This is the second and final post discussing some broad ideas for building a better city. The first post discussed the dynamic nature of cities and argued that a focus on appropriate pricing and incentive mechanisms was important to managing urban ills without stifling beneficial change. This part discusses how we might identify policy areas in need of improvement, and why we should care about efficient policy.

2. Cost benefit analysis is important for identifying opportunities to improve policies

Over the last 170 years, New Zealand cities have been shaped by a wide range of policies, ranging from planning regulations to public investments to government land-holdings to tax and subsidy policies. Many of those policies serve (or served) a useful purpose, and most are good intentioned. But it’s almost inconceivable that all of them are efficient. Cities are dynamic places, and policies put in place in past decades can easily become outmoded and begin to distort prices and limit people’s choices.

Fortunately, as I have tried to suggest in the previous post, we’ve got more policy alternatives than we think. We don’t have to use yesteryear’s solutions to solve next year’s problems. But how do we know what we might have to change?

In my view, cost benefit analysis, or CBA, has an important role to play in identifying which policies are good and which need to change. If you want to learn more about CBA, you can delve into the technical guidelines published by organisations like the Treasury and the NZ Transport Agency. But CBA is not really as complicated as the tedious official guidance makes it sounds. It boils down to a rather simple question:

“This policy has some benefits and some costs. Do we expect the benefits to exceed the costs?”

If the answer is no, perhaps we should do something different instead.

Cost benefit analysis can be applied to a wide range of policy questions. It’s commonly applied to evaluate public investment options – that’s what NZTA uses it for – and less widely used elsewhere. But the principles can readily be extended to a wide range of urban policies. In a paper I wrote for this year’s NZAE conference, I looked at a couple of approaches to evaluating the costs and benefits of planning regulations. I found that analysis of property sales could be used to identify cases where planning rules distorted prices and prevented people from making useful investments – as well as cases where planning rules could provide benefits by managing localised externalities.

Here are a few good examples of how CBA can help in making better decisions.

Back in 2009, the new National-led Government worked with the Green Party to design and implement an insulation and clean heating subsidy programme. In the first four years of the programme, roughly 180,000 homes were insulated and heat pumps were installed in around 60,000 homes. A cost benefit analysis undertaken in 2011 (Grimes et al, 2011) found that the project’s benefits exceeded the costs by a factor of five:

The overall results suggest that the programme as a whole has had sizeable net benefits, with our central estimate of programme benefits being almost five times resource costs attributable to the programme. The central estimate of gross benefits for the programme is $1.28 billion compared with resource costs of $0.33 billion, a net benefit of $0.95 billion.

This finding provided a strong rationale to extend the programme to 2016 and trial a rental warrant of fitness programme to improve home weathertightness and safety performance in selected NZ cities.

A second good example is the Ministry of Transport’s recent analysis of the economic performance of state highway investment. I reviewed their analysis in a series of posts last year (parts 1, 2, 3, 4). Among other things, they found that the economic efficiency of road spending had fallen since 2008, with projects with low benefit-cost ratios being selected over projects with higher BCRs.

MoT state highway BCRs 2005-2012

This is a valuable finding that should be taken seriously by policymakers and the public. It suggests that there may be opportunities to significantly improve the value that we are getting out of transport investment. That being said, it also suggests that policymakers have chosen to take a more optimistic view about project benefits than indicated by conventional CBA procedures. Sometimes this is warranted – it’s difficult to accurately account for some benefits – and sometimes it’s not.

This reminds me of a third example. I was struck by recent comments by Wellington’s Deputy Mayor about the city’s new publicly funded convention centre and film museum:

Deputy Mayor Justin Lester said the museum would become New Zealand’s most significant man-made attraction and an international draw card.

“It’s a little bit when Disneyland first opened in California, but in a Wellington context… In the 150th year since Wellington became New Zealand’s capital, there are only a handful of moments that rival the significance of this announcement.”

I haven’t read the business case, so I don’t know what assumptions were made to sell the project. But if the financial and economic forecasts require Wellington to become the “Disneyland of the south”, I would be very nervous.

This leads on to a very important consideration when using CBA results: To get the real story, it’s important to dive into the data and calculations that sit behind the headline figures. In some cases, people make claims about projects that are not backed up by their analysis. For example, they may require unlikely things to happen in order for the hypothesised benefits to materialise. In these cases, a properly-done CBA should also provide you with a means of understanding the risks inherent with the policy.

3. In an efficient city, there is time and space left over to lead a good life

But why is efficiency important? At the start of this post, I argued that good urban policies facilitate agglomeration economies in both production and consumption. This, in turn, enables cities to succeed in attracting new businesses and new residents. (The alternative of urban stagnation or economic decline is not really very appealing.)

Or, as Stu argued in a post last year, efficient urban policies provide us with an abundance of good things. Efficient urban planning policies allow us to have abundant, affordably priced housing, without sacrificing public goods. Efficient transport policies enable us to have abundant access. Good management of public assets allows us to combine a productive economy with a good supply of public goods.

Furthermore, generally prioritising efficiency in our urban policies means that we will have more resources left over for all the non-economic things that make life beautiful and enjoyable. For example, allowing people to use land efficiently by building more housing in areas that are accessible to jobs and amenities will also allow them to avoid commuting long distances to sprawlsville. This in turn frees up time to spend with the ultimate in non-economic investments – children and families.

Last December, I saw how things could be a little different. It was the first day that LightPath / Te Ara I Whiti cycleway was open. (Incidentally, I think it should be called PinkPath.) I skipped the mass ride organized by Bike Auckland in favour of a drink elsewhere, but checked out the new cycleway on the bike ride home.

