Long read: How dead is light rail?

Monday, 15 June 2020

A 2016 video by Auckland Transport shows the proposed route of light rail line to the airport, later taken over by NZTA.

ANALYSIS: Monday marked another deadline for the Government’s troubled Auckland light rail project. It was the last Cabinet meeting before the pre-election period kicks in on June 19.

That deadline has been kicked around - mainly by the Opposition - as the last possible day Cabinet would sign off on light rail, given the convention for governments to restrain their decision-making in the three months leading up to an election.

But light rail is the policy equivalent of Monty Python’s black knight: After each bout of terrible news, it rises to its feet, crying “I’m not dead yet”.

And technically they’re right: Light rail, unlike the capital gains tax, or the “feebate” electric car scheme, hasn’t been killed. Those projects were consulted on, axed by NZ First, and Labour and the Greens moved on. This is different: to this day, the Government continues to receive briefings on the project and Cabinet papers are still being prepared. Officially, the project is “on hold,” or “stalled”, but not “dead”.

In reality, light rail has been some version of dead since the beginning. As Stuff reported in October 2019, NZ First is very lukewarm about the project.

* Greens will campaign on light rail if Government fails to agree a deal

* Transport Minister Phil Twyford says light rail on the way, but Winston Peters disagrees

Back then, Associate Transport Minister and NZ First MP Shane Jones said party members were 'doubting Thomases' when it came to the 'light rail kaupapa'.

NZ First went out to its members expressing doubts about the project. The party blogged about light rail, talking up questions about increasing cost es timates on the party’s website. At an infrastructure conference in February, Jones reiterated to the very people who might be called on to build light rail, that his party wasn’t keen.

How we got here…

Artist impression of Auckland Light Rail trains en route to the Airport

That was before light rail entered its endgame. The Ministry of Transport was originally asked to look into two competing proposals to build the scheme, one from NZTA, the Government’s main transport infrastructure agency, and another from NZ Infra, a joint venture between the NZ Super Fund, and CDPQ Infra, an arm of a Canadian pension fund.

The Transport Ministry would look at the bids, and advise Cabinet on their merits before a final decision on which one to build.

Around February this year, Stuff began to receive damaging reports of the negotiations between parties, particularly Labour and NZ First.

Labour was known to favour the NZ Super Fund option. Senior Labour figures including Twyford, and Finance Minister Grant Robertson met with Sir Brain Roche and Michael Cullen to discuss the Super Fund’s unsolicited bid way back in January 2018. Twyford is understood to have been fairly supportive of that bid ever since.

The Ministry began reporting back in February. National Transport Spokesperson Chris Bishop has been using written and oral Parliamentary questions Time to explore what was happening behind the scenes.

Under questioning, Twyford revealed that a letter on light rail had been received by his office from NZ First leader Winston Peters on February 29, this was just one day after Jones told the infrastructure conference that his party was lukewarm on the project. Stuff later revealed it was from Chief of Staff Jon Johansson and detailed the party’s specific objections to the project.

It was at this point that Stuff could reveal Government sources were describing light rail as being “blocked” by NZ First.

When an agreement isn't an agreement

This was immensely frustrating to the Greens. A commitment to “begin” work on light rail to Auckland airport was included in their confidence and supply agreement in Labour. NZ First have maintained since October that they’re free to object given that light rail wasn’t included in their own coalition agreement.

But that ignores the fact that both agreements contain the line “Labour agrees that it will not enter into any other relationship agreement which is inconsistent with this Agreement,” which suggests that all three parties are in some way bound by both agreements.

The Greens, for example, didn’t agree to pass a ‘waka jumping’ bill in their own agreement, but did so because it was included in Labour’s agreement with NZ First.

Transport Minister Phil Twyford has seen Auckland light rail derailed.

On June 5, government sources had confirmed to Stuff that NZ First was “blocking” the proposal. However, unlike previous Governmental brouhaha there was no public acknowledgement that the project was dead, apart from occasional cries of exasperation from minsters.

