The government has released the briefings ministers received from their ministries and of course this blog is fairly interested in what the transport ministry has to say. The briefing has been split into two sections, one giving an overview of the portfolio and the other the policy challenges and upcoming decisions.
The first briefing gives a fairly high level description of what the portfolio is about, what the ministry does and what powers the minister has. It also goes through the various law and rule changes that have happened recently and the levels of funding that the ministry/portfolio is involved in. Overall there isn’t really anything new in here but that is what I would expect to see.
The second briefing on the policy challenges and upcoming decisions is much more interesting as it gives a good indication on the ministries thoughts which are what are likely to heavily influence the minister. The first section that really caught my eye was the section on oil prices on page 17. It seems that there is a bit of confusion in the message they want to deliver, first up there is a sort of high level comment about oil prices saying:
Almost all road transport is fuelled by petroleum products. This fuel source will persist over the next 20 years, but electric and plug-in hybrid vehicles will gradually become more widely used, as the real price of oil continues to increase. However, petrol and diesel will probably still fuel around 85-90 percent of vehicles in 2030.
In the short-term, people resist changing transport usage as costs increase. However,over longer time periods, oil price increases are more likely to induce changes in travel, lifestyle, and locational decisions.
but later on the same page they say
New Zealanders have a range of preferences for how they arrange work, shopping, socialising, and participation in education. These lifestyle preferences usually require travel. In the short term, individuals are reluctant to make lifestyle changes when the cost of transport increases. However, sustained oil price increases are more likely to induce change in travel patterns over longer periods:
• In the medium term (say 2–5 years), people can purchase more fuel efficient vehicles and make greater use of public transport, cycling and walking, where those choices are feasible.
• In the longer term (5–20 years), people will be more willing to make substantive and permanent changes to lifestyles in order to reduce their transport demand. For example changing patterns of social interaction, and living closer to places of employment and education.
So in 20 years time with high oil prices most vehicles will still be powered by oil based fuels but at the same time now where near as many will be driving them as most people would have made large changes to their lives to reduce their demand for transport or at least oil fuelled transport (but more on that soon).
The next thing that caught my eye was in the section on Land Transport starting at page 20. In the very first comment they say:
It will be increasingly important to manage the existing land transport network to its full potential.
There are wider economic impacts that cannot easily be estimated and considered in the traditional benefit cost ratio (BCR) evaluation framework. The current BCR assessment is based on a relatively high discount rate (8 percent real) and a 30-year horizon. This rate tends to discount away the benefits of long-life projects, such as motorways.
In the cities, cars remain the dominant means of people transport. Urban transport networks will need to become more effective through better use of infrastructure, urban planning, demand management tools and public transport increasing its role.
They acknowledge that we need to move away from the traditional BCR framework but this is exactly the thing they slammed the CRL business case for, it has also noted here in the past about just how much impact having a high discount rate and relatively short assessment time frame has on the outcomes of projects.
Continuing to work my way through the document I really had to have a chuckle at these two comments:
55. New investment in State highways is evaluated by the NZ Transport Agency (NZTA) using three criteria.
(a) Strategic fit which considers national strategic objectives as specified in the Government Policy Statement on Land Transport (GPS)
(b) Effectiveness which considers how well proposed activity would achieve the GPS impacts identified in strategic fit
(c) Efficiency which measures the BCRs
57. The major highway projects tend to score well on strategic fit. The BCRs for major improvements to the network have declined in recent years.
Basically that means the government tells the NZTA what projects it want and if the NZTA goes to do them then they can tick off two of the three assessment boxes which means that economic considerations get largely pushed out of the way and that is evidenced in the last part of comment 57. In just 5 years we have gone from have over half of all approved projects having high BCR’s to over half of them having low BCR’s. That’s an astounding change in such a short time considering there are a large number of projects out there that haven’t even been approved yet, things like Puhoi to Wellsford or the group of projects in Wellington.
