The Cost of Public Transport

So someone on the Rodney District Facebook page today put up a petition about ‘North Shore Rail’ (1). I’d never actually seen this before (every previous reference I thought was a joke). Apparently, what we need to do is take the money proposed for the second crossing between North Shore and Auckland CBD and use it to build a railway system on the North Shore (ripping up the busway in the process) and connected to the CBD (a rail bridge…yay). Now, having questioned what the actual capex and opex were, and pointing out that we remain a car driving nation, I was told that that’s 1960s thinking and that we need to move on (at great public expense, but we won’t quantify that). Now, I am not a proponent of ‘public transport’, as I believe that if something is a good idea, it should be self-sufficient (thus, we don’t call Air New Zealand public transport, as it’s private – so if someone wants to set up a bus or train company, that’s fantastic, but I don’t see why this should involve the council or state). Then there is the fact that railways are a 19th Century solution…but I digress. So let’s look at some of this logically (rather than the emotions often shown around ‘public transport’):

Simple Disruption of Replacing the Busway

The first, and simplest problem, is that the existing busway is in actual use and there will be disruptions if you decommission it. Buses go down that route already and while you’re ripping it up, they won’t. That isn’t a light disruption if the supposed 40% people volumes are pushed onto the existing motorway. Equally, the current system is more flexible (buses can come on from a variety of starting points, rather than just Albany, as is currently proposed). Equally, if railway was put in between Auckland CBD and Albany, you’d end up with people who currently have a single journey from Orewa, Silverdale, and Whangaparaoa now needing to take a bus down to Albany, then switch, and take a train to the CBD. The ‘future extension’ may go to Orewa, but that still shafts a lot of people in Whangaparaoa. Every time you add a switch, it adds cost and complexity to the system (and means people lose their seats, potentially get wet and cold, etc.). So this sort of thing really needs to be factored into any planning.

Cost of the Existing Busway Wasted

We’ve already stumped up $290m to build the busway. Granted, you don’t have to rebuy the land, but the point is: a huge amount of capital cost was already put into the existing route and that will now be wasted (in fact, you’ll have to pay to rip it up, first). I have a real problem with completing a major project in 2009 and then saying, in 2016, we should tear it down and build something new (is that how little regard people have for the public expense?).

Using AT Rates, the Cost-Benefit Doesn’t Add Up

Even Council’s own financial statements for 2015 (2) say that they require, on average, 27c per kilometre (fares only representing 47% of the cost, the rest is subsidies). So a 30km journey between Orewa and the CBD is going to have a, minimum, $8.10 subsidy (each way). I would imagine that the marginal subsidy cost for trains is a wee bit higher than buses (which don’t require capital maintenance on the roads to be factored in). So let’s say we get another 10,000 people to take this journey to work, every day of the week. That’s another $38.8m of subsidy required, and probably significantly more (on top of the $6bn that’s been spent just to get the network built to Albany). The existing users will also cost us more, as they’re going from a lower cost transport option to a more expensive one. I am failing to see why we want this to be brought about.

Conclusion

These aren’t ‘small’ problems. The proposal is to waste vast amounts of existing investment, replace it with a more expensive option, disrupt the bus network that is already in place, and then add significant operating costs. I know that I am not supposed to take this serious, but a friend of mine at work made a similar argument last week (and he’s usually a reasonably right-wing person). My problem is that people have started talking about public transport as if it’s some kind of panacea, without ever looking at the details (or the cost!). Hence, we should consider building railways to Orewa, when (even forgetting the billions required) it will land us with significant operating costs and it will cause further disruptions to existing transport options (again, you knock out the busway, any bus service is going down the motorway with the rest of us). I have a real problem with this kind of muddled thinking and wish we’d ban councils from doing this sort of thing (endless public subsidies, all justified by emotional ‘it’s the right thing to do’ rubbish). Personally, I think this is just a means to keep people from thinking about how silly the busway is in the first place, as now we’re forced to justify it.

