Can we pave our way to prosperity?

Tuesday, 21 May 2024

ANALYSIS: If anyone had to condense the Government’s plan to improve the economy into one word, it might well be “roads”.

Last year, Prime Minister Christopher Luxon said National’s plan to invest about $17 billion in 15 “roads of national significance” would boost productivity and raise New Zealanders’ standard of living.

Leaks suggest the costs have materially increased, but the promise remains the same — to “slash congestion, unlock housing growth, boost productivity and lift incomes”.

Roads can potentially do all of those, at least at a local level, but whether increased investment in roading can fundamentally change the trajectory of a national economy appears more of a moot point.

Stephen Gibbons, professor of economic geography at the London School of Economics, has headed a team of academics that have been among the world’s most active researchers on that topic.

They made headlines in 2017 when they concluded that while new roads could produce local economic benefits, in countries with mature transport networks, the benefits to national economies “seem small”.

“We cannot confidently say that road-building will set the UK on the ‘road to recovery’,” they said of its major road-building programme at the time.

Data released by Transport Minister Simeon Brown suggests the “benefit-cost ratio” for some of New Zealand’s proposed roads of national significance may be alarmingly low.

As low as 0.2 to 1.2 for the “second” Mt Victoria tunnel in Wellington, depending on the add-ons, and 0.7 for the proposed Warkworth to Wellsford expressway.

That would suggest their benefits may not exceed their costs.

Green Party transport spokesperson Julie Anne Genter believes the ratios for the wider roading programme mostly sat below two, before any recent increases in the roads’ anticipated costs.

The New Zealand Transport Agency’s manual on measuring the costs and benefits of its investment runs to a thumping 429 pages.

Going back to Luxon’s speech, reduced congestion is the easiest benefit to try to quantify in financial terms.

When travel occurs during people’s working hours — for example if they are a delivery driver or a tradesperson out on a job — it may be reasonable to equate the benefits of faster journeys to those employees’ hourly pay and their vehicle operating costs.

Valuing the savings to people’s leisure time is trickier, but most evidence points to people putting a price on their time at some fraction of their pay.

The Transport Agency simply values people’s time at half the average pay rate, or $18.91 per hour, although it whacks that up considerably if the time saved is indeed time that drivers would otherwise have spent fuming in traffic jams.

The common rebuff is that if the Government cared about people’s time so much, it should buy everyone a dishwasher.

Luxon’s argument that big investments in roading could “unlock housing growth” and boost productivity reflects the fact that as well as helping people get from “A to B”, roads will change what actually happens at “A and B”.

The Transport Agency’s manual notes new roads may improve land use and raise productivity by generating “agglomeration economies” as businesses and residents cluster around the newly better-connected areas.

Workers may switch to more productive jobs at workplaces that they wouldn’t have travelled to, had the road not been there. There are all sorts of potential secondary effects, some positive and some negative.

The Transport Agency attempts to put a dollar-value on the “wider economic benefits” where it can.

The snag that Gibbons’ group dwelt on is that it can’t necessarily be assumed there will be no “water-bed effect”, in other words that economic activity won’t to some extent just be shifted around, as opposed to actually increased, when new roads are built.

“New investment in one area following a road improvement may simply represent displaced activity from another area in the country, and not necessarily new investment for the economy as a whole,” Gibbons cautioned in a report commissioned by the UK Department of Transport.

The research coming out of the London School of Economics would imply it might make sense to raise the current bar on investments in roads and consider them dispassionately as part of a more balanced diet of infrastructure development.

Genter argues the Government shouldn’t be pushing ahead with new roads that have a benefit-cost ratio of less than two.

“Under Transit New Zealand, which pre-existed the Transport Agency, any benefit-cost ratio under four was considered low for roads and wouldn’t be funded. Now it’s very common to say, ‘it’s over one, it’s good’.”

“That’s where this brand of ‘roads of national significance’ came from under National Party minister Steven Joyce,” she says.

“It was trying to prioritise projects that did not stack up economically by calling them roads of national significance and saying ‘that's our strategy’.”

Genter also argues the Transport Agency’s calculations would need to be re-worked if the Government introduced congestion charging, as that would have the effect of lowering the assumed benefits of the investments.

While the Government appears to be assuming there is an ‘X’ factor to at least parts its road programme that can’t be captured by the Transport Agency’s benefit-cost calculations — which is of course possible — Genter, unsurprisingly, sees it differently.

“I'm from Los Angeles. It is obvious to me building a lot more roads and wider roads. creates a whole lot of problems,” she says.

“New Zealand now has the highest car ownership in the world. It's a burden on us and anything we can do to reduce the amount of cost we have to spend on cars and fuel is going to have economic benefit.”