Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS. FINAL REPORT Version 1.0. Submitted by Richard Paling Consulting

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2 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS FINAL REPORT Version 1.0 Submitted by Richard Paling Consulting August 2013

3 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS Table of Contents EXECUTIVE SUMMARY... I 1. INTRODUCTION... I 2. AGGLOMERATION BENEFITS... II 3. IMPERFECT COMPETITION BENEFITS... IV 4. LABOUR SUPPLY BENEFITS... V 5. CHANGES IN THE PATTERNS OF DEMAND FOR LABOUR... VI 6. TOTAL WIDER ECONOMIC IMPACTS... VII 7. CHANGES FROM THE PREVIOUS ASSESSMENT... VIII 8. APPLICATION OF THE BENEFITS... X 9. SUMMARY OF RESULTS... XI MAIN REPORT INTRODUCTION ASSESSMENT OF AGGLOMERATION BENEFITS INTRODUCTION AND SCOPE OF THE ASSESSMENT APPROACH TO THE ASSESSMENT OF AGGLOMERATION BENEFITS Introduction Agglomeration Elasticities Regional GDP per Worker Employment Forecasts Evaluation Period Growth of Benefits over Time Use of Regional Model Outputs Projects included in Regional Model Outputs RESULTS OF THE APPRAISAL OF AGGLOMERATION BENEFITS FOR ALL PROJECTS COMBINED USING THE REGIONAL TRANSPORT MODEL Overall Results Breakdown by Area Assessment of Agglomeration Benefits based on Car Travel Costs Only Sensitivity Testing Overall Findings for the Assessment of Agglomeration Benefits for the combined Package using the Regional Model ASSESSMENT OF AGGLOMERATION BENEFITS FOR THE WELLINGTON URBAN AREA USING THE OPUS WELLINGTON TRAFFIC MODEL Introduction Approach Results of the Appraisal Comparison with Conventional Economic Benefits Spatial Distribution of Benefits Overall Assessment ASSESSMENT OF AGGLOMERATION BENEFITS FOR OTHER RONS COMPONENTS: TRANSMISSION GULLY Introduction Assessment of Agglomeration Benefits Comparison with Economic Benefits... 22

4 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS 2.6 ASSESSMENT OF AGGLOMERATION BENEFITS FOR OTHER RONS COMPONENTS: MACKAYS TO PEKA PEKA COMBINING THE ASSESSMENTS AND COMPARISON WITH REGIONAL MODEL OUTPUTS AGGLOMERATION BENEFITS : OVERALL ASSESSMENT SENSITIVITY TESTING : ASSESSMENT OF AGGLOMERATION BENEFITS FOR OTHER RONS COMPONENTS: PETONE-GRENADA Introduction Assessment of Agglomeration Benefits Overall Assessment of Petone-Grenada Sensitivity Test SENSITIVITY TESTING OF AGGLOMERATION BENEFITS : USE OF ADDITIONAL TRAFFIC DATA FOR THE INTERPEAK AND PM PEAK PERIODS Introduction Approach Taken Results of the Sensitivity Tests : Use of the Regional Model Results of the Sensitivity Tests : Assessment using Local Models Results from the OPUS WTM for the Wellington Urban Components of the RoNS Results from the SKM model for Petone to Grenada Overall Assessment OTHER ELEMENTS OF WIDER ECONOMIC IMPACTS : IMPERFECT COMPETITION BENEFITS INTRODUCTION APPROACH TAKEN EVALUATION OF IMPERFECT COMPETITION BENEFITS OTHER ELEMENTS OF WIDER ECONOMIC IMPACTS : CALCULATION OF LABOUR SUPPLY BENEFITS INTRODUCTION SOURCES OF DATA Commuting Costs Average Wage Rates Other key parameters Sector definitions QUANTIFYING THE EFFECTS OF LABOUR SUPPLY BENEFITS IN 2021 AND The Effects of Changes in Commuting Costs for THE EFFECTS OF CHANGES IN COMMUTING COSTS FOR OVERALL ASSESSMENT OF LABOUR SUPPLY BENEFITS OTHER IMPACTS ON REGIONAL EMPLOYMENT PATTERNS INTRODUCTION ESTIMATION OF EMPLOYMENT IMPACTS ESTIMATION OF EMPLOYMENT IMPACTS : AN ALTERNATIVE APPROACH OTHER FACTORS : IMPACT ON THE PORT AND AIRPORT OVERALL ASSESSMENT OVERALL ASSESSMENT OF WIDER ECONOMIC IMPACTS INTRODUCTION ESTIMATES OF WIDER ECONOMIC IMPACTS Introduction Evaluating the Impacts APPLYING THE BENEFIT ESTIMATES CHANGES FROM THE PREVIOUS ASSESSMENT OVERALL ASSESSMENT Richard Paling Consulting ii