Peters said the project had been “suspended,” but not axed, meanwhile Twyford – who acknowledged that work was “on hold” during immediate aftermath of the Covid-19 outbreak – said that he would be taking a paper to Cabinet “in the coming weeks”.

Twyford has been true to his word. After receiving Johansson's email on February 29, Twyford received five briefings on light rail before the country went into lockdown on March 25th. He received more briefings on light rail that month than on any other subject.

All of these were meant for only Twyford, bar one, which was sent to Robertson and Prime Minister Jacinda Ardern as well. Non-Labour Ministers have previously complained that they were not briefed on light rail to the extent of their Labour colleagues.

One of the briefings went to the light rail ministerial oversight group, comprising Green party Associate Transport Minister Julie-Anne Genter and Jones (wearing his infrastructure minister hat) as well as Environment Minister David Parker and Finance Minister Grant Robertson.

Leaked impressions of an Auckland Light Rails scheme proposed by NZ Infra

Curiously, these ministers, along with Ardern, were also given a briefing on 13 March, although the title of that briefing has been withheld for commercial reasons.

The Green Party has supported light rail in Auckland from the start. The party's co-leader James Shaw campaigned on building light rail in Wellington when he ran for Wellington City Council back in 1992.

But the party is known to favour an earlier version of the scheme, which was a more modest proposal, first piloted by locally-run Auckland Transport. When the current Government took office, it took charge of light rail, giving it to central Government transport agency Waka Kotahi, NZTA.

Estimates for what this plan would cost varied widely, but they were fairly modest and reflected the design of the line, which was a simple tram that ran down Queen street and Dominion road.

This changed when NZ Infra got involved. Miscommunications between NZTA, NZ Infra, and the Government led to the project stalling. Stuff received leaked emails from the then-interim chair of NZTA that detailed the frustration of the agency, which was tasked with simultaneously developing its own plan for light rail, whilst also evaluating the Super Fund’s plan.

It rubbished the initial scheme as little more than six PowerPoint slides. An early draft of the plan was leaked to Stuff, and showed a radically different scheme with enormous raised tracks rising over Mt. Eden and a large tunnel down the middle of Queen street. This split the Auckland transport community.

Greater Auckland, a well-known Auckland transport website, with longstanding connections to Genter, criticised the proposal, calling it a 'scam'. The original light rail plan wasn’t meant to be a rapid trip to the airport, it was meant to help intensify the corridor down Dominion Road, paving the way for more housing and urban development. NZ Infra’s proposal would cut the number of existing bus stops on Dominion road in half, leading to allegations it prioritised a speedy trip to the airport over densification.

NZ First was getting cold feet too, but for different reasons. They opposed the involvement of Canadian fund CDPQ Infra, preferring to keep development local. And like the Greens, they were sceptical of the public-public partnership model touted by NZ Infra, in essence a rebranded public-private Partnership, but with a publicly-owned partner.

A Public-Public Partnership

The NZ Infra plan isn't without its merits.

Light rail is costly and the PPP model means this cost won’t be lumped on the Government’s balance sheet. Instead of allowing Government through NZTA to borrow and build the rail line itself, the debt will be carried by NZ Infra.

But there’s a catch, in return for bearing the cost of the project, NZ Infra will charge the Government to run the scheme. Just how much this could be isn’t clear, but Super Fund CEO Matt Whineray told a select committee earlier this year that the Super Fund targeted an 8 per cent return across its entire portfolio, although the fund denied reports in Stuff that it was targeting a 7 per cent return on light rail.

This could mean hundreds of millions of dollars being recouped each year by NZ Infra. A 7 per cent return on $6 billion – a lowball estimate for the cost of light rail – would still be $420 million. Some estimates pin the cost at $12 billion, meaning a return of $840 million.

