Wednesday, March 14, 2012

Northern Gateway toll road - politics over reason

I've had a fair few years experience of consulting in the transport sector, and one of the most basic tenets of establishing fully electronic free flow tolling systems is enforcement.  So the news that the New Zealand Transport Agency is finally going to get around to recovering fines for recividist toll violators on the Northern Gateway toll road made me laugh at how a state body can so egregiously ignore collecting money for the use of a service, when the incentives are so badly wrong.

The Northern Gateway toll road north of Auckland is a political creation though.

You see the Clark Administration had decided to take the ever so brave and bold step to allow tolls to be introduced on new roads, with authorisation by Order in Council.  The Land Transport Management Act, which included a wide range of measures including the politicisation of land transport funding priorities and removal of a common approach for economic appraisal of state funding of all modes, included the provision on tolling.

This created two imperatives.

Firstly there was the question of what would be the first agency to apply to toll a road.  The choice was between local government in the form of territorial authorities (and two councils at the time had toll road proposals in the pipeline) and the then Transit New Zealand, which of course was a central government Crown entity responsible for the state highway network.

Transit was determined that it should be in charge, being a central government body and Transit Chief Executive Dr. Robin Dunlop found just the project.  It was then called ALPURT B2, and is the road we all know as the Northern Gateway today.  It fitted the bill from an engineer's perspective in that it was the northern motorway extension that should have been built after the Albany to Orewa section, but which was delayed for RMA reasons.  This delay meant that it could now, suddenly, be treated as a stand alone project.

From a tolling perspective, practically speaking, it seemed to fit well.   It is a bypass of an existing slower and longer state highway, so conceptually users would pay to save time and fuel by using the new road.   

From Transit's institutional perspective it provided a "ready to go" project that could be tolled, especially since there were no others anywhere near "as good" for tolling.  In New Zealand, most road projects are neither big enough nor involve stretches of motorway without interchanges for tolling to be practical without it diverting large numbers of users onto other routes.

Transit not only wanted to have the first toll road, it wanted to be responsible for all future toll roads, because of the need to establish a whole range of functions and activities it hadn't undertaken before - in particular customer service and billing.

Transit, in full collusion with its "arms length funding agency" Transfund, subsequently Land Transport New Zealand (LTNZ), proceeded to blank out the history around this project.

ALPURT B2 as a highway project was originally costed at under NZ$100 million in 1999, but estimates of costs of big highway projects were not good a decade or so ago, and the massive increase in spending on roads undertaken by the last Labour government (especially after 2002 when the Greens were no longer necessary) had inflated construction costs.   Costs started heading towards $200 million.  The benefit/cost ratio of ALPURT B2 was good, over $3 for every $1 spent on it, but with cost increases that was being whittled away.   This was a good thing for Transit, LTNZ and the government because it enabled the impression to be given that ALPURT B2 would not be funded from fuel taxes and road user charges in the National Land Transport Programme like other roads.   With the RMA issues around the project getting settled, the issue of funding approval was going to come up.

This suited Ministers, because they had wanted the focus of the National Land Transport Programme to be on commuter motorway projects in central Auckland, such as Grafton Gully, the Spaghetti Junction improvements, Mt. Roskill extension of SH20, Upper Harbour Motorway and so on (don't talk about tolling motorways in metropolitan Auckland because that will cost votes, and means traffic stays on untolled roads).  

So whilst money was being dripfed into completing the investigation and design work for ALPURT B2, it was all set up so that the project would be deferred.  Bear in mind that it was still a high value project from an economic point of view.  Now, with the Land Transport Management Act passed Transit felt "obliged" to consider it for tolling, and so the project began to morph.

Transit decided that if it was going to charge motorists a toll to use a highway, it better not be any sort of highway, but be the best highway they had ever been on.  The original design for ALPURT B2 was to have inclines and curves that were not all to 100 km/h standard, because the geography of the area it went through would make it prohibitively expensive.  The biggest issue being what to do at Johnson's Hill.  The original plan was to have the road climb up it and go through a cutting.   That was seen as being inferior to trucks which would have to slow down excessively (especially if they are paying a toll) so Transit went about to pursue its other engineering goal - build a tunnel in Auckland.