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Some Thoughts Around Infrastructure Bonds

Now that people have gotten around to the idea of increasing land supply (through removing the rural urban boundary) I’d like to look at how financing all the additional infrastructure is going to play out. The latest idea, as has been floated about, is for local authorities to issue infrastructure bonds, rather than charging upfront development levies (‘contributions’). Thus, instead of the householder borrowing an extra $100,000 (‘upfront’) to contribute to the cost of infrastructure (roads, parks, water, etc.) the council will be responsible for issuing a bond (nominally for the same value) which will be funded through a targeted rate on the relevant properties. In theory, this should reduce variability between lending conditions and result in a cheaper overall borrowing cost.

In principle, I have nothing against targeted rates and this particular form of finance (the council is the socialised provider of infrastructure, so it’s legitimate to discuss how this is going to be paid for). However, there are a number of caveats which will need to be resolved prior to this financing mechanism being taken more seriously:

  • Bond Duration – New Zealand has a very short-dated bond market. Bonds are issued, whether by companies, the government, or councils, on maturities of 3 – 10 years. If bonds are issued for longer than this period, they tend to have rate re-set points along the way. Having a re-set point means that the targeted rates won’t be fixed (which could have negative downstream consequences). Equally, if you don’t compel the council to set a repayment date it could accumulate vast debts, which is already becoming a problem with councils in NZ.
  • Rate Duration – You’ll need very specific protections for the ratepayers. Targeted rates, where they are linked to an infrastructure bond, need to be transparent and limited. Where a bond has been issued for, say, 30-years, the targeted rate should expire after 30-years (with a full repayment of the loan principal). This is akin to requiring that the bonds are structured like home loans. Like with the bond duration issue, I think having explicit limits (and mandating bond repayment) is the only way to stop certain problems arising from creative council officers and councillors.
  • Bond Limitations – The council should not be able to fudge things and infrastructure bonds should be ring-fenced so that the funds cannot be used for anything else. There will need to be very specific definitions put in place, as infrastructure could be used to justify all sorts of ‘additions’ beyond core purposes (why shouldn’t new homeowners, for instance, be paying ‘their fair share’ of the rail loop?).
  • Cost Variations – The management of costs, and the need for associated transparency, becomes increasingly importance under this funding model. If the council budgets $20m and ends up only using $15m, what do they have to do with the difference? (slushy machine, anyone?) Equally, if the project is set to cost $20m and comes in at $50m, who is responsible for the difference? This is quite critical, particularly given how poorly some local authorities have been around infrastructure projects in the past (is that Kaipara I hear calling?).

I am particularly concerned around how we’d introduce the bonds in the first place. One of the reasons we don’t have long-term bonds in this country is that there is no structural demand-side to the equation. In the UK (until recently) there was a large annuities market (through government fiat – you had to buy an annuity with at least part of your private pension) and large pension schemes (which required, as with annuities, the matching of long-term assets and liabilities). New Zealand has no equivalent structural demand for long-dated bonds and there is no political appetite, as I can see it, to introduce more government measures in this space (much to Chris Coon’s frustration in the past).

Equally, a good point was raised around offering tax incentives (for instance, similar treatment to US municipal bonds – although we lack the need to differentiate between what income tax is involved). I am very reluctant to consider this option, as it’s distortionary, and a tax break is just another cost anyway (if the State is offering a bond at 6%, but gives you a tax free return, then you might as well just say it’s an 8% bond, in substance – although the 2% extra is paid for by the Crown, rather than the council). So it might ‘kick-start’ the market, but only because you’re paying over the odds (in which case, easier to just offer a higher yield upfront).

On balance, I think infrastructure bonds are better than development contributions, and can be made to be far less discretionary (thus limiting councils in their capacity to use the funds for whatever other political purposes they fancy). Targeted rates mean that clearly defined stakeholders will want to know what their contributions are being used for, and how the cost is being managed (in the long-term), rather than just being an upfront tax that nobody really notices. However, as noted above, there are a lot of ‘pesky details’ that need to be resolved prior to declaring it a ‘good idea’. I look forward, if Labour and the Government really are up to this, to a balanced and sensible discussion (and, hopefully, subsequent developments).