Now, I wasn’t extraordinarily enthusiastic about the project. It seemed to be too far over to the west edge of town and so I wasn’t sure how many people would want to use it. But it has surprised me. I’ve been up and down it eight or ten times since then, and there are always people out on it, even at 10pm. They are having fun cycling – a relatively new concept for Auckland.

LightPath - Vaughn Davis

PinkPath was designed to be fun to cycle on and fun to see from a distance. It sends a message: “Auckland will give you new choices about how to travel. Rock up on your bike.” It didn’t cost much – less than 1% of Auckland’s annual transport budget and a disused motorway off-ramp. But that money and space can easily be consumed by inefficiency elsewhere in the system.

Which leads me to my conclusion: the good things in life are not necessarily expensive, but they can easily be crowded out by bad urban policies. So get the prices right, do some CBA, and live a better life in a better city.

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15 comments

  1. On the subject of cost benefit analysis, yesterday you said that “As any economist will tell you, if you want less of something, put up the price!” and followed that up with “…high land prices encourage people to economise on land by building up.”. I think the first statement is true, but the second isn’t. I think high cost land drives away all investment, not just low value investment.

    People in the business of constructing high value buildings do a cost benefit analysis. Look at all the places they can build, compare them and invest in the best opportunity. The lower the costs the more money the investment will return. As an economist you would recommend your client build on land which is lower cost to maximise profits. Any city which wanted less new buildings would put up the price of land, because if you want less of something, put up the price!

    Adelaide, Auckland, Brisbane, Halifax, Melbourne, Perth, Sydney, Toronto, Vancouver and Victoria have all seen an influx of foreign investment. All 10 of these places have had a real estate boom, sending prices soaring. 9 of these places are in the midst of a building boom with levels of construction soaring to record highs, constructing densely populated liveable cities. Auckland has building levels retarded to that of about a generation ago. Why is Auckland retarded?

      1. Boom or whimper?

        Australia in 2015 (all of it, including the depressed bit in the middle) permitted 9 dwellings / 1000 people. http://www.abs.gov.au/ausstats/abs@.nsf/mf/8731.0
        British Columbia in 2015 permitted 8 dwellings / 1000 people. http://www.bcstats.gov.bc.ca/StatisticsBySubject/BusinessIndustry/Construction.aspx
        Auckland in 2015 permitted 5.5 dwellings / 1000 people. http://greaterakl.wpengine.com/2016/01/06/apartments-and-affordability/

        1. That’s an element of the supply side, but whats the demand side, for this it’d be what is the population growth in the same measure x per 1000, otherwise it’s pretty meaningless.

          1. Factoring in population growth would be meaningless and cloud these statistics with spurious info.

          2. What you mean is the housing deficit or surplus in each of these markets. I cannot provide that info on the Canadian or Australian markets, but if you can find out it might be helpful.

            I trust everyone knows the supply situation in Auckland.

  2. I agree CBA can be useful, but the biggest issue is recognising its limits; numbers sometimes have a spurious precision which can be attractive to decision-makers because it hides genuine uncertainty and value judgements. In Wellington for example, we are going down an extraordinarily retrograde path with converting electric transport to diesel, rather than building on the existing network strengths. In part this is because the funding systems are different for roads and public transport so applying conventional CBA to a subset will not give overall optimal outcomes; add in lack of road pricing and a few other quirks and we are in the world of second, third or even fourth best.

  3. Peter – I think CBA particularly with respect to transport is not actually that useful under current policy settings which assume the only benefit of transport is reducing travel times. Under that framework anything that slows down cars is seen as a cost, ehen in fact that same project may have many non transport related benefits.

    Thoughts?

    1. Yes the devil is very much in the detail. Also as the transport models are so clearly substantially broken the old garbage in garbage out problem applies too. Then there is the substantial issue of induced traffic. The EEM allows road projects that will increase total VKT to bank ‘carbon emission benefits’. And ‘decongestion benefits’. This is simply sophistry. A trick achieved by considering the route in question completely separate from the whole system. In fact the whole technical apparatus is stacked with levers and paths that lead to making road expansion look soothingly positive, as there is both institutional path dependency and political enthusiasm for this specific kind of spending.

      So Peter is surely right in theory but, as he says in the post, this depends mightily on the detail.

    2. Indeed – while more than travel time is considered in theory. the aggregation of small time savings across many vehicles and years does tend to dominate. Empirically, small time savings are not valued by people in this way; there is an extensive literature on people’s ‘time budgets’ and the non-linearity of the values people put on time.

      In practical terms the linear value of time used by NZTA means that saving a few seconds on a motorway journey of 30 minutes has far too high a value relative to say a five-minute saving on a public transport journey over the same route. This is not helped by NZTA valuing time savings for motorists at a higher $/hr rate than time savings for public transport users. This approach is incoherent from a social cost-benefit analysis point of view – as it reflects private values of time from surveys and not the social value of time savings.

      NZTA’s current approach reflects the ad hoc way NZTA (and before that Transfund and Transit’s) BCA has evolved from the roading project sequencing tool originally developed by the National Roads Board back in 1981!

      As I have commented in a video on Auckland transport a few years ago, under the current NZTA approach the state would buy everyone a dishwasher.

      1. And the downside is that quality of place suffers but NZTA and Government transport funding policy do not take that into account!!!

    3. Other than the agglomeration benefits and safety benefits which are counted and are most of the benefits in many projects.

  4. Yep – in my experience NZTA continues to act as a motorway agency. I would actually take administration of the NLTP off them and give it to another agency with a wider mandate.

    1. You do realise that they get a pretty direct steer from the Govt via their GPS? Pretty hard for the politically appointed Board to do much to change that without displeasing their masters…

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