It’s said you shouldn’t respond to every stupid thing you see on the internet but sometimes it’s too hard to resist and that’s the case with an opinion piece published by Newsroom yesterday about the City Rail Link. The piece was written by University of Auckland economics Professor Tim Hazeldine suggesting we should stop building the CRL.
He starts off with an analogy about a business that comes up with an app to save $2 million but would cost about the same to get operational. That business, after spending $700,000 on it, finds it will actually cost $4.4 million to fully deliver and so management put the project on hold. He then kicks into the core of his argument.
Now, I expect that most readers would be with management on this issue. It was a pity that it took $700,000 to find out the real costs of the project, but, hey, don’t throw good money after bad, eh!
So why I am fairly sure that if I just add three zeroes to all the numbers – turning millions into billions, and hundreds of thousands into hundreds of millions – many, perhaps most, of you will reverse your judgement?
Because I have already seen you do this. Those numbers, multiplied by one thousand, are in fact the cost and benefit numbers of Auckland’s railway tunnel project – the City Rail Link (CRL) – which will give ten thousand commuters to the city’s central business district a somewhat faster journey to work.
Those faster journeys were estimated to be worth (on a present value basis) about $2 billion, and the construction cost was originally estimated (guessed, really) to be about $2 billion. Then, last April, with $700 million spent and not a lot to show for it, the cost envelope was revised to $4.4 billion, with no guaranteed finish date. And there was no outcry. People, especially politicians, seem to suffer from what I call ‘Big Number Blankness’: they lose their critical facilities when confronted with figures so far from their personal experience.
Last week, CRL management warned us that, because of Covid-19, costs would indeed rise, with no numbers given, but the promise – or threat – that a “red pencil” will be drawn around the budget at the end of this year. No mention of the possibility that Covid-19 will reduce the benefits of the rail link, through more people continuing to work at home rather than commute.
Adding in some substantial costs missing from the official calculations, the costs of disruption to business and citizens during the build, and the cost of the huge subsidy on the price of rail tickets, it seems sadly reasonable to predict that we now have a $5 billion+ monster on our hands. Even with more sunk costs incurred since last year, we are looking, in the best scenario, at having to fork out another $4 billion to finish a possibly $2 billion value project. How dumb is that!
The CRL should be mothballed, right now. Indeed, I thought it had been in effect mothballed during the lockdown, but I was wrong. Four hundred hard-hats were sent home, but, we are now told, 850 white collar workers have been beavering on from their home offices on procurement, consents and engineering. I may be wrong, but I do get a sniff of a rather well-upholstered work site here.
But surely we shouldn’t be mothballing ‘shovel-ready’ projects? Isn’t huge expense what we are looking for to kick-start the economy? No it isn’t. There are plenty of ‘projects’ with much better benefit-cost ratios
So let’s break this down and respond to the points he raises.
Firstly let’s not forget we’ve already signed contracts with one of the world’s largest construction companies to build the tunnels. I doubt they’re just going to happily accept being told to pack up and walk away.
It’s correct that City Rail Link said there would be extra costs due to the COVID-19 lockdown but in the same article he quotes, they also said:
“The plan is to try and work within our current cost envelope.
“What we are hoping for is if we can have a number of good results in high-risk areas and turn those into positives that will create a bit of a buffer,”
While in a Stuff article was reported:
If there were extra Covid-19-related costs, these could be met out of the existing contingency budget.
So incurring an increase in costs in one area doesn’t necessarily mean the overall cost will increase above the $4.4 billion announced last year – a large part of the cost increase at that time was to provide the contingency fund mentioned above. In essence, it’s simply too early to be making claims about what costs are going to increase.
Then there’s the $700 million with nothing to show for it, making the project even possible at all by enabling that 39-storey tower is not nothing.
As for operational costs, they are factored into the business case and aren’t simply ignored like claimed. That business case even includes sensitivity testing around them in case they end up more expensive than anticipated.
The Uncertain Future
As well as being too early to know about the final cost of the project, I don’t think anyone anymore can say with any certainty what the world will look like in 4+ years time. Will we see more people working from home, possibly, but at the same time there are many people will likely still be working in offices, some things just don’t work as well from home. I’m aware of many who can’t wait to get back to an office as the work from home novelty has worn off.
We can make guesses but no one has a crystal ball, and if they did, why weren’t they shouting about COVID-19 from the rooftops (not that people may have listened).
What about the benefits
The biggest claim that needs addressing though is the questioning of the benefits. If there were only $2 billion in benefits then that would be a concern but there’s much more than that, both being counted and not.
Tim points to travel time savings but importantly they make up less than half of the stated benefits. Other stated benefits accrue from things like improved reliability, agglomeration, and even those still on the driving on the roads. This is shown below however it’s worth pointing out that these figures are from 2015 and are now out of date.
As mentioned, the figures above are about five years old. They’re also discounted over 40 years, unlike the raw construction costs quoted in the piece so it’s not a like for like comparison and it’s surprising a professor of economics would conflate the two. Importantly, the project has changed significantly since this case was completed and about a quarter of the the $1 billion increase in costs announced last year was also to increase the capacity of the project by 50%. There are not many projects where a 6% increase in costs can deliver a 50% increase in capacity. These extra costs also include the additional Karangahape Station entrance at Beresford Square which will make that station more useful and popular.
So how much are the benefits. A one minute google of the CRL benefits from Treasury brings up the this paper from last year’s budget information. It notes:
Things are tight but at this stage are still positive and that’s before we take into account some other factors that could impact it.
Other impacts on benefits
Even those PWC figures are two years old and could now be quite different. For example, the benefits in the 2015 business case were based off using a 6% discount rate over a 40 year period and I assume the 2018 update is also using this. With interest rates much lower in a post COVID-19 world, the discount rates should also likely be lowered. That same 2015 business case says shows that with a 4% discount rate, the benefits increased by almost 60%. Further benefits would accrue from extending that analysis over a longer period of time.
In addition, there have been changes to our plans for the city centre with the recent adoption of the refreshed City Centre Masterplan. The Access for Everyone proposal will give more space in the city over to pedestrians, bikes and buses thereby reducing the amount of capacity available for car travel and will mean that even if there are fewer people travelling to the city in the short-medium term, there will still be the need for that extra public transport capacity. And all of this could be further impacted by the prospect of road pricing.
One key thing the stated benefits don’t include is the benefits from land use change. The CRL has already spurred a $billions in development along its route – although some of these are now likely to be delayed or deferred as a result of COVID-19. Then there’s the thousands of new apartments and retail that can be on Mt Eden site after City Rail Link is completed and countless more projects around the region that will occur as a result over the next three to four decades.
Why the focus on just the CRL
Finally, one thing that frustrates me about pieces like this is the inherent rail bias that seems to exist. If we’re talking about mothballing projects already under construction with poor cost benefit ratios then there are bunch of big roading projects that should be ahead of the CRL in the queue that no-one says anything about. For example
The Otaki to Peka Peka expressway had a BCR when it started of 0.6. In November last year, the Waka Kotahi board agreed to increase funding by nearly $93 million, or an increase of 23%. How much lower is that BCR now?
What about the $190 million cost increase for Transmission Gully.
Why be silent on these while attacking the CRL, after all, his money is going towards those projects too.