In this earlier post Matt discussed the proposed Mill Rd project in South Auckland.
I actually grew up in Franklin (Waiuku) and know the wider sub-region quite well. Mill Rd is, in my experience, an unsafe stretch of road within a somewhat disconnected/fragmented network. So there’s definitely some transport/land use issues in the area that deserve our attention.
Tick to AT on that front.
As a transport economist, however, one must always ask whether the benefits of a proposal are commensurate with the costs. In terms of Mill Rd, the economic benefits of the proposed project are shown below (NB: This is extracted from the scheme assessment report pg 79).
The benefit cost ratio of the project is stated to be 2.2. This means that the project receives a “medium” rating for economic efficiency under NZTA’s project evaluation policies. It’s worth nothing that in Peter’s post on the MoT’s analysis of capital spending on roads, local road projects were found to typically have BCRs in the range of 3-4. Mill Rd’s economic efficiency is, in comparison, somewhat underwhelming.
Digging a little deeper we can see that the largest 3 benefits attributed to the project are 1) travel time savings ($271m); 2) agglomeration benefits ($69m); and 3) vehicle operating costs ($27m). I thought the benefits ascribed to agglomeration were the most interesting (NB: For those who haven’t heard of “agglomeration” before, you might want to read some of our previous posts on the topic here and here).
In a nutshell the literature suggests the primary agglomeration economies typically arise from:
- Regional economies of scale, i.e. larger markets for goods and services (especially more efficient labour markets). This can be achieved by either bringing more people/firms into the city and/or bringing existing people/firms closer together by reducing transport costs;
- Local knowledge spillovers in dense urban environments that increase productivity; and
- Efficiencies in the public provision of infrastructure/services.
When discussing agglomeration benefits the Mill Rd SAR notes (emphasis added):
“Agglomeration economies describe the productivity advantages that arise from the close spatial concentration of economic activity. There is a strong link between transport provision and the benefits that arise from the spatial concentration of economic activity.
The contribution of the improved Redoubt Road-Mill Road corridor to the upgrading of the Auckland transport system qualifies for the agglomeration benefits to be taken into consideration. Economic Evaluation Manual, Vol.1, Section A10 provides the methodology for estimation of these benefits.
The corridor provides an access route to Auckland CBD and Manukau City Centre. Both are major employment and commercial centres, which justify an adoption of the agglomeration benefits for the project. The value of these benefits was assumed at 20% of the total benefits, which is conservative as similar projects in the Auckland region use values in excess of 25% to 30%.“
Having observed that agglomeration economies arise from the close spatial concentration of economic activity, the SAR then proposes to estimate agglomeration economies by applying a blanket 20% factor to total benefits.
At this point I emitted audible “hmmm”, a bit like Homer Simpson day-dreaming about warm pie (NB: Source).
The SAR is correct that agglomeration benefits can arise from spatial concentration of economic activity. Where the SAR seems to make a fairly large leap of faith, however, is by assuming that the Mill Rd project (and specifically the land use patterns it enables) will logically lead to sizable positive agglomeration benefits. It’s worth noting at this point that from a quick read the above extract is the only discussion of agglomeration economies in the entire (200 plus page) report, despite them supposedly representing the second largest source of benefits for the project.
Before discussing agglomeration economies in more detail let’s introduce an important concept” The “counter-factual”. This describes would happen without the Mill Rd project. In the case of agglomeration economies, we’re primarily interested in land use effects, i.e. what would those 10,000 households do in the absence of the Mill Rd project?
It seems plausible to suggest that some households would simply choose to locate in the area anyway, while enduring slightly longer travel-times. For these households the agglomeration effects are almost identical to the base case. Other households might instead choose to locate somewhere else, most likely in a more central location. This would actually tend to generate larger agglomeration benefits than would have arisen had they located in the Mill Rd area, i.e. for these households the Mill Rd project can be considered to have a negative effect on agglomeration economies.
This discussion highlights two important points about agglomeration economies: 1) You can’t have a very informed discussion about them without first carefully defining the counter-factual (land use) scenario and 2) depending on this counter-factual scenario, it is possible that transport investment gives rise to negative benefits, because it encourages/enables development to spread out more (and create more congestion) than would have eventuated otherwise.
In this context, simply assuming a 20% agglomeration premium on total benefits strikes me as a tad presumptuous. Let’s now go back to the three micro-economic channels that contribute to agglomeration economies that we listed above and consider how they relate to the Mill Rd project.
First, it seems unlikely the Mill Rd corridor will, on its own, impact on regional economies of scale. It’s simply not a sufficiently large step change in accessibility that it would encourage more people/firm to migrate to Auckland than would have done otherwise. Indeed, with Auckland’s annual population growth running at approximately 50,000 people per annum, the total growth expected in this area over the next 30 odd years (25,000 people) is a veritable drop in the growth bucket. It’s primary effects seem to be bringing Papakura closer to Flat Bush and Botany Downs, and both of these centres slightly closer to Manukau. Unlike the SAR, I’m not sure how it provides a new access route to the city centre, at least to a degree that would have implications for regional productivity.
Second, it seems unlikely that the Mill Rd will contribute much to knowledge spillovers. In a geographic sense, the area is right on the periphery of the metropolitan area, and relatively remote from employment areas to the north. It is especially remote from the city centre, which is the source of most of the knowledge spillovers in Auckland. While secondary centres like Manukau do experience some agglomeration economies, these seem more likely to arise due to the two types of agglomeration discussed above and below.
Third, Mill Rd doesn’t seem to give rise to major efficiencies in the provision of public infrastructures and services. Indeed, the Mill Road transport project represents approximately $20,000 in CAPEX costs for every household that is expected to locate in the immediate vicinity. It seems plausible to suggest that these households could be accommodated for similar (if not lower costs) somewhere else in the region. To make the case for these agglomeration economies, we would expect to see evidence of surplus capacity existing in nearby health and education facilities.
So what’s the take-away message from all this econo-mumbo-jumbo-fiddle-faddle?
First, even taking the economic evaluation of Mill Rd project at face value, we find that it’s a fairly mediocre local road project. While there are transport issues in this area, addressing them in this way seems expensive compared to most local road schemes around the country.
Second, I’m not confident it is reasonable to assume the agglomeration benefits of the Mill Rd project equate to 20% of the total benefits. By extension, I question whether there is sufficient evidence to include them in the base economic evaluation. Instead, it seems more reasonable to treat them as a possible sensitivity, and even then 20% seems to be a very high premium given the location of the project. Removing these benefits from the evaluation causes the BCR for the project to drop from 2.2 to approximately 1.8. It’s important to note this is not necessarily a terminal issue for the project; the proposed scheme obviously still manages to address some importany problems in the wider area. It’s just probably not as urgent as it appears from the evaluation.
Finally, it highlights what I think is the most important and interesting policy issue: That is, the need for land use policies to be informed by transport outcomes, and possibly linked to financial incentives. In this case, it seems like the Mill Rd project will cost quite a lot. Perhaps, then, there is a need for AC to revisit the merits of enabling growth in this area. Indeed, AT can rightly say that they are to some degree simply responding to land use plans developed by AC. And the latter may want to consider whether development would even occur out this way in a hypothetical situation where the actual infrastructure costs were internalised into the costs of development and ultimately passed onto consumers?
What do you think is the best way to balance public/private interests when it comes to transport and land use outcomes?