A couple of weeks back the NZ Institute of Economic Research released a paper which looks into the traditional cost-benefit analysis used for appraising transport projects and asks the question of whether the current process fully recognises all the costs and benefits of those projects.
Existing transport cost-benefit analysis misses critical impacts “Standard cost-benefit techniques significantly under-estimate the costs and benefits from transformational infrastructure projects like motorways.” said NZIER.
“Transformational projects change economic activity, regional population, and land use – changes missed by standard cost-benefit techniques.” “For instance, a standard cost-benefit appraisal of Transmission Gully ignores whether Transmission Gully increases the number of people living along the Kapiti Coast and the costs and benefits associated with this.”
Understanding how major transport strategies affect the way we live and work is crucial for allocating limited public funding. Getting it wrong wastes money and can harm the long-term prospects of cities. The problem of accounting for changes in land use occurs worldwide with transport appraisal. It happens because people generally don’t know how to value these sorts of impacts.
In short, existing appraisals don’t assess the main long-run impacts of major projects. NZIER has researched ways to broaden the scope of appraisals.
It’s important to note that the paper highlights the breadth of both costs and benefits is likely to have been under-estimated previously. In other words, doing appraisals in a more robust manner isn’t necessarily going to boost the argument for all transport projects, but instead likely shift some projects upwards and some downwards on a priority list.
The relationship between travel time savings and land-use impacts has been discussed previously on this blog, particularly in relation to the work done by David Metz a UK transport expert. The NZIER study once again highlights this really critical point:
In many respects this is just highlighting the Marchetti Constant – that people will on average spend a certain amount of their day travelling and the faster you make it to travel from point A to point B, the longer distance people will travel (rather than them spending less time travelling).
The paper itself is full of lots of complex equations which probably only really make sense to economists, but it comes to a particularly interesting conclusion:
My translation of this is along the lines that projects which induce a land-use change which spreads development across a wider area and encourages longer trips may well create problems which undermine the benefits supposedly generated by the project. Basically that if a motorway encourages people to travel longer distances than they did before the motorway existed, then in the longer run (something current appraisal methods ignore) there may be little justification for said motorway project. This is particularly true if (as is the case) roads are not priced according to their use.
NZTA are currently reviewing the Economic Evaluation Manual – the guide for assessing transport projects. Let’s hope that some of the thinking in this paper gets incorporated into that review.
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Individuals and the environment should be the priority measure in cost-benefit analysis of infrastructure projects rather than the four wheeled motorised lounge suites the world spent much of th elast century catering for.
Hear, hear! I think in order to turn the tide we have to follow the money and see whom it was that profited so much from the automobiles uber alles transport model. That’s not to deny that there are some very strong reasons why automobiles have become so universally liked by those who have access to them – the problem, as always, is the externalities (land-use patterns is a big one) and lack of scalability of this transport mode.
So basically if we did this properly PT projects would perform way better and dumbass motorway projects would perform worse. Count me shocked. Not.
But what does Big Ger think?
Big Ger doesn’t think; he does what he’s told. Sometimes he can’t explain what he’s saying because what he’s been told to say is a bit complicated. But that doesn’t matter really because all the decisions have already been made without recourse to annoying things like cost-benefit analysis which are only there as a bit of a smokescreen for those annoying times when members of the public (and the odd Green MP) get a little too curious. FFS, we’ve got profits to make!
Have had a very quick squiz over NZIER paper and my initial translation is that not only may the current narrow (ie short run) CBA approach overestimate travel time saving benefits (because of the ‘Mertz effect’ and the absence of road pricing) it may likewise also underestimate the broader dynamic (ie long run) impacts that flow from those projects that provide improved transport access to more locations where people may wish to live.
To the extent that these net long run impacts may either be positive or negative, the overall result for any given project is that the current narrow approach may either over- or under-estimate net benefits.
So on one hand, it does not appear to imply that more PT and fewer motorways is slam dunk. In fact it states:
“the longer term direct benefits of such schemes [eg motorway expansion] must be greater than the direct benefits estimated as most people must be better off following the lifestyle and/or work change – else they would not have changed.”
However, on the other hand, it suggests that using time travel savings to justify transport projects is rather dubious as these may never eventuate.
In short, the rationale for undertaking transport investments may not be to save X minutes off people’s morning commute, but to enable them to live, work and play where they would prefer to do so.
“the longer term direct benefits of such schemes [eg motorway expansion] must be greater than the direct benefits estimated as most people must be better off following the lifestyle and/or work change – else they would not have changed.”
Thats true only if road pricing and other externalities are allowed for and that users therefore factor these into their own “cost/benefit” ratios.
For motorway projects, the often ignored costs are environmental degradation of motorway over the surroundings it built on, and the bigger land use degradation caused by more houses being built further out on (usually) productive farmland, noise pollution, light pollution, vehicle pollution, cost to the country of importing more petrol and cars, overall emissions increases (CO2), more time spent in commuting, and additional time spent stuck in congestion.
