, many of the properties to be acquired will be sold once the link is completed.  But assuming that the holding costs are based on $240m expenditure, any over-run will boost them.

So will delays to the project as a result of unresolved funding problems, continuing economic uncertainty, and likely fiscal constraints.  These are likely outcomes: a Benefit Cost Ratio of 0.4 doesn’t justify going ahead, and the strategic benefits remain decidedly unclear. But that’s another story. 

Suffice to observe that like alcohol bingeing among people with too much time on their hands, it seems that playing the train game is a difficult habit for politicians and other enthusiasts to break.

Passing the bucks

Even if  we do get to spend all this hard earned (or borrowed) money down the track, over-optimistic passenger and revenue projections and pie in the sky proposals for station-based office and residential developments will mean under-recovery of capital and operating costs.  A BCR of 0.4 looks a bit optimistic. 

Of course, we can continue  to behave badly by excessive, wasteful spending  and leave someone else to clean up the mess.  In this case another generation will be left to foot the bill while today’s decision-makers slip – or slope -- off into retirement (most likely in suburbia or their coastal retreats).  How responsible is that?

Tunnel Vision: thin edge of the rail wedge

Digging in

There is an interesting if depressing narrative emerging in a number of independent stories about Auckland's passenger rail aspirations, city centre hopes, and spatial plans.   This posting aims to string together just some of the bits - with links.   

The recent announcement that Auckland Transport is going to acquire 210 inner Auckland properties (or is that 280?) to preserve the route for a rail tunnel with no assured funding suggests that politicians and planners in this city – and their plans – are a couple of steps removed from reality, committed to an inner city rail tunnel at almost any cost.. 

At what cost?

It’s noteable that when councillors start lambasting officials for their tunnel costing, or propose a tax on motorists to pay for the project, they say nothing about and the history of over-runs associated with Think Big projects and the contingencies – including delays – that history tells us have the capacity to double the costs of large civil engineering projects. 

And they seem fixated on a tunnel without addressing how ongoing rail operating losses after completion will be met, or the costs attendant on the ancillary road works, the parking facilities, and  other above-ground spending on existing and proposed stations necessary to get people on board.  There is also the cost of the electrification  ($500m already advanced  by taxpayers for electric units, quite apart from line costs) required simply so that we can run trains underground. 


So far, then, it has been difficult to get a picture of the  total costs of this project.  Arcane debates between politicians and officials about how to factor in the impact of inflation over a project which it is conceded will take some time to get underway, let alone completed, seem rather incidental in the bigger picture.

Why is this city – today's and tomorrow's ratepayers – going along with a high risk, low return - and somewhat opaque - gamble?  The risks are all on the downside.  For a start, incremental investment decisions based on broad  estimates are bound to escalate the costs of a project of already doubtful merit. 

The reasons, we are told, lie in the benefits of better access to and promotion of the CBD, reduced road congestion, better connectivity between the south and the west of the region.  Let's revisit those reasons.

Cross-regional connection - L

Dealing  with the last first:  journey to work figures from  2006  show that only around 1.3% of all motorised commuting trips (a total of 4,700 by bus, car, rail, or motorcycle) were between the west and south of the region. So cross-regional connectivity hardly goes any distance towards justifying the tunnel. 

In 2006, 7% of commuting trips from the west to the Inner City were by train – around 560.  Let’s say that increases 5-fold or thereabouts as a result of a more direct route (putting aside, for the moment, the time associated with  additional stops at new stations).  That’s perhaps 2,500-3,000 trips.  Again, the marginal cost of these additional trips looks pretty high.

And with recent investment in road and industrial land  developments in the west of Auckland a much more sustainable strategy would be one that fostered more investment and greater work opportunities closer to home.  This is consistent with the expectation in the business case that many of the additional workers in and around the CBD will also live there.

So cross-regional commuting hardly makes a compelling case for the rail link.