The last thing I will cover in this post is showing just how much our transport expenditure has changed over time, as you can see spending has really ramped up in the last few years and in the space of about 5 years we have more than doubled how much we spend as a percentage of GDP. Of note the transport and storage sector accounts for around 5.2% of all of our GDP
There is quite a bit more to cover, especially the parts that relate to Auckland but I will leave that for the next post
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Wow that graph showing the shift in funding towards projects with poor BCRs is one hell of an indictment of the government’s transport focus.
“In the medium term (say 2–5 years), people can purchase more fuel efficient vehicles and make greater use of public transport, cycling and walking, where those choices are feasible”
It seems pretty strange to lump these reactions in the same timeframe. It is going to take *at least* a couple of years saving for most people to upgrade their car. The decision to walk or take the bus is surely something people can decide to do quite quickly, as soon as they’ve realised they’re spending too much filling up on petrol.
“where those choices are feasible”
that is the key.
For those who live within 15km of work, they can choose to cycle, for those who live on the RTN, they can choose PT, but for the vast majority, the only realistic choice, is when the next car in the family fleet is due to be renewed, to replace it with a more economic model. These are short term changes.
Say a family living in howick and working in the city, 1.5 hours each way peak on the bus to work is not realistic, all they can do is get a better car.
Longer term they can sell up, move the kids to a new school, and get a house nearer to the city or a RTN,
Feasibility is relative.
Say for example petrol shot up to $15 per liter. I bet the average fuel economy of the NZ vehicle fleet would shoot up. 50cc Scooter retailers would sell out (similar to when petrol first crossed $2 per liter). Sales of new “thirsty” cars would plummet. I think the most obvious fast gain would come from those households with multiple different cars. It is common for families to have a large and a small car. For say a family weekend trip where the larger car or SUV the more economical car might replace the larger car/SUV as the vehicle or choice.
I bet carpooling would shoot up too.
Great post Matt. Clear to see the last Labour government’s caution and just how aggressive Joyce has been with his programme. Despite preaching austerity it is clear that transport is one sector that they don’t act this way. The justification is that this is stimulus in order to help revive a contracting economy after 08. The problem is that the projects chosen are largely not necessary, and not even ‘nice to have’ but simply stuff the Mininster likes, or to use the ministy’s code they have a ‘strategic fit’.
Is it just me or are a. and b. above different ways of wording the same thing? The short form of which is: ‘stuff we want’.
They are quaint about PT, for people to be able to choose it it has to be there, so it needs to be provided. The men from the ministry do live in a strange world where endless motorways must be built in order for people to transition away from driving… There is however is faint whiff that the report’s authors know that the motorway game is all but up, but also that their current masters won’t hear that as they all live in a fantasy world of a perpetual 20 century.
We await the impact of events on these curiously confident predictions. But of course they know that no one will ever hold them to account for their hopeless predictions of unchange by 2030, yet it is a tool to do nothing good in the near term.
Ah well, it’s not often you find turkeys recommending Christmas; and its just as unlikely that the roading engineers who make up the senior echelons of the Ministry of Motorways will recommend public transport solutions to the minister even as their preferred mode of transport is going the way of the moa.
The interesting thing is that the Ministry of Transport would know that publishing a graph like this is going to have political repercussions. This suggests that, as road mad as they are, perhaps even they are concerned about the amount of money being wasted on the RoNS projects?
The briefings to incoming ministers is the one chance every three years that the ministries have the opportunity to “speak their mind”. You see this with the ideological burps which emerge from Treasury in every BIM. So while MoT is still stupid enough to believe that in the long term we need to build more and more motorways, they seem to be a bit concerned about recent investment not being very cost effective.
Wait till you see the part 2 of this post which I am working on right now.
Wow that’s so interesting. I did not realise that things had got quite so bad on the BCR front. Gotta love National’s focus on economic productivity. Ahem.
National really need to take a hard look at their transport policies. They just dont make sense. They are supposed to be the party that is sensible with money, yet they are blindly pooring billions into uneconomical motorway projects. It just baffles me.
Where is the funding for small local road improvements, with good BCR’s? Walking and cycling links? Local road infrastructure? There seems to be very little money for this now. I’ve heard of several local road and cycling projects that have been canned as NZTA funding has been redirected to the RONS program, which makes it unaffordable for councils to do these projects on their own. Its madness.