There are obviously way more others than that but if none of those are included, then your estimates are limited.
“Thats true only if road pricing and other externalities are allowed for and that users therefore factor these into their own “cost/benefit” ratios.”
Actually it still’s true in relation to the direct (ie private) benefits, and it might still be true of wider social benefits, but yes, you’re correct that without taking these externalities into account we have no way of knowing, which is why it would be such a sensible idea to enact policies that address these externalities directly such as road pricing and development contributions that incorporate environmental and other externalities.
One slight aside – building housing on farmland doesn’t create a wider social cost. If farming a given plot of land was actually so productive, the land would be worth more as a farm and it wouldn’t used for housing anyway. Also emissions are already internalised by the ETS and fuel excises. But most of the other effects you list are indeed externalities that need to be accounted for in any proper CBA.
‘If farming a given plot of land was actually so productive, the land would be worth more as a farm and it wouldn’t used for housing anyway’
Bollocks I say! There you go again singing from the theory sheet not from planet earth. If you started that sentence with: ‘In an ideal world where all pricing was pure then….’
I’m intrigued to know what it is about farmland that provides so many benefits to the wider community?
Is it the faeces from livestock run-off that massively pollutes our nations waterways? Is it the chemicals that are sprayed into the environment to kill insects and other plants so crops can grow faster? Is it the destruction of native forests so farmer Joe can cram some more diary cattle onto his farm so it increases in value and he can make a bigger tax-free capital gain?
Bro, I’m all for incorporating environemtnal externalities, but if we’re talking about looking after planet earth, I wouldn’t have thought farming is your number one poster boy
Yes you are right about farmland. Turning farmland into housing is not policy relevant! Yet it is one of the main points Len Brown and council continue to make when advocating for restrictions on greenfield residential development. You would think they would take a little bit of professional advice.
Dirty farming is a red herring. Farms can relatively easily be returned to a natural state. Not so built environments. And while overall productive capacity might be marginally affected, retaining productive output near to cities does ultimately matter. If you think filling your car is the height of oil price pain, wait until it really bites in our transport and fertiliser dependent food chain.
Cities need more than transport and houses to flourish.
If retaining the option of farming is of so much value, then there will be people willing to outbid residential developers.
Swan, you are confusing the value to individuals and the value to society.
What I’m confusing real things and pretend things?
Where are these angels that know how valuable farm land will be in the future that investors don’t? Who know better than the guy who actually owns and tends the property? Where are the angels who know that the discounted value people put on future consumption is wrong, and the right value is x? Please tell me, I’d love to consult them.
“If retaining the option of farming is of so much value, then there will be people willing to outbid residential developers.”
The farmland has ongoing future value to the collective by vringing food production closer to population.
The developed farmland has immediate value to a developer as it will turn a profit.
The collective group will never buy out the property as it doesn’t pay an immediate benefit anywhere near that of developing it, and people in NZ don’t make 50 year investments with indirect yields.
This doesn’t mean that the value as farmland is lower, just that it is indirect slow and incremental as opposed to direct, immediate, and absolute.
Turning farmland into residential areas has has a large ongoing service cost to the collective that none of the people who will buy the land to develop will have to realise any significant amount of.
I actually agree that we should remove the MUL, your free market arguments have convinced me of that, but we need to more accurately price them at the same time. Make land area more significant in rate, or target resident Houston style to pay off the costs to provide infrastructure including trunk upgrades, and PT services. Toll local roads to accurately reflect the cost of each individual trip on a single road.
However your argument about the free market solving the inherent value of local farmland issue seems to completely ignore the fact that the cost of that is nowhere near the fre market rate.
Re: the native forests point. This actually is a potential market failure. If society combined as a whole (tree-huggers, dirty farmers and sprawlistas alike) together place a sufficiently high value on retaining/regenerating native forests, then there is a role for the state/council to outbid all farmers and developers, buy the land and plant trees on it. But only if the total value placed on it by society is sufficently high.
Now, given the huge costs of doing this all around the MUL, is the wider community prepared to forego the squillions of dollars worth of value to do this? My opinion is probably not except in a few areas of particular natural beauty, but others may have a different view.
If the motorway had not been built to connect the given plot of farm land in the first place, it’s likely value would remain that of farm land.
Quite.
I have read elsewhere a comment that that buildings are just a logical extension of regular farming, so that the “farming buildings” instead of crops/food is something that cities cause.
And whether you get food or buildings grown on a piece land comes down to the “best return” for the land owner over the measured time period.
[so you could consider developers to be an extension of farmers, albeit without the environmental concerns for the long term].
The issue is with buildings, is that you get a massive up front payout when you sell the land for building (or land and bullding packages), but over the longer term the return may dwarf that if its used for other purposes. But if you measure the “cash now” value, building houses on the land always wins out as its simply no contest with any other option bang for buck for the individual (no so society however).
So in effect its simply best described as a form of economic masturbation.