Reduced congestion L

There is an expectation that even making a marginal difference to car traffic will reduce congestion.  That ignores the experience: road capacity gained by transferring commuters from bus or car to rail is simply absorbed by the reinstatement of trips that would otherwise have been deferred by peak capacity constraints. 

More than that, we are now seeing the benefits of considerable spending on roads in the past by way of reduced congestion anyway, something that could easily undermine  rail patronage forecasts. 

 And we can look forward to even more gains on that front as more people work from home, an ageing population reduces its use of cars, and long-term increases in fuel prices lead to more rationing of car use by households.  These benefits come at virtually no public cost – and are likely to be collectively a lot more beneficial than a costly (but still limited) increase in the capacity of the passenger rail system.

All the big boys have one L

Of more immediate interest is why we would be expecting to generate greater demand for rail transport to the CBD.  Several reasons have been advanced. One is the old  Me Too chestnut.  The big cities we are familiar with – Paris, London, New York, Sydney  –  have metro rail serving the CBD using underground systems.  We want to be one of the big boys.  


Of course, we start well  behind the eight ball.  Cities with "successful" metro rail transit also have populations many times that of Auckland. 

Even so,  metropolitan rail in large cities still runs at a loss despite long-sunk capital costs, higher population densities, and vastly more employees in the central city. Take New York’s Metropolitan Transport Authority, for example. 43% of revenue comes from taxes and subsidies, another 12% from tolls; and just 43% from fares. Railcorp, responsible for passenger rail transport in New South Wales, including Sydney’s CityRail, lost $2.5bn prior to state government contributions in 2010-11.   Travel for London reported an improvement as a result of increasing trips numbers: to 1.2bn from a loss of £626mn in 2010 to £100mn in 2011/12, or close to £3.60- for each of its estimated 28milion passengers on the London rail and underground. And on top of these losses are substantial ongoing capital costs. 

It’s hard to understand why we should emulate these systems.

Boosting the CBD L

The Auckland Plan makes much of the CBD as  the key to Auckland's international standing.  The new rail loop is seen as a critical part of that.  

This is based in part on the expectation that many more people would live and work in and around a series of new stations to  be built on the proposed inner link. As I have suggested previously, there is very little we might see in the development of future labour markets or even housing preferences that suggests that the inner city will hold a lot of appeal or achieve the sort of growth proposed in the Auckland Spatial Plan. The business case for the rail (and the spatial plan) presents outcomes underpinned by implausible drivers.

Laying Waste

In the meantime, let’s think about the impact of acquiring 210 to 280 properties on the possibility that they are  required for tunnel construction. We know how the acquisition of land for motorway construction in the 1950s and 1960s laid waste to swathes of inner-city land for decades, here and overseas. We can look forward to that on a putative rail corridor from Britomart to Mt Eden for who knows how long.

Proposed Inner City Rail Link - Planned Corridor

      Source: Auckland Transport

And the disruption this will cause goes beyond the cost and inconvenience to current owners who have invested in inner-city businesses and inner-city living.  This will be no doubt lead to a long and contested consultation programme. 

But what will happen when  this land  is acquired?  One possibility might  be a range of quirky, interesting, temporary activities occupying low rental ageing properties. But that's not likely when we are dealing with a corridor.

Another - more likely - is that it simply goes to waste, becoming a  ribbon of vacant, deteriorating buildings cutting through the inner city.   Already Aucklanders are wringing their hands over the booze-ridden late night culture, and “a deluge of rubbish” hitting inner city streets. Creating a corridor of waste land will not help.    

The real and immediate problem faced by Auckland's  inner city is not one of enhancing access. It is a problem of credibility; of maintaining the quality in a place where its appeal as a place to visit (at least after dark) and live is already under threat.  Locking the city into the rail tunnel is not the way to tackle the long-term prosperity of the CBD and surrounds.  This is a much bigger issue – and not one that should be obscured by desperate defence of a flawed project.

... to be continued ..