5 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS 1. Introduction Executive Summary The role of Wider Economic Impacts (or Wider Economic Benefits as they are alternatively known) has become increasingly recognised in the overall evaluation of transport schemes, adding to the benefits derived from conventional economic evaluation based on the impacts for transport users. These wider impacts are regarded as especially important in relation to large schemes impacting on the major urban areas in New Zealand. The Wellington Northern Corridor Roads of National Significance (RoNS) forms such a scheme with a substantial package of investment in the SH1 corridor between Wellington City and the Kapiti Coast to the north of the region. It is noted that the RoNS represent a significant change in planning for major national transport infrastructure in New Zealand. They are lead infrastructure - proactive improvements that encourage economic growth. In the past, improvements have tended to be reactive and focused on improving transport networks to keep pace with growth. With improved accessibility, the productivity of economic activities improves as firms and their workers have more opportunities to interact and suppliers can benefit from the larger markets which they are able to serve from a particular location. These effects can include both improvements to the productivity of existing operations and changes to these patterns as levels of employment and output change in response to the new opportunities. While the processes for estimating the magnitude of these Wider Economic Impacts (WEIs) are currently evolving with some being at a more advanced stage of development, it is recognised that these can be treated as additional to the benefits derived from a conventional economic evaluation. Estimates of the different components of the Wider Economic Impacts from the Wellington Northern Corridor RoNS have been determined based as far as possible on the procedures set out in the NZTA s Economic Evaluation Manual (EEM) as updated in NZTA.General Circular Funding: No 13/06 released on 17 July 2013 (GC13/06) and on the procedures set out in the NZTA Research Report which sets out possible guidelines based on international best practice. The different benefits assessed comprise:- Wider Economic Impact Principal Evaluation Methodology Agglomeration Benefits EEM Volume 1, Section A10 Imperfect competition benefits NZTA Research Report 448 Section 8 Labour supply benefits NZTA Research Report 448, Section 10 Changes in the patterns of demand for NZTA Research Report 448, Section 11 labour through moves to more productive jobs and increases in employment 1 Wider economic impacts of transport investments in New Zealand, Kernohan, D and L Rognlien NZ Transport Agency Research Report 448, It is acknowledged that some of the procedures within this research are currently under review for inclusion in the EEM as approved methodologies.

