The East West Link Board of Inquiry is now in its eleventh week. While the Hearing is scheduled to wind up on 15th September, we won’t see a decision until the 22nd December this year.
A post back in June covered the economic evidence so far for the East West Link Board of Inquiry. Option F is a four lane expressway along the Onehunga foreshore which, on the face of it, offers less economic benefits than two other options. That post ended with these areas of disagreement between various economists:
- 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 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.
Since then, the NZTA provided further rebuttal evidence. The NZTA pretty much stick to their guns and claim a benefit cost ratio of 1.9 based on the December 2015 Detailed Business Case. The rest of the rebuttal is unremarkable, however the following statements stand out:
5.5 I acknowledge that I have not prepared a quantitative assessment of the economic costs of the Project. Neither have I quantified the benefits. However, for the reasons explained in this statement I do not consider that it would be practical (and may not even be possible) to undertake such a task nor do I think it is helpful…
7.8 Based on all the information available, I am confident that the economic benefits of the Project will outweigh the economic costs (especially if the construction costs are not included)…
8.15 I reiterate that the BCR is not a relevant matter under the RMA and the BCR is only one of the tools used by the Transport Agency when making an investment decision and considering alternatives…
8.16 At the expert conferencing Mr Curtin raised the issue of how Option F reconciled with the Transport Agency’s own system for prioritising Projects. This is not an economic matter and I defer to the evidence of Mr Wickman and Ms Linzey.
The way the Board of Inquiry works is that all experts can be cross-examined, and this is what has been happening over the last few weeks. The point of cross-examination is to try and get an opposing expert to concede your points, and to try and strengthen your own case. It turns out you don’t need to be a lawyer to do the cross-examining, so as a submitter the Campaign for Better Transport was able to ask a few pertinent questions. The remainder of this post briefly summarises the transcripts covering the economic evidence cross-examination.
First up we cover a few points Auckland Council’s economic expert David Norman from the 7th August, as recorded in this transcript from page 3262 This line of questioning was really attempting just to confirm a few facts about how economic evaluations are done:
MR PITCHES: … you must be familiar with the New Zealand Transport Agency’s own economic evaluation manual?
MR NORMAN: Yes, I am.
MR PITCHES: Can you tell us a bit about that?
MR NORMAN: It’s a very big document – I can start there – and it’s sort of the basics that they use to I suppose try to ensure that when they evaluate various projects they do it like for like, so it’s a standard methodology, if you like.
MR PITCHES: Okay. So my understanding is that it looks at a number of factors, including the expected volumes of traffic, expected travel time savings and congestion benefits etc.
MR NORMAN: Yes. Yes, that’s right.
MR PITCHES: It’s a tool that’s been used to evaluate dozens of transport projects over the years, so it must be considered a robust way of comparing alternatives in an economic sense, especially for different options in the same study area.
MR NORMAN: I would say so, yes.
NZTA’s economic expert, John Williamson, appeared before the Board on 16 August. He had been brought back to be cross-examined by Mercury Energy, who are opposed to the Option F as it cuts through their power station at Southdown. While not currently producing power, is operating in a “care and maintenance mode”. You can read more about this in Mercury’s legal argument here.
The CBT cross-examination of Mr Williamson begins on page 4081 of this transcript.
MR PITCHES: … in your rebuttal evidence at paragraph 7.8 you state you are confident that the economic benefits of the project will outweigh the economic costs, especially if the construction costs are not included. That is an unusual statement for an economist to make, so what is the context of that paragraph?
MR WILLIAMSON: I would just like to clarify, firstly, that this paragraph is based on the information available, and that is quite important point I think because I have not seen information personally which suggests that there has been any significant change in costs or benefits, so based on the available information.
MR PITCHES: But my —
At this point the Chair of the Board of Inquiry jumps in. Dr John Priestley is a retired High Court judge who also headed up the Puhoi Warkworth Board of Inquiry.
DR PRIESTLEY: Sorry, Mr Pitches, I find that statement odd too because in your evidence-in-chief you are looking at the economic benefits and you are looking at construction costs estimated. I seem to recall there is a figure of $900 million or something like that. But if one is looking at the economic benefits generally, one would hope you would end up by the economic benefits outweighing the economic disadvantages. Am I right?