Land Affordability & Interest Rates

As was being discussed on Kiwiblog the other day (Germany releases land to keep housing affordable), the German solution to keeping housing costs low has, for a number of years, been to keep land available for building (among some significant other things, which I am not discounting). This contrasts to the policy positions taken in New Zealand and the UK, where land restrictions are quite significant and property prices have skyrocketed for a number of years now (even when the economic fundamentals look utterly bonkers). This does not mean Germany is a veritable paradise, but it does mean that housing prices don’t tend to suffer the same unsustainable spikes as New Zealand does (and it’s not like we’ve run out of land…) nor do they suffer the same booms and busts in the housing market. Conversely, as was noted by Robo63, low interest rates have also played a part (heavily linked to central banks trying to cover up the failures of progressive government fiscal failures). So let’s examine both topics (land supply and interest rates).

The land supply argument is very simple: if you restrict land use, you end up with reduced supply. This further adds additional compliance costs, and the restrictions inevitably leads to insufficient land being available (compared with the natural equilibrium that would have been achieved). The outcome is further compounded by the problem of ‘landbanking’, which is where you’ve achieved government grace (they’ve said you may develop your land), but you can then just sit on the property and watch its value rise (as insufficient land continues to push up your nominal value), rather than actually develop. This mess has been created, primarily, because people have surrendered their right to develop their land on the basis that there must be ‘some control’ (as mayoral aspirant Phil Goff has said very recently). Beyond that, in surrendering our rights, the central government decided it was a great idea to give such an important task (the economic development of land) to the most competent and qualified people in New Zealand…local government officials and councillors. As can be imagined, it’s worked swimmingly since then onwards. Since the RMA was passed, what has been the compounded rate of house price decreases, again?

The second component is interest rates, thanks to operating monetarist policies (I am not getting conspiracy theorist here, just talking about central banks trying to ‘manage’ interest rates). Instead of banks, lenders, borrowers, etc. setting interest rates purely based on market mechanisms, the State has taken a lot of this role upon itself (hence people watching the OCR so closely). The effect has been that successive governments have been able to operate terrible fiscal policies, which can be covered up (for a time) by lower interest rates. The Government has increased your taxes, successively, for how many years? How much has been borrowee at enviably low interest rates? Don’t worry about it, your house ‘value’ has doubled, and you can now borrow at 4.99% for 5-years. You don’t need to save for that car you want, you can just borrow and pay it back later (something I’ve just done recently – so I am not without sin here). This allows the NZ economy to ‘continue along’, irrespective of whether we’ve faced a continued squeeze or not (although, as I said, it cannot last forever). The Government can continue to pretend things are fine, irrespective of a continued fiscal expansion, and can even announce no ‘tax cuts’ this term of Parliament (and it won’t have the same dent such a policy once would have, as if things get bad, the Reserve Bank can just cut interest rates a wee bit more). Thus, the State can continue creating large economic imbalances and it can be plastered over (for now).

Now, this doesn’t mean that central banks have no part to play in our economy, but the same as the supply side has been fundamentally buggered through limiting land supply, so has the demand side been buggered through perpetually low interest rates (although, I am aware, NZ rates were very high in the earlier part of the 2000s). Without interest rates being a mechanism to wash-over poor fiscal policies (which we call ‘good’ policies because alternative parties have even worse ones), we’d actually have to face the music much earlier. In the meantime, we can continue to screw the poor (and particularly the young) as we keep their taxes higher than they need to be, while also making it nearly impossible to own a house (‘Don’t worry, interest rates are low, you just need to now save a $200,000 deposit and then the bank will give you a loan…’).

So there should be some fun times ahead, should anyone ever attempt to unravel the mess (or it comes to a screeching halt). The biggest problem, as I see it, is that the bigger the property ‘boom’, the harder it is to put in place any remedies (as wiping out 400k of nominal equity off my house is going to sting, and even that will yield reasonably unaffordable housing).