Tunnels on state highways in New Zealand are rare, the geology makes them expensive to build compared to say Sydney, so they have never been good value unless absolutely necessary.  Transit had never built one in its institutional history, the last new road tunnel built having been the Terrace Tunnel in Wellington completed in 1978 by the Ministry of Works, which was justified because there was no other way to bypass central Wellington without building an eyesore along the waterfront.  

Transit saw the future as having many more tunnels.  There was already pressure to change the Victoria Park Viaduct widening project into a tunnel (which is exactly what happened), and the extension of SH20 to Waterview was also expected to have tunnels (and will).  So tunnel construction and operation in Auckland was something Transit was keen to get started, along with tolls.  See the focus of an engineering based government agency?

So it was decided that tunnels would be built.  Another "innovation" was to build a four lane viaduct  over the Waiwera River, even though the highway would have to narrow to two lanes directly to the north (and there was no prospects of funds to widen that in the near future).  It was also decided to build a viaduct over Nukumea Stream to smooth RMA negotiations.

Certainly a series of government decisions caused the costs of the road to blow out.  One early one was Labour's decision to remove the cost/benefit funding threshold which once encouraged Transit to ensure project costs were contained to get project approval.  The funding threshold was abolished, as the Clark government wanted a whole host of major projects approved.  A philosophy National has continued.

In engineering, projects can be "gold-plated" by including elements that are not essential, but which raise the cost.   Here, Transit was "green-plating" by arguing that the tunnel was less environmentally destructive than a cutting.   The additional cost? $85 million.  The Ministerial Advisory Group on Roading Costs in 2006 found "the Board papers (including resolutions) are silent on whether Land Transport NZ viewed the changes as justified. This does not appear to have been a rigorous review for what was a costly change to the project." No there wasn't.  However, cost effectiveness was already declared to be less important under Labour than it had been before, and this was about building a flash toll road "the first fully electronic toll road" in Transit promotional literature.

By now (2006) the cost of this road had skyrocketed to $359 million.  Bear in mind it was $82 million in 1997, had gone to $138 million in 2001, $218 million in 2004 and by 2006 had been green-plated to $359 million, including several million of costs of toll equipment on site.

Never mind, tolls will pay for it right?  Well no.  Prices can't be set at any level.  There is a revenue maximising level above which too many motorists will choose to use the parallel untolled route, and below which you're not really encouraging too many more to use it.   So when that was modelled, it came that at best, half of the cost of the road could be recovered from tolls.  The other half would come from a normal funding grant, paid for by fuel taxes and road user charges, in other words from all road users.  Yes, ALPURT B2, sorry, Northern Gateway toll road, is subsidised.

Now a fair argument can be made that everyone using the toll road also pays either fuel taxes or road user charges whilst on the road, a secondary argument is that those using the current road also benefit from the new one because of less delays, so this subsidy is not necessarily a big deal.   The state highway network at the time was self funding from revenue collected from users.

It was agreed that Treasury would raise some public debt to pay for the tolled component, to be repaid by the toll (after collection costs are paid).  That is what the toll is paying for.

However, that's not all.  Whilst the cost of building ALPURT also includes the cost of installing electronic tolling equipment, that isn't enough to implement tolls.   It also needs a transaction processing centre, customer contact centre, with accounts payable, receivable etc.  It also needs to connect to the motor vehicle registry to correlate images of number plates to vehicle owners for billing and enforcement purposes.

Now you might think that this all sounds perfect to be outsourced, besides the provision of access to the motor vehicle registry.  No.  Transit and LTNZ decided this would be a separate, bigger project, called the Toll Systems Project.  That would be over $60 million more, just to collect the tolls.

The philosophy behind this was empire building.  The idea was presented that this was the first of "a series" of toll roads (none of which Transit was very transparent about), and that a single back office billing operation would be the "most efficient solution".  However, there were a few flies in the ointment on that idea.

1.  It was after the 2005 election, and Labour had already surrendered to NZ First the only other viable tolling project in the country - Tauranga Harbour Link.  Without the number of transactions from that project, Northern Gateway would be an orphan.  Transit had identified no other major tolling projects likely to proceed in the next few years, with the Weiti Crossing project of the then Rodney District not looking viable and talk of Auckland congestion charging simply political suicide for now.  In short, the case for a single large bespoke billing system for lots of toll transactions had become nonsense.

