In a number of recent posts I’ve taken a look at both the demand for new roads (tends to be lower than expected) and the cost to build new roads (tends to be higher than expected). This has led to a bit of trouble for road builders in many developed countries – it’s getting harder and harder to find good projects.
This wasn’t always the case. Fifty years ago, people were flocking to new roads, even toll roads like the Auckland Harbour Bridge. But the transport market has shifted over the last decade. I would argue that we’re seeing signs that the market for driving is saturated. New Zealand’s road networks are mostly complete, and they have already succeeded in attracting the highest-value trips. Further road expansions will, by and large, serve lower-value trips.
I’m not saying anything revolutionary here – just restating some concepts from Economics 101. It’s worth going back to the basics of supply and demand to consider what might be happening in New Zealand’s road markets.
First, supply curves tend to slope upwards. In the case of transport investment, this reflects the fact that it tends to be increasingly expensive to build more road capacity as the network expands. Building the first ten kilometres of road may be cheap – the next 1,000 kilometres, not so much.
Second, demand curves tend to slope downwards. Effective, what this means is that the people with the highest willingness to pay tend to be at the front of the queue. The first people to use a new road will tend to be the people who place the highest value on travelling. The people who come later – perhaps as the road is being expanded – will tend to value travel less.
So far, so good. In a typical market, the quantity supplied would be determined by the intersection of the two curves. If transport agencies applied similar thinking, they would seek to build roads to the point at which the marginal willingness to pay for more driving was equal to the marginal cost of the next road. That’s shown in the green circle below.
However, transport infrastructure is not a typical market – it’s provided free of charge by monopoly infrastructure builders that must estimate (rather than observe) the amount of demand for their products. And rather than specifying a downward-sloping demand schedule, NZTA’s Economic Evaluation Manual (EEM) simply presents a standardised average figure for the value of time for travellers. (More precisely, a set of different averages for different types of roads and types of users.) The result of that – shown in the graph below – is effectively a flat demand curve.
If estimates of future demand are based on the value of time for the average current user rather than the marginal new user, they will significantly overestimate people’s desire to drive on new roads. In theory, the EEM includes procedures to correct for this – principally, their application of the “rule of half” to scale down transport benefits for new users. In practice, a lot of analysis seems to be done on the basis that future users will value driving in much the same way as previous users. Furthermore, demand forecasts can be developed in a fairly crude way that doesn’t take into account people’s marginal willingness to pay for new road capacity.
The graph below shows this dilemma. Effectively, if we don’t take account of the fact that demand curves slope down, we run the risk of massively overspending on new roads.
But that’s just the theory – has this actually happened in reality? There is some evidence that it has. For example, the failures of private toll roads in many developed countries suggest that road-builders may not have accounted for people’s declining marginal willingness to pay for travel time savings. Broader support for this hypothesis is provided by the fact that vehicle kilometres travelled in New Zealand have flatlined over the last decade, in spite of major investments in new roads:
Can we expect the same thing to happen in public transport or cycling networks? Eventually, yes, it will. But right at the moment the fact that these networks are incomplete means that improvements may attract new users faster than expected. For example, the City Rail Link is a three-kilometre tunnel that will give Auckland Transport the ability to double train frequencies throughout the entire 100km+ network. Doing that will make rail a lot more useful throughout Auckland and attract new users who otherwise wouldn’t have taken the train. Recent improvements to PT seem to have had this effect – i.e. attracting users more rapidly than expected.
But that’s a story for another day…
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Excellent post. Thanks Peter. Someone should now explain that to Don Brash because based on his recent facebook status, he doesn’t seem to understand that economics stuff.
I think you could apply the same to sea and air travel. Early adoptors paid a premium to arrive faster (steam ship vs sailing ship, or plane vs ship), but when that market was satisfied, airlines had to reduce fares to attract a bigger market, but eventually capacity exceeded demand, and shipping lines and airlines went bust or abandoned unprofitable routes. The only significant difference is they didn’t have to construct a physical “road” to travel on, but the ports/airports did the speculating when it came to providing infrastructure.
A far greater inefficiency is providing road space free to the user particularly when there is congestion. So rather than those with the highest willingness to pay being at the front we have those who value a good lie in the least and those whose value of time is the least. Even a very small charge for peak time travel would make people weigh up the costs and benefits to them of using the road. Those who gain very little would then change mode, change travel time or not travel. That would leave road space for those who cant make those changes. A side benefit is we wouldn’t have to build as many new roads and we could spend the toll on something useful like public transport or hip replacements or child poverty or lower income taxes whatever people consider important.
Excellent point! Congestion is simply rationing by queues.
Agree in general, so long as people have real choices (e.g., good-to-excellent public transport choices) so that they don’t have to get up at 4:30 am to beat the traffic, or don’t have to quit their job/quit working to avoid the trip.
Important post. Good to see a technical explanation of what is intuitively obvious: we have a lavish road network, are continuing to spend eyewateringly sums of money expanding it, yet that neither improves the city’s economy nor liveability, nor even attracts the marginal user.
We have a broken methodology for analysing infrastructure need and performance in the transport sector. Urgent need for our institutions to do mode blind analysis, not simply search for more places to build state highways.
This looks like another good reason to divert money away from low value projects into the CFN.
I don’t get the CRL. It will cost 2.5 billion to shave 10 minute off the travel time for west Auckland residents who live within cooee of a train station. That just doesn’t seem cost-effective at all.
