State Highway Investment in New Zealand the Decline and Fall of Economic
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Michael Pickford State Highway Investment in New Zealand the decline and fall of economic This issue is an important one. The NZTA is responsible for spending efficiency about $3 billion each year on land transport projects. Recently, about half of the funding has been allocated for the A decade ago, the benefit-cost ratio (BCR) – the economic maintenance, improvement and building of state highways.1 Over the next ten years measure of efficiency in investment spending – was the most the funding is projected to increase,2 with a substantial proportion of this larger important criterion used by the predecessors of the New amount to be devoted to the government’s Zealand Transport Agency (NZTA) to determine which land roads of national significance programme. The NZTA’s approach to project selection transport projects to fund. However, from 2003 there was is therefore of great importance, both in determining the economic efficiency a gradual shift away from a reliance on the BCR, and since of its funding of road infrastructure 2009 it has been only one of three criteria used. In this article investments, and for the impact on the wider economy. I examine how this change has come about, and demonstrate The article is organised as follows. that it has resulted in the funding of a mix of state highway The first section looks briefly at the institutional and statutory background. projects that is far from being economically efficient. Average This is followed by a brief description of how social cost-benefit analysis is BCRs have dropped so much that the estimated benefit from used to evaluate investments in road the allocated funding is far smaller than it would have been improvement projects. Section three reviews the recent pattern of spending of had the reliance on the BCR been retained. the NZTA on state highway projects, and shows that the average BCR generated has declined sharply. Section four shows Dr Michael Pickford, now an independent economic researcher, was previously the Chief Economist at the New Zealand Commerce Commission, and before that that changes in the NZTA’s decision a Senior Lecturer in Economics at Massey University. criteria are responsible. The impact of Page 28 – Policy Quarterly – Volume 9, Issue 3 – August 2013 these changes on economic efficiency prioritising projects. The addition of costs of a road project typically include is then considered. The final section the two other assessment factors was design, property acquisition, construction, considers the implications for the NZTA’s designed to gain more information and annual operating and maintenance. investment in the roads of national about an activity and to reflect the Some other social costs, such as possible significance programme. multiple objectives for transport adverse impacts on noise and pollution investment introduced with the levels, are typically not included, although Institutional and statutory background LTMA 2003. (Ministry of Transport/ in principle they should be. The benefits There were two principal forerunners of NZTA/Local Government New from road investment projects usually the NZTA: Transfund New Zealand, which Zealand, 2008, p.56) include travel time savings, travel time funded land transport infrastructure reliability, vehicle operating cost savings, services; and Transit New Zealand, which Later, the 2008 amendment to the avoidance of accident costs and savings provided these services. This separation LTMA merged the former ‘funder’ and in vehicle emissions. Travel time savings aimed to avoid the potential for a conflict ‘provider’ agencies to form the NZTA,4 usually make up around three-quarters of of interest from having both roles and introduced the requirement that the benefits. An 8% real rate (a relatively performed by a single organisation. the NZTA must ensure that the National high rate by international standards), as Transfund’s objective was to ‘allocate Land Transport Programme ‘gives effect prescribed by the Treasury (2008, p.3) for resources to achieve a safe and efficient roading system’ (Heggie, 1999, pp.5-7). The government set the charges that determined the inflow of funds to the Under the NZTA’s internal procedures, a minimum road fund, but only Transfund could requirement for a project to be funded is that it has determine how the funds were spent. The National Roading Programme was built a [benefit-cost ratio] of at least one. up from bids submitted by Transit New Zealand for state highways and by local territorial authorities for local roads. to the GPS’, the new government policy infrastructure projects, is used to discount The bids were subjected to checks on statement on land transport. The GPS, to costs and benefits