Thursday, February 07, 2008

Private road or expensive folly?

Earlier reports that the government was going to bribe Auckland voters by using taxpayers money to fund the hienously expensive and greenplated "Waterview extension" motorway link have proven to be only partially correct. It appears, amazingly, according to the NZ Herald that the government is looking to use private capital to fund, build and operate it. The full details are here in the government press release.
Firstly, it makes sense to do this. It makes sense for the private sector to raise capital and pay it off, using revenue collected from road users. It also makes sense for the private sector to not only build it (all roads in New Zealand are built by private contractors in essence), but operate it and although discussion is about a "lease" this in effect means it is a private road. The talk of Annette King that it is "not privatisation" is a fudge. In effect, even if it is a traditional BOOT operation (build own operate transfer) it is a privately built road that gets nationalised at the end of the lease period. This is not much different from similar private roads in Australia, or shouldn't be!
However there are still some significant issues:
1. Why must only the section of SH20 that goes under the PM's electorate be placed underground in a tunnel that adds well over NZ$1 billion to the cost? If the people of Mt. Roskill, Manukau, Albany-Puhoi, Greenhithe, Hobsonville and Waiouru Peninsula can have motorways built at ground level or in trenches, why is the PM's electorate special?
2. Should Transit do more than complete investigations on this project, and let the private sector take control of the design, route selection and property purchasing as well as construction? In Melbourne, the Citylink tollway saw the private company responsible for it determining the route, producing a design, engaging in consultation and negotiating with property owners for building the road. Why not let the private sector be incentivised to do all of this, so the road is built quicker, with more public acceptability and lower cost? Transit is clearly poorly incentivised to keep costs down.
3. How should the private sector recover the costs of building the road? The only fair, modally neutral and economically efficient way to do this is:
  • Allow tolls to be charged on the highway, at a rate of the choosing of the private sector (it will charge at rates to maximise use of the route, and is likely to vary by time of day. There are easily two alternative for potential users of the road);
  • Land Transport NZ should pay shadow tolls to the private owner to reflect the fuel tax and road user charges collected from road users as a result of using the road.

Of course, a combination of these and the ultra high cost tunnel option wont work. It simply isn't enough money to pay for the road. That is why the private sector must be involved in the design stage, and lower cost alternatives be developed. However, even then there may still be a gap, which the government will be tempted to fill. The question is whether non-users should pay.

The only way this could be justified is to charge other road users for the benefits the road will bring in relieving roads they travel on (such as the parallel Great North Road, and Central Motorway Junction). This could be calculated and be part of a shadow toll (recognising that you could recover this if the roads were properly priced according to demand/supply), but that's it. I'd be wary about calculating this as well, because assessing economic benefits to non-users should not go beyond road users, so that the benefits of the project are not double counted.

If the project cannot be financed from tolls and shadow tolls that reflect what the users pay, it should not proceed. The road is not good "at any cost", it is only worthwhile if those who will benefit from it are willing to pay for it.

4. Finally, the question of the period of private involvement is important. Labour's legislation limits it to 35 years. I'd argue it could be indefinite (in fact the whole of SH20 could be privatised), but that wont happen. In the interim it would be preferable to have a 99 year lease and for the private lessee to have full control over that period. By then maybe people will not be scared of private roads.

Fundamentally the government COULD do this right, as long as it doesn't write a blank cheque, doesn't subsidise the road from revenue from those who wont directly benefit from it and allows the private sector to innovate and bear the risk. After all, if the forecast traffic levels are wrong the private sector should bear the risk/benefit depending which way it goes. This is a chance to see how things COULD work, but I suspect the main reason private involvement is being sought is to do off-government balance sheet borrowing. In other words, while the private sector finances it, the state effectively guarantees it and will almost certainly be willing to bail out a failed private invetsment. If that IS the case then all of the criticisms by the Greens and others on the left about Public Private Partnerships will be true.

The Waterview connection MIGHT be a good investment for a private company, it might not be. The government should simply allow the opportunity to be presented on terms that don't mean it is subsidised and do not mean failure is protected by the government. If the private sector is not interested, because the revenue from those who will benefit directly from it is insufficient to pay for the road, then it should NOT proceed at present. It might be worthwhile in the future, especially once the other sections of motorway are completed and there is further traffic growth, but if it can't be paid for by users then others should not pay for it.

Meanwhile I have to laugh at John Key saying "it represented a "massive flip-flop" after years of opposing private sector involvement in roading". Pot calling the kettle black surely, John Key ought to know a flip flop or ten.

UPDATE: No Right Turn makes the nonsensical claim that PPPs have been a "complete disaster". You may as well claim that government funded roads have been as well, because some of them have not generated the economic returns that were promised (although thats not very transparent). The truth is that many have been a roaring success, Melbourne Citylink is one, as is the Dartford Crossing in the UK, Chicago Skyway and on and on. His example of the Sydney Cross City Tunnel (which was also about improving the on street environment) shows it went into receivership, but it is still private debt and being privately managed. The road is there, it wouldn't have been there otherwise. The point is though that he isn't talking about fully private roads, and frankly if no taxpayers' money is involved and it is a new facility, why should he care?

UPDATE 2: Further reactions are curious:

Peter Dunne is cheering it on, and even seems to not care if it is all privately owned. This is good news, although I don't think he is that agnostic about whether it gets built. After all, Transmission Gully being an economic dud hasn't stopped Dunne cheerleading it.

The Greens are jealous that the government doesn't want to piss more of your money down a drain into the faith based initiative of rail based public transport saying "A couple of billion dollars could pay for a rail line to the airport, turning the Britomart line into a loop - with an underground extension to Mt Eden - and connecting Onehunga with the western line at Avondale". Yes but whose money is it Jeanette? When you build you trainset you want hundreds of millions every year to subsidise its operation too!

ACT's Rodney Hide has turned his back on user pays and economic efficiency in saying the government is dithering without saying what he would do. An empty statement at best, at worst he wants taxpayers' money ploughed into it without any concern about value for money.

The NZ Contractors Federation want this to be part of a Think Big style massive taxpayer funded build of infrastructure, which their members could profit from building. They claim it can be built on time and within budget. Which budget? The cost keeps shooting up year after year! Most concerning is the belief in Soviet style planning saying "We would like to see it become part of a 20-year national infrastructure plan. At present infrastructure planning for this country is ad hoc. To get the best from our scarce resources in the future, New Zealand needs to better co-ordinate projects, particularly very major ones like this".

So you want to nationalise planning for telecommunications, electricity, water, sewage, stormwater, airports and ports as well? Sheesh.

Perhaps the best comment came from IPENZ Director of Policy Tim Davin who says the current legislation is flawed "We are already hearing in the media today, members of the community opposing the project. Because the Act’s ‘high degree of support’ clause it may make any large roading project difficult to proceed as a lot of communities may take the NIMBY (not in my back yard attitude.) ".

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