MR WILLIAMSON: You are quite correct.
DR PRIESTLEY: What is the purpose of this bit in brackets, “Construction costs not included”?
MR WILLIAMSON: To be frank, I find this odd as well as an economist —
DR PRIESTLEY: Sorry, I can’t hear you.
MR WILLIAMSON: I actually agree entirely that an economic analysis should include the costs and the benefits. However, the advice I was given is that, within this context, it is difficult within the confines of the Resource Management Act to take into consideration the cost of the project. That challenges me as an economist as well because I think an economic analysis should, indeed, as the NZ Transport Agency’s economic analysis does, consider the costs of a project, including the capital costs and the benefits…
Next we touch on why the Detailed Business Case cost benefit analysis wasn’t updated:
MR PITCHES: … So we know the reported cost of the project has increased to a range of $1.25 billion to $1.85 billion according to central government. It would be a straightforward exercise to update the economic evaluation with this new range and, hence, provide an updated benefit cost ratio, would it not?
MR WILLIAMSON: Actually, I think there is a point of confusion here. When the Transport Agency reports the cost of a project, it uses three different approaches to cost estimation. For its own internal prioritisation process it uses either a P50 cost, which is the cost that has the probability of occurring 50% of the time or a P95 cost as the extreme, and that cost will occur in 5% of cases. Those costs are presented in the dollars of the day. In this case it was in 2015 dollars. For budgeting purposes they will use an escalated cost, and that is where the costs are inflated to the year of spend and that will increase the cost, but for economic analysis we discount the costs back to a net present value using a discount rate of 6%.
When you look at the costs that are provided by NZ Transport Agency, the $1.8 billion cost is the inflated P95 cost which corresponds with the net present value of $980 million for construction costs. So there has been no change in costs but there are different ways in reporting those costs and I think there has been a degree of confusion. The reported cost hasn’t changed. What has changed is the cost base, if you like, which is used for reporting purposes. So this benefit cost ratio is consistent with the current cost estimate of the project.
(I’ll leave it as an exercise for the reader to confirm that $1.8bn has a net present value of $980m in 2015 dollars.)
The conversation moves on to the Multi Criteria Assessment that is included in the Indicative Business Case. This is the document prepared by Mr Williamson that evaluated six different transport options.
MR PITCHES: … Mr Curtin in his evidence said the multi-criteria assessment did not spit out any obvious winner. Do you agree with that?
MR WILLIAMSON: I can’t comment on the multi-criteria analysis because that was not my area of involvement with the project.
MR PITCHES: Yet you wrote the indicative business case that evaluated the MCA, did you not?
MR WILLIAMSON: I was the author, or rather I managed the process of compiling the business case with others, but I did not undertake the multi-criteria analysis. The business case, if you like, is a receptacle of information. The information that is gathered through the development of the project is placed in the business case as one way of providing all of the information, but I wasn’t responsible for undertaking the multi-criteria analysis and I wasn’t responsible for choosing the option.
MR PITCHES: Were you responsible for the conclusion that option F was the best option?
MR WILLIAMSON: No, I wasn’t. No.
MR PITCHES: Who was?
MR WILLIAMSON: I can’t answer that question. That’s a question for the Transport Agency.
At this point Dr Priestley jumps in.
DR PRIESTLEY: Sorry, I’m confused yet again. Were you the person who compiled the business case?
MR WILLIAMSON: I managed, with others, the process of compiling the business case, but —
DR PRIESTLEY: What does that mean, managing the process? Does that mean you’re like the overseeing author?
MR WILLIAMSON: I’m one of the authors. Yes.
DR PRIESTLEY: Okay.
MR WILLIAMSON: But the business case includes a section which reports the outcome of the multi-criteria analysis, but it’s merely reporting the outcome of the process.
DR PRIESTLEY: So you have no responsibility for the multi-criteria analysis?
MR WILLIAMSON: None at all, no.
DR PRIESTLEY: But presumably, for professional and common sense reasons, if you thought it was a load of nonsense, you wouldn’t have included it.
