The East West Link Board of Inquiry is well under way, with the expert witness conferencing sessions winding up last week, and the hearing itself set to begin shortly. Expert witness conferencing is where experts representing the applicant (the NZTA) and submitters come together to try and find common ground and identify remaining areas of disagreement.
Expert evidence has been submitted on a wide range of topics, but in this post we take a look at the economic arguments for and against the East West Link.
As most readers will know, the estimated cost of the East West Link has escalated to as much as 1.8 billion dollars. We’ve previously analysed the costs and benefits of the various route options, and found that the best “bang for buck” actually comes from the cheaper options that were assessed. Using an incremental approach, the BCR of NZTA’s chosen option over cheaper options actually comes out negative. In other words, the increased benefits of the NZTA’s chosen option aren’t enough to overcome the increased cost. If Finance Minister Steven Joyce was sincere with his recent call for greater discipline in assessing the benefits of large infrastructure projects, he need look no further than the East West Link.
In the NZTA’s economic evidence put forward to the Board of Inquiry, there is no discussion of benefit-cost ratios. Instead, NZTA’s economic evidence makes a number of assertions, some of which include:
- The area is a significant employment centre, accounting for 10 per cent of Auckland’s employment in 2015.
- The area accommodates a large number of other major distribution and logistics facilities serving Auckland and the upper North Island. Supporting these activities and the supply chains they underpin is clearly important to the future economic prosperity of the Auckland and the upper North Island.
- The Project provides an opportunity to reduce travel times and improve connectivity between firms and markets locally and between regions and between workers and jobs, mainly within Auckland. This will support a range of economic benefits including increased business productivity and reduced operating costs.
- As employment increases within the area so too will commuting trips [by private motor vehicle] with much of the area not well suited to passenger transport.
- And so on…
The NZTA’s evidence concludes:
- The EWL area plays an important and unique role within the Auckland and upper North Island economy as it is both Auckland’s and the upper North Island’s main industrial, transport and distribution hub. The economic contribution of the area is regionally and nationally significant, generating approximately $4.7 billion of output in 2012, or 7.5 per cent of Auckland’s total GDP and the area is a significant employment centre, accounting for 10 per cent of Auckland’s employment in 2015, second only in size to the CBD.
- Inefficient connections are constraining the EWL area’s growth. Through the provision of additional transport capacity, which delivers a wide range of accessibility improvements, the Project will support the growth of the EWL area and Auckland’s economy.
- By improving accessibility for businesses the Project will result in improved productivity and output through faster travel times, more efficient use of resources and reduced operating costs.
- Importantly, the EWL will work in conjunction with the operative zoning to support the development of the parts of the EWL area identified by Auckland Council as key manufacturing and transport locations with future growth potential, making the Project a real example of integrated land use and transport planning.
There are obvious defects with the NZTA economic evidence. For starters, there is no attempt to quantify the benefits in economic terms, and there is no mention of the cost of the project and costs imposed on the wider community.
However, at a Board of Inquiry it isn’t enough for a lay person to make these points, no matter how obvious they may seem. Submitters have to engage their own experts at their own expense. Four submitters have done just that, putting forward their own economic evidence to the Board.
- Auckland Council’s evidence expects the economic benefits of the Project to be significant. Again there is no mention of cost in their evidence, presumably because this particular project is primarily funded by the NZTA. However, Auckland Council do point out that NZTA did not attempt to quantify the economic benefits, and the also mention that “the NZTA has not provided Auckland Council with the workings from the  Detailed Business Case, and has indicated that no additional work has been done on the economic implications of any changes in to the option that may have been introduced since.”
- Auckland Heliport Limited’s evidence discusses how their operation could be “effectively reduced to non-viability and the economic benefits flowing from it lost to the city, region and beyond.” They say the NZTA evidence “has not quantified the claimed benefits of the EWL project, nor sought to assess its economic costs which should then be subtracted from those to estimate net benefit. In my opinion, the Board is not able to undertake a proper assessment of the EWL in accordance with the RMA without NZTA having provided such evidence.”
- Mercury NZ Limited’s evidence again points out that the NZTA “does not assess the economic costs of the East West Link proposal, and does not quantify the economic benefits.” Their evidence shows that “updating the NZTA quantification of the economic benefits of the East West Link proposal, for the revised construction costs and for the cost of impairing electricity generation at the Southdown Site, would suggest the East West Link proposal may have an adverse effect on the economic wellbeing of New Zealanders.” They also make the excellent point that “The capital for the East West Link proposal would come from the National Land Transport Fund. This fund is limited and any funds committed to the East West Link proposal would necessarily displace other projects competing for funding.”
- The Campaign for Better Transport’s evidence endorses all of these points and more, discussed further in the remainder of this post.
The Campaign for Better Transport’s evidence comes from economist Donal Curtin. He takes a look at the NZTA’s Indicative Business Case, their Detailed Business Case, and provides commentary on the evidence of the NZTA and other submitters.
The Indicative Business Case
From the Indicative Business Case, Donal highlights the options assessment.
Donal makes the following points:
- NZTA’s chosen Option F, from a purely economic perspective, was not the best option. The greatest quantum of benefits comes from Option B.
