Roading economics: A reply to the NZ Transport Agency

Dave Brash of the NZ Trade Agency challenges Jason Krupp, and through him my article in Policy Quarterly, on several grounds, all of which I disagree with. 

First, Mr Brash argues that standard cost-benefit analysis (CBA) in transport project appraisals does not capture the impact of large transport schemes on long-term land use development and on induced traffic effects. 

He implies that the NZTA’s use of the “strategic fit” and “effectiveness” criteria lead to a better estimation of the total economic impact of the proposed activity than using the “efficiency” criterion alone. However, he does not substantiate this claim and it is unclear how use of these criteria could achieve that goal. 

For example, the Wellington Northern Corridor Road of National Signifance (RoNS) was given a “high” rating for strategic fit on two grounds: that it was identified as a RoNS in the GPS of May 2009; and that it was an important freight route.*

The first adds no new information other than that the government wants the road built, and the second is based on a benefit already included in the efficiency analysis. The road gets a “high” effectiveness rating on similar grounds. 

Rather, Mr Brash should argue the NZTA is addressing the limitation of standard CBA by including the wider economic benefits (WEBs) in the appraisal, and so this limitation can no longer be held against CBA and the Benefit-Cost Ratio (BCR). This also means the use of the “strategic fit” and “effectiveness” criteria do lead to a double-counting of the benefits already included in the efficiency evaluation. 

Mr Brash’s second criticism relates to NZTA’s view that a RoNS should be viewed as a package, because of the interrelations between the component road sections. He argues that evaluating each component of the RoNS separately “doesn’t tell the whole story,” implying this would be contrary to good project appraisal practice. 

I disagree. It would be economic folly to focus only on the BCR for an arbitrarily-defined RoNS, and to ignore the low BCRs of individual components. A component project’s BCR can be developed using a base case which assumes that the rest of the package is implemented. If the incremental benefit added by a component relative to its incremental cost is low, then that component should be excluded from the package. 

This incremental approach is consistent with the NZTA’s Economic Evaluation Manual (vol 1, s2.10). For example, and consistent with this approach, in 2009 the Wellington RoNS was defined as the expressway from Wellington airport to Levin. In 2012, the Otaki-Levin section was abandoned in favour of a lower cost road upgrade because the BCR was re-estimated to be only 0.29 or less.**

Finally, Mr Brash argues that improvements in individual sections “will unlock benefits along the whole corridor.” He cites the building of the Auckland Harbour Bridge, which facilitated the city’s expansion on the North Shore, as an example of the development benefits that can result from major transport projects. 

However, it is perhaps not surprising that the bridge had this effect, as it facilitated the first direct road connection. The RoNS are different, because they generally involve replacing existing state highways with expressways, which offer only incremental improvements on the existing connections. Consequently, the benefits are limited, and combined with high costs, result in only modest BCRs. 

Further, even accepting the NZTA’s WEB estimates, the numbers are often relatively small.  For example, the Wellington RoNS’ standard BCR of 1.0 increases to 1.2 with agglomeration benefits added, and to 1.4 with WEBs (2009 figures). These BCRs still fall well below the average of about 4.0 for state highway projects in the recent past (when WEB assessments were not then included). 

My view remains that the BCRs of NZTA’s state highway projects are suffering because the goals of “strategic fit” and “effectiveness” are given greater weight than economic efficiency,  resulting in many hundreds of millions of dollars of benefits annually being sacrificed. 

And with the RoNS, the NZTA is, in effect, taking an $11 billion punt on their speeding growth and development, when its own estimates and common-sense shows that this is improbable. 

* NZTA, “NZ Transport Agency: (SH1) Wellington Northern Corridor RONS Endorsement and Funding for Investigation, Design and Property Purchase”, Board paper 09/11/0292, Nov 27, 2009. 
** NZTA, "Otaki to Levin Staging Options," DMT Paper, Jan 12, 2012, P4.

Dr Michael Pickford is an independent economic researcher. He was previously chief economist at the Commerce Commission and before that a senior lecturer in economics at Massey University. He was an expert witness for Save Kapiti at the board of inquiry into the MacKays to Peka Peka Expressway in November 2012