6 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS Reflecting the recent changes set out in the GC13/06 a discount factor of 6% and evaluation period of 40 years are used for determining present values of benefits and costs spread over time for the main analysis set out in this report. However sensitivity testing has been undertaken including the use of a 4 per cent discount rate and an 8 per cent discount rate and a 30 year evaluation period. 2. Agglomeration benefits Agglomeration benefits measure the potential increases in productivity that arise with improved accessibility as workers and firms are able to interact more effectively. As such they do not result from any changes in the patterns of employment but reflect higher output from the same numbers of workers. Agglomeration benefits have been estimated in accordance with section A10 of the EEM for the package of projects contained in the Wellington Northern Corridor RoNS as far north as Otaki and for each of the major components individually using output from the Wellington Strategic Transport Model (WSTM) operated by Greater Wellington Region and project models developed by consultants. This approach extends that undertaken for the 2009 Wellington Northern Corridor RoNS Business Case where only the benefits from the Wellington urban components were taken into account at that time. The use of alternative modelling approaches allows consideration to be taken of both the total region-wide impacts of projects which are included in the Regional model and the more detailed assessment of individual projects provided by the individual project models. The components assessed using project models comprise:- The Wellington urban components Transmission Gully Mackays to Peka Peka In the 2009 Business Case, Petone-Grenada was included as an integral part of the RoNS package. Subsequently in developing the Wellington Northern Corridor RoNS Network Plan, which collects together all the roading components which support the RoNS package, the NZTA decided to include this project as one of the supporting elements. However, although the investigation, design and property phases of these elements are funded from the RoNS budget, the relevant RCAs have yet to determine how the construction of the Petone-Grenada link is to be funded. As a consequence and to reflect this uncertainty, the benefits, including agglomeration, resulting from this link have been treated as a sensitivity test The overall total agglomeration benefits for the package as whole have been estimated for 2021 and 2031 using the Regional model. These are set out in Table 1. The table also includes the total NPV of the agglomeration benefits based on an evaluation period of with the scheme benefits discounted to 2012 using a discount rate of 6 per cent. To provide comparability with earlier work, the benefits have also been estimated on the basis of a 30 year evaluation period and an 8 per cent discount rate. Richard Paling Consulting ii

7 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS Table 1 Agglomeration Benefits from the Regional WSTM Based on Car and Public Transport User Costs Annual Agglomeration Benefits ($m) Benefits in Benefits in Total Discounted Benefits based on a 6 per cent discount rate and a 40 year evaluation period. 410 Total Discounted Benefits based on an 8 per cent discount rate and a 30 year evaluation period. 235 The figures in Table 1 indicate that the agglomeration benefits of the corridor upgrading are substantial and increase sharply over time. This reflects the expansion of the projects included within the overall RoNS package by 2031 and also increases in traffic employment and productivity. To provide an indicative benchmark, these can be compared with the estimate of the conventional economic benefits which based on the latest information from Opus total about $2.4 b for the projects south of Otaki. This would give agglomeration benefits of about 17 per cent of the conventional benefits which is broadly typical of the results elsewhere for major highway schemes. The above benefits have been confirmed by NZTA as a reasonable estimate for the Wellington Northern Corridor RoNS. Benefits have also been estimated for the individual projects within the scheme using both the strategic Regional Model and the individual project models. Although the detailed project models are likely to provide a better representation of conditions within their own study areas, they do not pick up any wider regional impacts and also are confined to considering the effects on car users only. The benefits are compared for the year 2031, a time when all the projects within the Wellington Northern Corridor RoNS are forecast to be completed. These results are set out in Table 2. Table 2 Estimated Annual Agglomeration Benefits in 2031 from Components of the Wellington Northern Corridor RoNS (Projects Considered Individually) Project Benefits Estimated from Project Models Benefits Estimated from Regional Model Wellington Urban RoNS 21 Mackays to Peka Peka 17 Urban projects + Mackays to Peka Peka Transmission Gully 4 15 Urban projects plus Transmission Gully The results in Table 2 demonstrate a reasonable match between the agglomeration benefits estimated using outputs from the Regional model and those generated by the project models, given the different focuses of the two approaches. This is further demonstrated in Figure 1 which compares the stream of benefits over time. Richard Paling Consulting iii