2.  Given the lack of transactions, it wouldn't be viable to pay for the Toll Systems Project from toll revenue.  In other words, the Northern Gateway toll would not be able to charge enough to pay for the capital costs of the back office systems required to bill the toll.  The operating costs could be recovered, but the capital costs of tolling would have to be born by all other road users through fuel taxes and road user charges, despite there being no discernible benefits to them from doing so.

3. Land Transport New Zealand already long had a billing activity in house, used for paying road user charges, handling fuel tax refunds and motor vehicle and driver licencing transactions.  It saw advantages in taking on this function as well.

So what was decided by Transit and Land Transport New Zealand (which Labour subsequently merged, because it didn't believe in the accountability implied in separating a funder from a bidder for funds), was that the Toll Systems Project would proceed, regardless of the fact that only one toll road would open within the next five years or so, ignoring that the tolls on that road would not be able to contribute one cent towards the capital costs of the billing system.

So all road users in New Zealand have paid for a toll billing system run by the New Zealand government in house, for one toll road that will be, in part obsolete, by the time the next toll road comes about.

Therefore, it is hardly a surprise that the tolling system itself isn't incentivised to pursue debtors who ignore fines.  The fines themselves are not revenue for the toll system, but Crown revenue. Yet pursuing fines does mean that toll revenue increases because the incentive to evade tolls reduces considerably.   Curiously, NZTA's own reporting on tolling claims there is an "industry standard" of 10% evasion of electronic free flow tolling worldwide.  A fascinating figure, but it's wrong although it makes 4.3% look awfully good.  5% is average from my experience, so the performance at the moment is rather average.

Even today in 2012, the next toll road is likely to be Tauranga's Eastern Link motorway, with Wellington's Transmission Gully after that (and unlikely to open before 2020).  By then the infrastructure and systems behind the Tolling back office will be long obsolete.   In short, the Toll Systems Project was an abject waste of money.

A better solution would have been to cut ones losses and simply outsource the entire billing function for the Northern Gateway toll road, because it is not a big road, it only has around 14,000 trips a day on average.   Sydney's much maligned Cross City Tunnel manages around 30,000 vehicles a day, Melbourne's Eastlink manages 190,000 a day, Brisbane's Clem7 around 25,000 a day, Sydney's Harbour Bridge and Tunnel manage over 250,000 a day.  In other words, by global standards the Northern Gateway toll road is low volume, which makes a bespoke collection system even more absurd.  What's a bet that Vodafone, Contact Energy or Sky TV could have done it for them.   However, that would be an anathema to the Clark administration's opposition to anything that smells of "privatisation".  So instead we have what might be the only customer service and billing operation set up that hasn't been paid for by the people paying the bills!

Indeed, it is hard to avoid the possible conclusion that it wasn't worth building as a toll road at all.  

However, it is done now, and a better option all up would be to sell it and the toll system with it, on the basis that someone else might be able to make a better go of operating it.   A utility company, for example, can do billing and chase debts far more effectively than a government agency.  Besides, as a privately owned highway it would still have a parallel state owned route through Orewa and Waiwera.  (Before some on the left get agitated, France is covered in privately owned motorways and almost all of the toll motorways in Australia are privately owned).

The bigger lesson is what a debacle can ensue when something as simple as a road project gets mired in politics and the institutional incentives of bureaucracies.   In this case we had:

- Politicians wanting to prioritise lower value roads over this one, but still wanting it built;
- Politicians wanting to allow tolls, but expecting a toll project to emerge to prove they were right in allowing tolls (but not the toll project in the electorate of the coalition partner);
- Central government bureaucrats wanting to take charge of running tolls and keen to find whatever project would be practical, ready to build (even if not exactly economically viable) for tolls, before a local authority did so (Tauranga);
- Bureaucrats wanting to build a tunnel and a really high quality road (because they are engineers who get excited about these things), so those paying the toll would be "wowed" by the road and it enabled them to silence the concerns of those objecting to the road because of environmental impacts, regardless of the cost;
-  Bureaucrats wanting to take charge of running a single national toll system because it enabled them to wider their remit and authority into customer service and billing, regardless of the fact that the billing itself couldn't pay for it;
-  Bureaucrats already running a kind of billing/customer service system wanting to widen their remit and secure more money to expand their operation;
- Politicians uninterested in pushing for outsourcing or private investment, bureaucrats not incentivised to push for it either.

