Costs and (or lack of) benefits of transport projects

By William Taylor 10/09/2013 1


Auckland Transport Blog have put up a post today discussing the costs and benefits of the planned transport projects in Auckland that the government is backing. I’ll discuss that in a second, but first there is something I want to get off my back regarding the assessment of transport projects.

BCR ratios (aka CBA by another name)

One thing that has always intrigued me when I hear about transport projects is that rather than talking about the “net benefits” from a “cost benefit analysis” (CBA), they talk about “benefit cost ratios” (BCR). Now the BCR is just the calculated benefits divided the costs (B/C). The surprising thing to an economist is that the BCRs are often < 1.

This means one of two things:

  1. The projects are money hole and shouldn’t be built (we get less benefits than we put in)
  2. There are significant non-quantifiable (or difficult to measure) benefits, and bureaucrats have made the judgement call that the non-quantifiable benefits are enough to tip the balance to give a true BCR>1. So there is some objective analysis, and some “gut feel”, but this can’t be avoided.

Hopefully not many fall into the 1 category, but given the scope for politicians and bureaucrats to drive these decisions, I wouldn’t be surprised. Even for the category 2 projects, it’s quite possible we are going to get bad decisions made, as the decision is ultimately going to be subjective. Many projects depend on who wins an election, which I think illustrates the problems here quite nicely.

There is also another, frightening alternative which I will now discuss in the context of Auckland

Auckland’s transport package

The crux of the ATB post is some quotes by Brownlee in question time about the costs of the various projects and a table of the benefits (I’m assuming both are “gross” and not “net”) They correctly note that the benefit figures are in net present value (NPV) terms and the costs are not, so they aren’t directly comparable. However, if we assume the construction time isn’t longer than a couple of years and the NPV is discounted back to around the same period of time, it isn’t two outrageous to compare the two numbers (Using un-discounted costs does of course understate the BCR, depending on whether the benefits need to be discounted further so the start dates are consistent.).  Three things jump out

  1. The projects seem to either have a BCR substantially less than 1 or only moderately greater than 1
  2. The second harbor crossing costs $4.7b  yet only has benefits of $568m
  3. The East-West link costs $1b and the project has the backing of the government even though the benefits are “yet to be assessed”

As mentioned above, (1) isn’t particularly worrying if you believe that the benefits of transport projects are hard to quantify.  On (2),  that is a hell of a lot of non-quantifiable benefits to make a 2nd crossing worthwhile. And (3) provides us with the 3rd category that could have been in the first half of this post “projects for which the benefits have not been assessed, yet someone has decided it’s a good idea anyways”. I’ll call this the “entirely gut feel” category. I don’t know about you, but $1b is a lot of tax payer money to spend on something without actually thinking about what the benefits are relative to the costs. (Sidenote: it will make my day if someone can point out that I have misunderstood and this isn’t actually the case!)

Update:  as this post went to press everyone has been talking about the Puhoi-to-Wellsford “holiday highway” (Herald and ATB). Looks like no attempt has been made to quantify the benefits, beyond estimates of saved travel time  for people going on holiday up north (which could be used to estimate a benefit if you have an estimate of the opportunity cost of people’s time, which if the stereotype of rich Aucklanders heading up north to holiday homes is true , it might be quite high!). This particular Road of National significance (RoNS) suffers from the same problem as above, i.e.  having politicians decide to build a road first, then think about whether it is a good idea afterwards. At least this road is going to be tolled. (Sidenote: is the same true for all of the RoNS? i.e. no CBA?)

Update 2: If you are interested in transport funding in NZ, this paper mentioned by detmackey in the comments looks to be great read. I will certainly be giving it a thorough to read to lessen my ignorance on the institutional framework for road funding in NZ

 


One Response to “Costs and (or lack of) benefits of transport projects”

  • “At least this road is going to be tolled.”

    Surely if a CBA hasn’t been done, we can’t tell if tolling would be better than not tolling?