In October last year I did what was obviously a very rough cost-benefit analysis of the Puhoi to Wellsford “holiday highway”, and I came up with a cost-benefit ratio of 0.19. Of course my analysis didn’t have all the traffic models that various consultancies that do these things for real use, and I must admit my understanding of NZTA’s economic evaluation manual is fairly limited, but there was a bit of method in my process, as you will understand if you read the post.
So I must say I was a little bit surprised to find out, in January this year, that the cost-benefit ratio for the project had been calculated at 0.8: and that was just the worst case scenario. Add in the ephemeral “wider economic benefits”, plus a lower discount rate and the BCR got as high as 2.0, as can be seen in the table below: I could understand if I had under-estimated the cost-benefit ratio by half, but four times out on the standard analysis and out by a factor of 10 if you reduce the discount rate and add in the wider-economic-benefits. Something seemed a bit odd.
A couple of weeks ago I finally got my hands on a full copy of the December 2009 “Puhoi to Wellsford Four Laning: Business Case Statement” which I have fully scanned in so that anyone can have a look through it (though at a relatively low quality to ensure the file size wasn’t massive). While having a good look through that study explained a reasonable number of things I had missed in my admittedly unofficial first analysis of the project last year, it appears to me as though the benefits of the project have been highly over-estimated by this Business Case Statement, which means that the real “cost effectiveness” of the project probably lies somewhere between 0.8 and 0.2.
Let’s take a look at the Business Case Statement in a bit more detail: in particular the last few pages of it where the cost-effectiveness of the project really gets analysed. There are four main types of conventional “benefit” that the road is anticipated to generate: journey time reliability, travel time savings, vehicle operating cost savings and accident cost savings. Added to these conventional benefits are the “wider economic benefits” that I will explain in more detail later on. All up, the analysis of the project came up with the following totals for the amount of “Net Present Value” benefits: The total amount of benefit is $689 million, including the wider economic benefits. Comparing this to an estimated project cost of around $1.4 billion in 2008 dollars gives us a “return on investment” that’s a lot lower than the 1.1 in the first table of this post (perhaps that’s taken account of by the benefits being net present value, I’d be interested to hear more about that.)
Going through each of the stated benefits, if we look first at the improvements to journey time reliability, the amount generated is relatively low: at $8.4 million for the project. Journey time reliability benefits are calculated separately from time savings benefits, I guess to recognise the gain from knowing more clearly when you’re going to arrive at where you’re going: which is probably particularly useful for freight. While the issues I have with the way time savings benefits have been calculated may also apply to the reliability benefits, in general I think the amount is low enough to not make much of a difference.
Shifting on to time-savings benefits, as indicated in the table above these are a huge part of the economic justification for the project, with two-thirds of the conventional benefits arising from “travel time savings”. Putting aside my general scepticism of time savings benefits, it is interesting to analyse how this figure of $352 million was worked out. This is detailed more in the table below: Wow, it’s difficult to know where to start it outlining the problems with this. Let’s start at the top: as I note that the Warkworth to Wellsford section has been estimated with an opening date of 2029, not the 2022 that NZTA are talking about. As I am sure is obvious, the longer you leave an upgrade the more necessary it becomes and the more benefit you get from doing it – which means that shifting the completion date of Warkworth-Wellsford forwards to 2022 means lower vehicle numbers, and a lower amount of time-savings benefits.
The next issue I have is the level of assumed traffic growth. What the data actually shows is that traffic around Wellsford has been decreasing (although as a pretty slow rate) over the past few years. Further south, yes there have been increases in traffic flows, but with rising fuel prices I think it’s incredibly optimistic to be suggesting 4% increases in traffic over the next 16 years. Lower levels of traffic growth will mean fewer vehicles benefitting from the upgrade, and once again – lower time savings benefits.
The next issue I have, which is probably the most significant, is the incredibly low average speed of 60 kilometres per hour that was used as the “current situation” to compare the improvements to. While I definitely agree that the current road gets congested at times, and that there are slow parts: particularly between Warkworth and Wellsford – it seems utterly wrong to suggest that the current average speed is as low as 60 kilometres per hour on this road. Wises suggests that your average speed would be about 83 kph between Puhoi and Wellsford: If the current speeds are higher, then the benefits gained from the upgrade would be a lot less, and as a result the time-savings benefits would be dramatically lower.
Moving along to vehicle-operating cost benefits and safety benefits, I don’t have too many problems with the way these have been calculated: except to note that most of the safety benefits could probably be achieved by far far less expensive means. I would also note that on current trends, around 50 people will die on this road before the proposed upgrades are completed.
That brings us to these wider economic benefits. Now from the outset I think it’s important to note that I am not against counting the wider economic benefits of transport projects, as in fact I think that they are probably the most real benefits (along with safety) that upgrading transport infrastructure will bring. It is likely that, for example, the CBD Rail Tunnel project will generate enormous wider economic benefits – and that they would form a critical part of the business case for that project. The issue is about the veracity of the wider economic benefits, or put more simply: will they happen or not?
Turning back to the holiday highway, I am sure that it will generate some wider economic benefits. It should bring Northland a bit economically closer to Auckland, even if mainly in an imagined rather than a real way (I can’t see a 10 minute time-saving making the world of difference) which would have some benefit. But the problem I have with the wider economic benefits for this project (and they make a big difference to its cost-benefit ratio remember) is the “flip-flopping” that studies into them have done.
We have the 2008 SKM study into an upgrade of this road saying the following about wider economic benefits: In short, the wider economic benefits are limited, modest, small in scale and unlikely to make a significant contribution to the viability of the project (although obviously there would be some benefit).
However, the 2009 SKM Study (the business case that this post is about) says this about wider economic benefits:
I must say I find it highly strange that wider economic benefits that were limited, modest, small in scale and unlikely to make a significant contribution to the viability of the project in 2008 can somehow magically transform into being significant, substantial and even a guess that this assessment is “conservative”. What magically happened between 2008 and 2009 to so significantly change the economic impact that this road upgrade would have? (aside from who the Minister of Transport is).
Overall, reading through this Business Case Assessment confirms many of my fears about the poor quality of analysis and assessment that has been undertaken into determining the cost-effectiveness of the holiday highway project. While it may be a bit of a laugh to call this road a “holiday highway” and fun to poke a bit of fun at the Minister of Transport by saying it’s a monument to him – this is actually a deadly serious situation. By pursuing this project not only will people unnecessarily die on this stretch of SH1 as its safety upgrades are delayed, but also in my opinion it is clear that even the relatively low cost-benefit ratio this project has is vastly over-estimating the benefits of the current project. While the Puhoi-Wellsford road will undoubtedly have its benefits, it is extremely clear to me that they are not anywhere near worth the cost, and we should be looking at far cheaper alternatives.
Remember, the $1.5 billion dedicated to this could be the funding so desperately needed for the CBD rail tunnel. I very much look forward to seeing the CBD rail tunnel justified by a proper, high-quality and robust Business Case. Not the rubbish that is being used to justify the holiday highway.