Dear National Party, WAKE UP!!!!!
Hear hear.
@ Malcolm ‘They are supposed to be the party that is sensible with money’
Sadly for us, this is one of those truisms that has absolutely no basis in historical fact and there’s no information that this situation is going to change. The National party is pretty good when it comes to enriching individuals (vide Kiwi Keith and Kinloch) but when it comes to the sensible economic governance of the country then you have to look elsewhere; probably the most fiscally literate governments we’ve had were the 1st and 2nd Labour administrations; the 4th (1st ACT government) was a social and economic disaster, only bettered by its immediate successor. But, as the above post suggests, facts have very little to do with the current regime’s fiscal strategy.
Heh. And they have the nerve to criticise the City Rail Link’s business case.
That bar chart is classic! Sums up the nzta in so many ways.
I was wondering if maintenance costs are factored into the BCR? You know when 20 years down the track you have to reseal the motorway network.
Yes maintenance costs are included.
You know, they heavily discount maintenance costs in the future, which I really do not understand the justification for because the real price of maintenance could well increase. We put out a release about the potential budget blow out due to high oil prices, but there were many angles I would have like to pursue. As you rightly note, the BIM is quite incoherent and even contradictory. Demonstrates the different conflicting views of officials in the organisation, I would guess.
Higher oil prices in the future obviously blows out the cost of new asphalt too.
Discount rate or 8% real. Wow that’s huge. I always assumed discount rates were quoted in nominal terms (although real rates sound more relevant) due to the high number. 8% real is way out of wack with the current cost of capital.
I guess a preference for projects with short/medium term benefits over one with long term benefits is partly due to out short political cycle.
More discussion of discount rates in these previous posts:
http://greaterakl.wpengine.com/2011/12/03/the-deal-on-discount-rates/
http://greaterakl.wpengine.com/2011/10/11/the-disputed-economics-of-the-city-rail-link/
No, the 8% discount rate is (apparently) just the way that Treasury rolls. I think it’s their way of reducing BCRs, which in turn undermines the rationale for government investments.
It’s not only out of line with the current cost of capital, but it’s also out of line with social rates of time preference, i.e. what people are willing to pay in order to receive deferred benefits.
In the not too distant past a 10% discount rate was used.
I agree with you that it’s just Treasury’s ideology coming through, trying to discourage government spending on anything by discounting the long-term benefits enormously.
My understanding is that the NZTA is currently doing an investigation into what discount rates should be along with other aspects of their economic evaluation model. I think this might have been partly prompted by the CRL business case and review which got wildly different results depending on how the current criteria was applied. It would also probably to help improve the BCR’s of a few suspect RoNS
I doubt there’s much desire from NZTA or MoT to improve the BCR of the City Rail Link, so it seems far more likely the motivation for re-looking at the issue is to boost the BCR of the holiday highway and other waste of money RoNS.
That’s right Mr Anderson, there’s even a line somewhere in the BIM about how high discount rates do not favour projects with long term benefits like MOTORWAYS. I think I half laughed, half screamed, when I read this at the kitchen table Thursday night, which scared my poor housemates.
Doesn’t induced demand generally reduce the benefits of motorway expansion project to near zero with a decade?
Ironically isn’t it actually agood thing if NZTA claims it will benefit BCR of motorways? May lead them to change the usual discount rate used, meaning projects such as railways (which can’t get funded by them stupidly) will have much improved BCRs.
Yes perhaps someone is playing a very subtle game in the MoT?
Reduced discount rates would be a VERY GOOD result. Politicians will always game the system by favouring their TYPE of projects, but lower discount rates will shift the basic playing field towards more long-term thinking, rather than “quick benefit” projects. That can’t be but good, overall.
To make an example case, everyone can see the benefit of resurfacing a road with better asphalt (or even concrete) so the next maintenance occurs much further out. It is called “producing quality”. Yet a high discount rate discourages that for a quick fix.