NZ Initiative on light rail

Jason Krupp writes:

Light rail is once again a topic of discussion around New Zealand dinner tables after newly elected Auckland Major Phil Goff stated that this transport mode is part of the city’s future. Auckland is not alone. The Greater Wellington Regional Council is also looking to review a plan to put in a light rail line through the southern suburbs as a means of fixing the city’s congestion problems.

The alarming thing about these proposals is the risk associated with them. A crude rule of thumb when it comes to light rail is these projects almost always come in over budget, never meet deadlines, and seldom achieve usage forecasts.

This is well supported by anecdotal evidence such as Sydney’s light rail project in the western suburbs, where costs have blown out by 250%. Washington DC’s street car project opened nine years late, and is unlikely to ever recoup the costs of construction, let alone break even.

The evidence is not  just anecdotal. A comparative analysis of 58 rail projects across 28 countries found that the average cost overrun was 44.7%, and of the 25 projects where data was available, average passenger traffic was less than half of what was originally forecast (-51%).

So let’s say these projects had a BCR of 1.0 – the benefits would equal the costs. Say $100 of costs and $100 of benefits. The average actual cost was $145 and the average actual benefit was $49. So that BCR projected to be 1.0 turns out to be 0.34 – a huge waste of money.

Essentially, there is a governance problem when it comes to project selection. 

This occurs because funding for projects, like light rail networks, is by its nature limited. And one would reasonably expect that only those projects with a high ratio of benefits to costs would be given the go-ahead.

An unintended consequence of this process is it creates an incentive for project promoters and project managers to deliberately overestimate benefits and underestimate costs to beef up this ratio and get the project over the line. The temptation to tip the scale is especially strong where there is no punishment for doing so, as the project promoters will have moved on by the time the real costs are tallied.

We see this in Wellington where politicians declare they can design a light rail system for half what the experts costed it to be.

His fix is to put in  sufficiently big counter incentives in place to ensure that project promoters stop producing biased forecasts. At the low end of the scale this involves commissioning independent peer reviews of project proposals, while on the other end he recommends professional and even criminal penalties for those who produce deceptive forecasts.

The question is whether this should be extended to the people who make this promises in the first place. I would argue that the answer should be yes.

Surely if, as Flyvbjerg proposes, forecasters are to be made accountable for the forecasts they produce, those who propose projects should also be made to account for their proposals. The danger is of course that too few projects get proposed because politicians fear to put their necks out, but this could be ameliorated by setting a best practice test. For example, should the costs on a project blow out, politicians that can show the forecasts used to support the project were based on independent and peer reviewed analysis will be absolved of liability.

This has appeal. Have it as a similar test for company directors – recklessness.

The light rail line being proposed from the Wynyard Quarter to Dominion Road in Auckland may indeed provide more benefits than costs. Indeed, as has been argued by Greater Wellington Regional Councillor Roger Blakeley, there may be ways of restacking Wellington’s light rail project so that it delivers a benefit cost ratio significantly higher than 0.05 (which was what the first cost benefit analysis on this project showed in 2013).

But if they are so confident in these forecasts, let them put their money where their mouths are.

Here is what so scary in Wellington. The official BCR is 0.05 which is insanely low. It is around the same as putting $1 billion of bank notes through a blender and $50 million survive.

But on the basis of past experience of light rail projects that BCR may be too optimistic. Based on experience that $1 billion cost would blow out to $1.45 billion and that $50 million of benefits will turn out to be $25 million. So the BCR might turn out to be 0.017!!!

If politicians vote to go ahead with this, having had expert advise on what a waste of money it will be, they should be held liable.