to their present values the reasonableness of their supporting be issued every three years, is intended (PVs). BCR calculations, and then projects were to ‘guide the Agency and land transport The BCR is the efficiency criterion ranked. Maintenance projects were given sector on the outcomes and objectives, and used by the NZTA to assist it in the highest priority, with other projects the short- to medium-term impacts, that determining which land transport being ranked in order until the available the Crown wishes to achieve’. Since 2009 projects to undertake, and which to delay funds were exhausted. Given limits in the the government, through the minister of or discard (NZTA, 2010, p.1.2). The BCR funding relative to project demand, a cut- transport, has had a strong influence over is the ratio of the present values of the off BCR of four was set by Transfund for the NZTA’s activities by setting high-level benefits to the costs. The use of the BCR projects to be accepted. funding and investment priorities. (rather than alternative measures, such Recent changes in the approach as the net present value (NPV)) reflects started with the introduction of the Cost-benefit analysis of road projects the funding constraint under which the Land Transport Management Act 2003 Like its counterparts overseas, the NZTA NZTA operates. Maximising economic (LTMA). This act widened the range of uses social cost-benefit analysis (SCBA) to efficiency means extracting the maximum objectives to be considered in assessing assess the impact on economic efficiency benefit from the limited budget, and this, a proposed land transport project for of investment projects. It has developed basically, is accomplished by ranking funding. The aim was to achieve an an Economic Evaluation Manual (EEM) projects according to their BCRs and affordable, integrated, safe, responsive (NZTA, 2010), and requires that projects accepting those with the highest BCRs and sustainable land transport system.3 to be funded from the national land until the funding is exhausted.5 In 2004 this led the NZTA to add two transport fund and costing more than Under the NZTA’s internal procedures, additional criteria to the ‘economic $250,000 must be subject to an SCBA a minimum requirement for a project efficiency’ factor, namely ‘seriousness using the framework in the EEM. to be funded is that it has a BCR of at and urgency’ and ‘effectiveness’, a change In brief, an SCBA estimates the annual least one. However, this stance should which was justified as follows: streams of future costs and benefits that be (but in practice is not) subject to the would flow from a road improvement qualification concerning opportunity Before the current assessment (or other land transport) investment cost. If an agency like the NZTA is framework was introduced in 2004, project, compared to a ‘do-minimum’ capital-constrained, so that alternative the government’s transport funding counterfactual of what would happen uses of the funds exist, and the agency agency used economic efficiency without the project, thereby allowing an seeks to maximise economic efficiency (as measures as the primary tool for assessment of its economic efficiency. The arguably it should), then a BCR exceeding Policy Quarterly – Volume 9, Issue 3 – August 2013 – Page 29 State Highway Investment in New Zealand: the decline and fall of economic efficiency Table 1: Breakdown of costs of approved state highway projects by BCR 1(a) BCR 2005/06 2006/07 2007/08 2008/09 2009/10 High $88,037,900 $273,010,700 $507,159,600 $94,495,300 $21,248,200 Medium $78,682,200 $205,620,700 $49,155,000 $841,507,200 $206,089,468 Low $0 $37,169,100 $104,221,800 $391,738,000 $484,421,500 TOTAL $166,720,100 $515,800,500 $660,536,400 $1,327,740,500 $711,759,168 1(b) BCR 2005/06 2006/07 2007/08 2008/09 2009/10 The NZTA’s new approach to project High 53% 53% 77% 7% 3% selection, in which ‘strategic fit’ and Medium 47% 40% 7% 63% 29% ‘effectiveness’ were added to the traditional Low 0% 7% 16% 30% 68% ‘efficiency’ criterion based on the BCR, TOTAL 100% 100% 100% 100% 100% came into effect in July 2009 with its first Investment and Revenue Strategy 1(c) (IRS).8 The IRS provides ‘the tool we use 2005/06 2006/07 2007/08 2008/09 2009/10 to ensure our investment decisions give Weighted 4.06 3.96 4.30 2.69 2.04 effect to the GPS 2012’ (NZTA, [2012], average p.2). Every proposed project is rated on BCRs 4.14 2.46 each criterion as being either ‘high’ (H), ‘medium’ (M) or ‘low’ (L). These ratings one is a necessary, but not a sufficient, was 4.14. However, in the subsequent two are combined to form an ‘assessment condition for the acceptance of a project years the weighted average BCRs declined profile’ which is used to prioritise the on economic efficiency grounds. I return sharply to 2.69 in 2008/09, and to 2.04 in project.