Krupp wrong on roading economics says transport agency

Jason Krupp's comments that the NZ Transport Agency is "straying from economic rigour" in reference to cost-benefit analyses for large state highway projects cannot go unchallenged.

Mr Krupp - echoing Michael Pickford in Policy Quarterly - incorrectly states that the Transport Agency's inclusion of strategic fit and effectiveness factors alongside the Benefit Cost Ratio (BCR) in our decision-making on transport investments amounts to “double weighting” as, in Mr Krupp’s words, “these two factors are already counted in the BCR.”

That assertion is simply not correct, as standard cost-benefit analysis adopts a restrictive assumption that long-term transport induced land use changes either do not happen or are immaterial to the cost-benefit result if they do occur.

Calculating BCRs for large, transformational infrastructure projects like the Roads of National Significance is no simple task.

In addition to considering traditional factors like savings in travel time, operating costs, accident costs and the inclusion of some external costs such as pollution and health effects, it also requires knowledge of the relevant conditions in markets likely to be affected by the project in question, and an understanding of the land use development and induced traffic effects that can be a long-term characteristic of major transport schemes.

The Transport Agency's appraisal methodology for assessing projects takes all of these factors into consideration. 

Far from "straying from economic rigour," this methodology is in accordance with currently accepted international best international practice, including the “three case” model applied by the UK Department of Transport and by Austroads in Australia.

It is an approach which recognises the limitations to standard cost-benefit analysis methods which do not adequately capture all positive - or negative - impacts of large infrastructure projects. 

Also in line with international best practice, the Transport Agency has strengthened the way it evaluates economic efficiency by including agglomeration impacts to account for the productive advantages that arise from the close spatial concentration of economic activity.

Like other road projects, the individual segments which comprise the Wellington Northern Corridor are designed to work together as a whole corridor. 

To selectively examine BCRs for individual components of the corridor in isolation - like the Otaki expressway - doesn't tell the whole story, as people's journeys are seldom limited to the arbitrary boundaries of single sections chosen for project management purposes.

Collectively the improvements to individual sections will unlock benefits along the whole corridor.  This is best practice.

For an historic example we need look no further than the Auckland Harbour Bridge. 

Estimates of the bridge's impact on population and economic growth were very conservative, but when the bridge opened in 1959 the effects were immediate, triggering extensive development on the North Shore and enabling huge economic growth in the region.

A truly accurate estimate of the bridge's impact was difficult to calculate because a bridge itself would be the biggest incentive for population growth on the North Shore. If the decision had been based on a pure application of a traditional BCR, the bridge wouldn't have been built.

Rigorous cost benefit analysis is the cornerstone of our economic appraisal for investment but is not the only aspect relevant to the decision-making process for transport projects and programmes. 

For a detailed response to Michael Pickford’s Policy Quarterly paper and a full explanation of the Transport Agency’s approach to assessing the costs and benefits of large transport projects go to here.

Dave Brash is the Transport Agency Group Manager of Planning and Investment.