Not one of these decisions was seen as creating consequences for the other, but the result has been well over $100 million wasted because of it, on one road project. 

Consider this, if the road was privately owned would there even be an issue of people not paying the toll and getting away with it on the scale currently seen?

Finally, the National government, to be fair, had nothing to do with any of this, because it was all over bar the ribbon cutting when the 2008 election happened.  This was a Clark Administration special.   However, it is rather poor form for the Nats to not contain things now. I have three simple recommendations:

1.  Put the Transport Registry Centre of NZTA up for sale (with the toll system) keeping data management of the driving and motor vehicle licensing databases in-house and separate.
2.   Require NZTA to outsource provision of tolling services for any future toll roads by competitive tender;
3.   Put the Northern Gateway Toll Road up for sale (or even lease for 50 years). 


Anonymous said...

Great piece thank you.
Such a shameful project.
I get angry every time I drive that road, thinking myself a sucker for paying when 10s of 1,000s don't.
You do not mention the quality issues with the system. I have travelled the toll road 3 times in the last 6 months. Twice the billing was incorrect. Once I managed to pas in both direction within 20 seconds. Another time they fined me when I had credits in my account. A system with a 66% failure rate would not be saleable.
The other quality issue is their "customer service" office being only open 8 to 5 Monday to Friday.
This is yet another strong case for Government being restricted to less important things like justice and security (hmmm?).
Free Mack

Right_Wing_Dad said...

Scott, What a riveting analysis of yet another Think Big project that on the face of it seems reasonable (Tolls - Surely the users are paying...?) but is in fact a huge destruction of value. I'd be interested to read your take on the covered White Elephant down in Dunedin.

libertyscott said...

Free Mack: Curiously it is one of the first fully electronic free flow toll roads NOT to use the tag and beacon/DSRC technology used elsewhere, which dramatically increases reliability - although NZTA reports very good reliability stats that indicate it may not have been necessary,

Let's be clear, I think the road project in itself was worthwhile, particularly before it was greenplated. I also approve of tolls per se, nothing wrong with user pays - except it wasn't.

If you remove the greenplating and the toll systems project, there are savings of around $140 million that could have been made, which is nearly 80% of the debt taken out to make it a toll road in the first place.

Current users of the road paying the toll are part paying for the road, but everyone else is also paying for the road and the system to collect the tolls.

It is funny how a good road project and a good concept can be combined at the wrong place in the wrong way to cost a lot of money largely so some politicians and bureaucrats can have a show pony.

Anonymous said...

I’ve just received my second Toll Payment notice from these clowns running the toll road and I’m just as frustrated as I was the first time around. Both times I was unable to pay due to excessive queuing or “Out of Order” machines … I don’t have a credit or debit card and I don’t have a Windows computer to use the POLi system. Neither do I have a cheque account. The only option is to either get someone else to pay it for me, or obtain a bank draft.

For the love of God, I don’t object to paying the tolls but why make it so hard for people to comply? My sister is in the same boat but she has accumulated $100′s in fines for non payment. If there was a simple and reliable method of paying neither of us (and many others out there – obviously) would be owing for our trips.

I phoned the NZTA 0800 number and moaned to them, the best explanation they could offer was that “there were numerous options available but they were working on making it easier for more people”. Well, it’s been 4 years since this damn toll road was opened – why is it still so difficult now as it was back then? And WHY is an online banking payment restricted to what computer operating system a user has?

Regarding non payments, NZTA have admitted that "it’s more trouble than it’s worth to take people like this to court” … I’d propose that it’s too much trouble (or brain power) for NZTA to come up with an equitable paying system that is accessible for users. If they did they might find compliance of users to be vastly improved.

I think it’s time NZTA passed control of tolls on to someone who better knows what they’re doing. At this point, the bar is set rather low so that shouldn’t be too difficult!