Flashback Saturday: Road Building Brouhaha

This post by Matt was originally published in July 2019. It reads particularly interestingly when you consider six months later the government announced the NZ Upgrade Programme.

Over the last week there’s been a flurry of discussion in the media about the country’s transport priorities following the publication of a letter by the government’s Business Advisory Council (BAC). There are a number of areas the BAC have concerns about with infrastructure but the key point of contention can be easily summed up by the headline Business Council’s blunt message to Government: We need more roads. The article is behind the Herald’s paywall but helpfully the key issues are in the first two paragraphs shown.

The Prime Minister’s Business Advisory Council has called on the Government to proceed with the 12 roading projects presently on hold or under review and open them to private investment.

It has also called on the Government to investigate the “responsible and sustainable” use of international expertise, capital and labour (both skilled and unskilled) for both high-priority future projects of national significance and existing infrastructure projects, and, a move by the Government into “asset recycling – selling mature assets to fund new infrastructure.

Let’s look at a couple of the issues.

The 12 projects

It feels there has been a bit of confusion about just what the 12 projects are. These are shown below and all but one have had their re-evaluation completed.

In most cases, the re-evaluations have resulted in the projects being refocused on delivering urgent safety improvements, particularly as the volumes of traffic on many of these corridors simply don’t justify some of the significant upgrades that were planned.

I think there has perhaps been added confusion as a result of some people counting projects made as election promises at the last election. A couple of examples include:

• In 2016 the former government announced a $520 million package of upgrades to the SH2 corridor between Tauranga and Waihi – although $286m of that was for the 6.2km Tauranga Northern Link motorway and another $150m for about 6km of upgrades from the TNL to Omokoroa. That left $85m to improve safety on the remaining 40km+ north to Waihi. In 2017 during the election, National then promised to turn the entire route from Tauranga through to Katikati, about 30km length, into a motorway. The project re-evaluation has resulted in the project focusing much more on fixing the urgent safety issues but some are pretending the motorway was always the plan and this is a major step back.
• Yesterday in Stuff where Mike Yardley blames the government’s for not extending the motorway south of Christchurch some 60km from Rolleston to Ashburton. Only it wasn’t even a road to be evaluated as it was only an election promise, not a project actually on the plans.
• Similar silly opining comes from Heather Du Plessis-Allan who effectively seems to blame these projects not proceeding for congestion between Pukekohe and central Auckland.

Perhaps the most valid of the comments I’ve seen comes from the AA yesterday, noting have having been re-evaluated to focus on quick safety outcomes, these projects still haven’t proceeded. At fault here doesn’t seem to be some ideological mode issue but simply a funding one. Other projects currently under construction are seeing cost and scope increases and that is putting pressure on the amount of funding that’s available for other projects. These funding pressures seem to be existing across the board and don’t just exist with these state highway projects.

Opening up the projects to private investment

Building more projects with private investment, also called Public Private Partnerships (PPPs) has long been a stable of business lobby groups. But PPPs aren’t the silver bullet they’re made out to be.

In the past they were sold as a way of transferring the risk of projects to the private sector but particularly following the string of high-profile failures in Australia around a decade or so ago, PPPs these days are mainly just about providing financing with the government paying the debt plus the commercial rates of interest it incurs. As such, the problem with this is perhaps summed as:

• The government can borrow the money cheaper
• They need a source of money from which to pay that debt back

There are two PPP underway right now with both Transmission Gully and Puhoi to Warkworth financed this way. To put the costs in perspective, when the Transmission Gully PPP was signed in 2014, it had a net present value of $850 million but because of the PPP structure, we will be paying about $125 million annually for 25 years. I can’t find what the Puhoi to Warkworth annual payments are but the Net Present value of the project in 2016 was $709.5 million.

As Phil Twyford said in response, the issue is how you find the money to repay that debt.

“It would be really bad policy to do what they’re advocating in that particular area,” he said

“If we were to do what the Business Advisory Council was saying, it would mean spending a great deal of money, more than $12 billion, on projects that have very low economic value.”

Allowing private investment into the roads didn’t make sense either, he said.

“Borrowing money is not the problem here. It’s never been cheaper to borrow money than at the moment … It’s actually having the revenue to be able to service that debt.”

That money could only come from the National Land Transport Fund, or tolling, he said.

“None of those roads have enough traffic on them to generate anything like the kind of revenue you would need to pay for them, to service the debt. It’s just not realistic.”

Perhaps the government should calculate how much fuel/road taxes would have to increase by to cover the debt needed to build these projects. I wonder how many people would still support them then?

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