MR WILLIAMSON: Absolutely, yes.
DR PRIESTLEY: So how do you know it wasn’t a load of nonsense?
MR WILLIAMSON: Well, because as part of the process of including that information in the business case I was involved in understanding the criteria to be used, the information that was to be used to assess the options against those criteria, and the results of that process. So I understood how the process was used but I didn’t make the decisions.
I never did get to the bottom of who made the decision to go with Option F. Next we talk about the economic evaluation, and why Option F was chosen even though it wasn’t the best option from an economic point of view.
MR PITCHES: … We heard from Mr Norman last week, who agreed that the economic evaluation tool has been used to evaluate dozens of projects over the years and it must be considered a robust way of comparing alternatives in an economic sense. Do you agree?
MR WILLIAMSON: Personally, I think it is the most well-developed economic assessment tool within the public sector in New Zealand by a long way.
MR PITCHES: Very good.
MR WILLIAMSON: Yes, it is good.
MR PITCHES: Even so, the indicative business case did not recommend the option with the greatest economic benefit, which was option B. Nor did it recommend the option with the highest benefit-cost ratio. So again, what are the other reasons why option F was chosen?
MR WILLIAMSON: Yes, well, again I will defer to the evidence of Ms Linzey, but what I would say is that the process for option selection was based on the Transport Agency defining the outcomes it wished to achieve within the project area, developing a set of criteria which enabled it to test the options against those outcomes, and then choosing the option which it felt best achieved the outcomes. That may not necessarily have the highest cost-benefit ratio.
Make of that what you will. There’s a discussion about what is meant by the supposed “enduring benefits” of Option F, which I won’t summarise here but are worth a read if you interested on page 4088. There is also a discussion on whether the NZTA had been under political pressure to choose Option F (answer: no).
The final questions asked of NZTA’s expert witness are relevant because of the Basin Bridge decision, which turned down NZTA’s application to build a flyover near the cricket ground in Wellington.
MR PITCHES: All right, so my last two questions. Do you think the assessment of alternatives for this project has been logical, transparent and replicable?
MR WILLIAMSON: Yes. Yes, I do.
MR PITCHES: In an economic sense as well?
MR WILLIAMSON: Yes.
MR PITCHERS: And the alternatives that have the potential to reduce environmental effects have been adequately assessed?
MR WILLIAMSON: I’m not qualified to determine the adequacy of the assessment of environmental effects but I have been involved in the development of these two business cases and I would say that the process that’s been followed here is significantly better than some of the processes that have been used previously. One of the advantages of this process is that the first thing that takes place is an understanding of what the issues are and what the opportunities are and what the outcomes that are being sought might be before anybody starts to think about what the solutions may be, which is possibly a difference that you might see compared to some older projects. So in terms of developing solutions, the solutions are then developed in response to the identified problem and the opportunities. I think that’s a particular good way to get around developing options and then assessing options against criteria which reflect those outcomes. Does that help?
MR PITCHES: All right, yes. But you agree, though, that the option chosen is not the best economic option?
MR WILLIAMSON: I would say it doesn’t have the highest cost benefit ratio but that’s not the same.
MR PITCHERS: Or option F does not have the highest absolute net benefits either, does it?
MR WILLIAMSON: It doesn’t have the highest net economic benefits but those benefits are the benefits that you can quantify using the Transport Agency’s economic assessment model.
The Campaign for Better Transport
Donal Curtin is The Campaign for Better Transport’s expert witness for economics, and summarised in this post here. He argued that the NZTA hadn’t chosen the best option based on a benefit cost evaluation, and neither was Option F the stand-out option in the Multi Criteria Analysis. Donal defended his evidence well in the face of questioning from NZTA counsel Patrick Mulligan, from page 4898 for the transcript:
MR MULLIGAN: I think that part of your evidence talks about choosing the right option, whatever that may be, depending on from what perspective you look at it, but you would accept that as part of the RMA process it is not the Board’s job, in terms of its decision-making process, to second guess whether the applicant has chosen the right project?