- On a Benefit Cost Ratio, or “bang for buck” basis, Option F is again not the clear preference.
- None of the options were highly effective projects when assessed against the NZTA’s own classification system of effectiveness.
Donal points out that the economic perspective is not, however, “society’s last word on the right projects to undertake.” To this end he takes a look at the NZTA’s multi-criteria evaluation, again from the IBC:
The MCA assessment did not spit out any obvious overall winner. Donal notes that if you simply added up the scores of the MCA and combine with the BCR, then Option A becomes the clear winner. Using a slightly different weighted approach, Option C becomes the winner.
Most importantly, the Indicative Business Case does not explain exactly why Option F was chosen. Somewhat diplomatically, Donal states that “it leaves open the possibility that the decision process did not adequately lead to the identification of the best project, even when tested against the BCR and MCA criteria that the NZTA chose.”
The Detailed Business Case
From the Detailed Business Case, published in December 2015, Donal then focuses on the updated BCR table for NZTA’s preferred Option F.
The big changes are a $200 million increase in benefits and a $125 million increase in costs. Anticipated net costs have increased as a result of the DBC refinements, and a more complete understanding of the works required. However, the increase in costs has been matched with a relative increase in benefits such that the BCR remains similar to the level identified in the IBC.
Donal questions why the benefits happened to have increased by $200m:
If for example, the original benefits were unchanged, rather than assumed to rise in proportion to costs, then the BCR of the EWC would fall from 1.9 to around 1.65. On a BCR(P95) basis, they could be as low as 1.25. This would be close to the bottom end of the NZTA’s ‘Low’ rating for a BCR
Furthermore, on the basis of more recent project estimates of $1.25-1.85 billion, the BCRs for the EWC would be 1.42 (on the $1.25 billion number) or 0.96 (on the $1.85 billion number).
“A BCR below 1.0 means that from an economic perspective, the country would be better off if the EWC were not built. While it is likely that other options considered at the IBC stage would also have encountered some of the same pressures (particularly in respect of escalation in construction cost), these numbers suggest that the original decision to prefer option F was not as well-grounded as it might have been. Options with higher BCRs, rejected by the NZTA, would have left significantly more headroom to absorb cost pressures and still result in projects with BCRs that made them worthwhile for society to construct.”
My final comment would be that we do not appear to have the transparency around the most current calculations of benefits and costs that I would have expected to have been available at this advanced stage of a major infrastructural project.
Joint Witness Statement
So where does this leave us? Coming back to the Joint Witness Statement prepared for the Board, there is some agreement among the five professional economists:
- Existing economic activity within the Project area is substantial.
- The project will reduce travel times and improve travel reliability between firms and individuals within or across the Project area.
- Reduced travel times and improved travel reliability would support a range of economic benefits, including increased business productivity and reduced costs.
- Achieving these economic benefits would incur economic costs, including capital costs, disruption to existing activities and other opportunity costs.
- An economic assessment of this Project should consider both economic costs and economic benefits.
- NZ Transport Agency completed a detailed cost-benefit analysis in December 2015
- Neither the December 2015 analysis nor an updated economic assessment of costs and benefits have been presented as part of the application or evidence given in support of it.
But areas of disagreement remain:
- These proceedings should include an assessment of effects on economic wellbeing, covering economic costs and benefits. [Agreed by the four economists of the submitters]
- An assessment of effects on economic well-being has already been undertaken within the Detailed Business Case to assist NZ Transport Agency to make its investment decision. [NZTA]
Economists for the submitters state the application and subsequent evidence does not establish:
- How Option F was arrived at as the preferred option and, in particular, how the Option reconciled with NZ Transport Agency’s own system for prioritising Projects;
- Whether all material benefits and opportunity costs were included in the analysis and how they were estimated;
- What the up-to-date assessment of economic costs and benefits is for the latest iteration of the Project.
In response to the above, the NZTA state:
- The process for arriving at Option F is outlined in the cumulative evidence, consisting: Assessment of Alternatives; Transport Planning; Traffic and Transportation; Planning Effects
- The material benefits and costs used to arrive at Option F as the preferred option are outlined in the cumulative evidence, consisting Economics; Assessment of Alternatives; Transport Planning; Traffic and Transportation; Planning Effects
- The most recent comprehensive estimate of costs and benefits is included in the December 2015 Detailed Business Case.
Economics and the Resource Management Act
It’s worth stepping back from this detail and asking does any of this matter in the context of the Resource Management Act?
The NZTA argue that “A benefit-cost ratio (BCR) is used as one piece of information to support the business case but it is not the sole determinative factor in the investment decision by the Transport Agency”, and “the BCR is not a relevant consideration under the RMA. Rather, it is the Project as an activity put forward by the Transport Agency which needs to be considered by the Board of Inquiry.”
Time will tell if the Board shares this view.
Can you help?
It is costing thousands of dollars for the CBT and other like-minded organisations to submit against the East West Link. No matter how small, financial contributions are gratefully received and can be paid directly to The Campaign for Better Transport’s bank account – Kiwibank 38-9009-0281735-00.