There are hundred posts on the CRL on this site. Just go and do some reading. The whole bus network is changing primarily to take people to train stations very quickly. The CRL allows us to run double or triple the number of trains we do at the moment. We are unlocking the unused potential of our existing rail infrastructure. This is a huge shift in the way people can use the network. Hopefully they will sort out the pricing so that it becomes more attractive.
I mean 20 minutes
Whatever the time savings.
The question to ask yourself is what would it cost to deliver that sort of improvement in travel times for all those Western Suburbs car drivers who used cars to get where they need to go if you tried to widen the motorways? Could you even do it?
Even if you could, it will be a darn sight more than whatever $ figure you think CRL costs, and thats just the Western Suburbs you’ve considered add in those elswhere too and the CRL benefits are massive for the $.
It effectively means the entire rail network won’t have to squeeze into Britomart and then reverse out again before another train can have it’s turn of squeezing in.
Britomart will have trains flowing through in both directions meaning a doubling of the rail capacity across the network, even for people who don’t work in the central city. Trains will be able to come past much more frequently and trips will become shorter because they’ll be more direct or on an electric train.
Aside from the direct benefits to the rail network it will also mean that bus services can become proper feeder services in an integrated network, so if you don’t live within walking distance of a train station, you can tag onto a bus zoom up a bus lane and then tag onto a train a maximum of a 5 min wait in between. With the integrated fares coming the bus ride will effectively become free if it’s a dog leg type trip.
If you’re a plumber that will never use public transport, you’ll be better off because others will choose to leave the car at home.
“It effectively means the entire rail network won’t have to squeeze into Britomart and then reverse out again before another train can have it’s turn of squeezing in.
Britomart will have trains flowing through in both directions meaning a doubling of the rail capacity across the network, even for people who don’t work in the central city. Trains will be able to come past much more frequently and trips will become shorter because they’ll be more direct or on an electric train.”
Excellent points, which is why I was aghast that AT were planning on making the same mistake for the airport railway station (having an in-out dead-end for a line that continued on to Manukau (and ultimately Botany and Panmure). Can’t we learn that through stations are better than dead-end ones?
The time savings are bigger than that, enough to induce further demand. And we’re talking about millions of trips. I don’t know what the C/B says, but over the life of the project (we don’t evaluate its success in the first month or year, maybe not even decade), that adds up to considerable savings, not to mention other transport projects that were *not* needed.
Improved travel times are a nice bonus, but they’re not the major reason it’s needed. It’s a huge unlocking of potential across the entire rail network. With the current pattern of ‘everything goes to Britomart and then reverses out’, we can’t increase the number of trains much more than the numbers running at peak in the Dec 8 timetables, so we can’t use the rail network to its full capacity. And aside from the benefits of more frequent trains for everyone, we need that rail capacity – it won’t be long before the central city can’t fit any more buses at peak (Symonds St is practically already there), so to cater for demand, we need to be able to run more trains. The CRL makes Britomart a through station, which makes it all possible.
Have you looked at HOW MUCH of Auckland is “within a cooee” of a train station? Especially when cycling is added in the mix to get to the train stations (CAA did a great map on this). So this is a VERY efficient project to improve quality and quantity of train services for a very large part of Auckland.
http://caa.org.nz/wp-content/uploads/2013/11/Rail-Map_02_CAA_Logo.jpg
I think you hit the nail on the head when you said:
transport infrastructure is provided by monopoly infrastructure builders that must estimate the amount of demand for their products.
The more they deliver, the more they can charge, right? There is no incentive to build less, only to build more.
In any other industry self imposed demand would be frowned up or cause an outright uproar
(not that it would work because supply and demand usually works in other industries)
I love the graph of forecasts. Talk about group-think. Or group faith or whatever it is, but they are obviously determined to get it wrong every year until they get it right. And they think their methods are scientific.
What I find most interesting about that graph is that the short-term forecasts (2-4 years) are all basically correct. Whatever forecasting models MoT is using are clearly picking up some of the factors that are causing demand for driving to level off. This was true as far back as 2006, when the trend towards flatlining VKT was only just emerging.
Of course, the models project a return to historical levels of growth in the long term. (Perhaps it is assuming that factors like higher fuel prices, changing user preferences, or changing demography will get “priced in” after a certain point, and that people will go back to their old ways.)
Basically, I think the models deserve credit for their short-term predictive power (as well as skepticism about their long-term projections).
And, what is the effect of land acquisition costs on new construction? Wherever a road is built land prices rise because of improved access and in anticipation of it. The more you reduce travel time the more land values appreciate, the more it costs to acquire the ROW.
Yes MoT’s short term forecasts look like they are fact based, but a couple of years out and faith kicks in, and it’s all ‘back to the 1960s’ of pent up unfulfilled demand.
Covec and NZIER just drink from the 20thC koolaid straight off the bat.
Anyone know MoT’s 2014 number? Why isn’t it there, it’s their chart?
Maybe they have given up making any predictions… 🙂
I really like the graphic comparing the “Before the Rail Link” and “After the Rail Link” travel times – Would it be possible to crowdsource an advertising campaign to run this kind of graphic appropriate to the local area in every local giveaway paper (the example in this post of course here would be the NorWest News) along with the message “tell your local MPs and councilors you want this”? I’d cheerfully chip in.