MR CURTIN: I don’t know that I do accept that partly because, as I mentioned, I am not totally familiar with the RMA process. In fact, I am not at all familiar with the RMA process. This is the first time I have given evidence in this particular type of inquiry. That said, I would be very surprised if a board of inquiry, like this one, merely accepted a decision on faith and did not reassure itself, kick the tyres as it were, that of the options that could have been presented to the tribunal a more sensible rather than less sensible option was chosen…
MR MULLIGAN: So to that degree you wouldn’t be in a position to comment about – and particularly given your comments about your involvement in the RMA process – the adequacy or otherwise of that alternatives analysis in terms of the RMA test?
MR CURTIN: The best I could answer that with is to say that I thought, based on the published documents that I read at the time, that the NZ Transport Agency had done a jolly good job of bringing different perspectives into the calculation, including environmental perspectives. As I say, I could not see my way to how they quite got to the option they could, based on that very good information they’d collected.
MR MULLIGAN: You would accept that the way that the overall structure of the analysis had been undertaken, that NZ Transport Agency, through its business case process, hadn’t rested its decision-making wholly and solely on what that BCR number is, though? You would accept that? It’s undertaken the CMCA process as well?
MR CURTIN: Absolutely. It’s quite clear from the initial case and the detailed case that they made quite a detailed trade-off across many criteria. There was the business case, the cost-benefit ratio stuff, which you’d expect in any investment project. As I said, they had ten different perspectives at this multi-criterion analysis that they conducted to look at it every which way, and I can only say again that if all of us had been in the proverbial smoke-filled room looking at that good information that had been gathered, it wasn’t clear to me that that was the option that most aligned with the information on the table.
MR MULLIGAN: Now, final question is – you may not be able to comment, given what you’ve said about your history with the RMA process – it will be my submission to the Board that building costs of a project like this aren’t really a matter for RMA consideration. As a matter of law, would you have a view on that?
MR CURTIN: I don’t know as a matter of law. As a matter of economics or financial common sense I find it difficult to consider the advisability or otherwise of an investment project without some idea of its costs.
After Mr Mulligan, I’m offered the opportunity to re-examine Donal:
DR PRIESTLEY: …Now, Mr Pitches, I’m only mildly perplexed because I’m conscious that Mr Curtin, as he says in his statement, was contracted to Campaign for Better Transport for the previous assessment. So if you feel the need, I’m quite happy to let you reexamine, but only on the issue of any matters which have arisen out of Mr Mulligan’s cross-examination or questions from the Board, and the questions would have to be open questions, not leading or patsy questions or putting out further information. Now, do you want to do that or not? I’m giving you the opportunity, if you feel that there’s something which he’s said which needs clarification.
MR PITCHES: I just have one question.
DR PRIESTLEY: Yes. Off you go.
MR PITCHES: Mr Curtin, is there anything you’d heard today that has made you change your mind about the evidence you’ve presented so far?
MR CURTIN: From the cross-questioning, no, not so far. As I say, I’m not au fait with things that may have happened in front of the tribunal since I put my original evidence in. We heard the question about enduring benefits, and I had been thinking about that a bit since I originally put it in, so I suppose today I’ve said a bit more about enduring benefits as a potential criterion that I that I said in my original testimony. I can understand why people might want it but it’s not the normal way people would go about looking at the flow of benefits of a project.
DR PRIESTLEY: Mr Pitches, with respect, that’s the best question in re-examination I’ve heard in 50 years in the law. You should probably send it out to every Crown counsel in the country. It might increase conviction rates. Thank you. Thank you very much, Mr Curtin.
MR CURTIN: You’re welcome.
DR PRIESTLEY: It was a beauty, wasn’t it, Mr Hewison?
DR HEWISON: I’m impressed. I’ve written it down so I can use it myself.
That’s it for now. It is difficult to know which way the Board will go with the Inquiry, but I sense that the decision will be a finely balanced one. I’ll do another post on the Campaign for Better Transport’s closing representation to the Board.
In order to help pay for their expert witness, contributions to The Campaign for Better Transport are gratefully received and can be paid directly to their bank account – Kiwibank 38-9009-0281735-00.