Some of this would be recovered through fares, but the rest would have to come in the form of the subsidy, funded either through general taxes or the NZTA’s National Land Transport Fund - the pool of money that comes from fuel taxes totalling roughly $3 billion a year.

Depending on the cost of the project, light rail would eat up a significant portion of this. The Government’s draft policy statement on land transport – a long document that effectively tells NZTA where to spend its money – says that it expects a maximum of $630m spent on all forms of public transport in New Zealand in 2022/23, rising to $1.14b by the end of the decade.

Covid-19 hasn’t so much changed the equation, it’s just entrenched the politics. Debt is still politically toxic, making the super fund option attractive, but borrowing is still cheap, making the project economically questionable.

With the Government set to take on $140 billion in extra borrowing over the next few years, it will be much less inclined to borrow any more than it needs.

But equally, the incredibly low interest rates that made it attractive for the Government to borrow and build the line itself, have fallen even lower as central banks scramble to stimulate economic recovery.

That means that despite the Government taking on significant additional borrowing, the cost of that borrowing is actually falling. Back in December, the Government was expecting 10-year bond rates (effectively its interest rate) to be 1.3 per cent in 2020, 1.5 per cent in 2021, and 1.4 per cent in 2022.

Those costs have more than halved in the intervening months, meaning borrowing to build light rail is even cheaper. The average 10-year bond rate is now expected to be 0.5 per cent in 2021, and 0.9 per cent in 2022, before popping up to 1.7 per cent in 2023.

The Government expects to spend roughly as much servicing its post-Covid-19 debt as it expected to spend pre-Covid-19, despite the fact that it expects to borrow more than twice as much as before.

There’s also the messy politics of the deficit. Were NZ Infra to be paid for building the project out of general taxation it would make closing the deficit, which the Government hopes it can achieve by 2028, much more difficult.

Were the project to be entirely funded centrally, it could be achieved at relatively low cost although the Government would have to wear the messy politics of borrowing more.

The pre-election period

In the immediate-term, concerns over the pre-election period are a non-starter.

In reality, the convention has little to do with light rail. Unlike the UK and Australia, New Zealand governments don’t go into full shutdown in the pre-election period, meaning signing off on light rail is fair game.

It’s not hard to see why the Opposition is so excised by this. The convention as its understood overseas, is meant to stop an outgoing government launching a host of expensive initiatives that the new government might disagree with. Should that new government win the election, it would be faced with the choice of axing those policies – which could get it into hot water if contracts had been signed – or ploughing money into initiatives it disagreed with.

The Auckland light rail project raises similar problems. Even former National leader Simon Bridges only promised to pull out of light rail only if a contract hadn’t been signed before the election – if it had been, he may have had no choice but to progress with it.

We also know that a host of changes necessary for light rail will be coming after the election. It will likely require special legislation, which Parliament now doesn't have time to pass before the election.

The Green Party has committed to campaigning on the project should it fail to get through Cabinet - it’s not clear if Labour will too. Ardern and Twyford can probably think of better ways to spend the next three months than talking about one of the Government’s biggest failures.

There are also looming questions over the process followed by the Government after NZ Infra made its surprise bid to build the project. At this point, Twyford chose not to open up the project to a competitive bidding process, where other infrastructure companies could have a shot at bidding to build the line.

The process has pricked the ears of the Auditor-General, which, over the last few months, has been weighing up whether to launch an investigation. Bishop also quizzed Twyford in Parliament over whether redacted sections of Treasury advice recommended Twyford open up the process to other bidders.

Twyford initially denied this was a recommendation, but was forced to correct that answer to Parliament earlier this month, saying that one of the options recommended by officials would have allows other “market participants” to bid for work, but he could not provide further detail because of commercial sensitivities.

If the Government decides to approve either one of the schemes, it will likely face lengthy political battles about the process it followed.

There’s also the question of NZ First after the election. If the coalition gets a second shot in its current formation, would NZ First be likely to axe light rail again or could Labour get it over the line by promising the party a big infrastructure project of its own?