Geoff Cooper: The value of infrastructure
The Auckland Harbour Bridge was built over 50 years ago. Photo / Janna Dixon
Infrastructure impacts on all of us, every single day. For businesses, it might be the local roads or rail infrastructure that ensures goods can get to market and that supply chains are efficient and reliable; for households, it might be the water networks hidden under our city that ensures a steady flow of sparkling water.
Any way you look at it, infrastructure is critical to the way we live. It provides opportunities, creates certainty and facilitates productivity and innovation. In short, it underpins our economic competitiveness and general prosperity - something which is emphasised in Auckland's Economic Development Strategy.
With Auckland expected to reach two million people by 2030, however, much of our infrastructure will come under increasing strain.
This is the background to an active debate on defining exactly what the full benefits of infrastructure actually are. Without an understanding of what good infrastructure looks like, we are likely to get locked in with bad infrastructure which lasts for decades or even centuries. And the only thing worse than under-provision of infrastructure is over-provision of bad infrastructure. Castellon, Spain's airport to nowhere (recently refurbished into a tourist attraction) is an important reminder to developed economies around the world of the value of good economic assessment when it comes to infrastructure.
Traditionally, projects are measured using cost-benefit analysis, - infrastructure benefits are given monetary values and compared with costs.
Unfortunately, many of the prescribed techniques used in a cost-benefit assessment understate the full benefits of infrastructure by some margin, particularly for large-scale transformative projects. It is somewhat puzzling that many of Auckland's major transport priorities have been assessed as having very low benefit-to-cost ratios. The second harbour crossing has a ratio of 0.6 (meaning a return of 60 cents for every dollar invested); the Puhoi to Wellsford highway is not much better than one; and the City Rail Link gets a ratio of either 0.4 or 1.1 (depending on who you are talking to). On this basis alone, none of these proposed projects ought to inspire a great deal of public confidence.
There are two main reasons why these (and other) projects have been assessed as having such poor economic return. The first is that standardised government guidelines for appraisal miss many of the economic benefits. Critical infrastructure underpins economic growth by providing the foundations required for innovation to occur and jobs to be created.
For really big projects, infrastructure can fundamentally change the drivers of economic growth by creating changes in land use, enticing population inflows, and generally increasing the amount of economic activity (think of what the Auckland harbour bridge has done for population growth on the North Shore). Yet none of these benefits are considered in the economic appraisal of modern transport projects.
The second reason why long-lasting infrastructure projects attract such poor benefit-to-cost ratios is the way we value future generations. New Zealand Treasury policy necessitates the exclusion of all project benefits that accrue after 30 years - an astonishing requirement, not least because of the lifespans of the projects themselves. For instance, Auckland's harbour bridge was built over 50 years ago, our storm and waste-water networks have been around for 100 years, the southern and western rail lines for well over 100 years and the port longer still.
All these remain among our most important pieces of infrastructure. We are extremely fortunate that previous generations did not use modern day cost benefit guidelines to decide on these projects - otherwise we might be aspiring to catch up with countries far poorer than Australia.
In fact, New Zealand policymakers have settled on some of the most short-sighted appraisal methods in the developed world. By comparison, Britain measures infrastructure over 60 years, while Australia uses a 50-year period. The difference is significant in terms of valuing infrastructure. If we applied the British framework to the City Rail Link, for example, the project benefits would be around six times higher. The resulting benefit-to-cost ratio would likely stoke a great deal of public confidence. Exactly the same is true of a number of other key infrastructure projects. The hurdle for long-lasting infrastructure in New Zealand is far too high, which erodes public confidence. This means that short-lived, piecemeal projects are usually given priority.
The result is an under-investment in quality infrastructure, which puts further strain on our global competitiveness.
This makes us poorer.
The 2010/11 Global Competitiveness Report highlighted inadequate infrastructure as the biggest problem facing businesses in New Zealand; and it should have little comfort that that we rank only slightly better than Greece for infrastructure provision.
* Geoff Cooper is chief economist at Auckland Council.
Perhaps, but there is also an increase in the costs for the extended period. And it depends also upon what are defined as benefits in the benefit / cost calculation. If social benefits are allocated dollar values (which may or may not accrue), then a project may have a high positive ratio, but the actual dollar demand burden is not affected.
Consider also how the initial construction cost estimates for other recent major projects in Auckland have been greatly exceeded by the time of completion. Working underground is a notoriously high risk operation. And note too the doubling of the cost estimate for the proposed port in Marlborough over the last two years.
The rail link is a high risk project highly unlikely to provide the returns that the City is so confidently forecasting.
It is unfortunate that Treasury is a "monopoly" on economic policy, with little incentive to think outside a very narrow academic world-view. Project lifetimes, appropriate long term discount rates and their views on the feasibility of foreign exchange taxes (Tobin style taxes) are all examples of this conservative, narrow "groupthink" world view.
Unfortunately their blinkered thinking is damaging New Zealand's growth. The classic example of people who know the price of everything, and the value of nothing.