8 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS Annual Agglomeration Benefits ($m) Total Separate Projects Regional model Figure 1 Comparison of the Total Agglomeration Benefits from the Project Models using Project Specific Opening Dates with the Regional Model Totals The higher benefits over the longer term from the Regional model reflect the region wide impacts which are not picked up in the project models. Given the potential for the Regional model to pick up the area wide impacts and the relative similarity of the results produced by the two approaches, it is considered that the Regional model provides an appropriate basis to estimate the agglomeration benefits of the Wellington Northern Corridor RoNS. 3. Imperfect competition benefits Imperfect Competition benefits arise if a transport improvement causes output to rise in sectors where there are margins between the marginal cost of a product and its market price and as a consequence a revaluation of the benefits is necessary to reflect the higher value to the consumer of the additional output generated. Conventional economic appraisal assumes that savings from reduced in-work travel time are translated into additional output and that the value of this additional output is equal to the value of the travel time saved. However if price cost margins exist, the value of the additional output will be greater than the value of the savings in travel time and the overall benefits will be underestimated. As an example if a price cost margin of 20 per cent exists a travel time saving of $10 would be translated into increased output of $12. As it is this latter figure which represents the value of the benefits, an adjustment is necessary to reflect this difference. The effects of imperfect competition are assumed to be related to the benefits estimated for business and freight travel costs which form part of the total costs of production. Richard Paling Consulting iv

9 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS The revised EEM procedures now take into account research in this area (NZTA Research Report 448) which indicates that based on an analysis of the price cost margins in New Zealand, Imperfect Competition benefits can be taken to be 10.7 per cent of the conventional economic benefits to business travellers. No information is available from the assessment of conventional economic benefits on the benefits to business travellers, which form the basis of the assessment of imperfect competition benefits. However experience from other schemes suggests that business benefits probably represent about per cent of total benefits. On the basis of total conventional economic benefits of about $2.4b, this would give an Imperfect Competition NPV benefit of about $130m. 4. Labour Supply Benefits Labour supply benefits can arise if the cost of commuting declines. Because of these reduced travel costs, additional workers will be attracted into the work force, since the benefit to the individual from working will now more than offset the costs of commuting. These commuting costs would typically fall as a result of the reductions in travel times and operating costs arising from the projects included in the RoNS scheme. The externality benefit which is included in the Wider Economic Impacts is the tax wedge, the difference between the gross and net income of new workers choosing to enter the workforce which is returned to the government. The approach in general assumes that balance in the labour market is constrained by the supply of labour and that the demand for labour is such that new workers choosing to enter the workforce can be accommodated. It should be recognised that this is a particular and possibly very special condition. In times of surplus labour as is the case currently there may not be the full potential to absorb additional labour into the workforce. The results derived from the assessment of the benefits from increased labour force participation are set out in Table 3, using the methodology set out in the NZTA Research Report 448. Table 3 Forecast Increase in Labour Supply and Resulting Increase in Taxation revenue 2021 and 2031 Sector Total wages ($m) Reduction in annual commuting costs ($m) Increased labour supply (persons) Increased wages from new entrants ($m) Increased taxation on new entrants ($m) Total , Total , NPV ($m discounted to 2012) While the value of the tax wedge is relatively small at $35m, the impact on wages and on GDP is much larger. Based on the increase in wages, it is broadly estimated that the impact on GDP would be of the order of $ m. Richard Paling Consulting v

10 5. Changes in the Patterns of Demand for Labour Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS While there are reasonably well defined approaches to calculating the WEIs from the three elements described above, the techniques for assessing the impact of new transport schemes on the demand for labour and the evaluation of these changes are less well defined. For this analysis therefore alternative estimates have been developed and compared to current employment levels in the Region and forecast employment growth in order to provide an indication of the robustness of the responses estimated. Experience from overseas suggests that the construction of new roads would give rise to an increase in employment in the corridor served of between 0.4 and 4 per cent. The analysis of this is set out in Appendix C of the report Roads of National Significance : Economic Assessments Review. 2 A conservative interpretation of this relationship has been applied with employment increases in the corridor assumed to lie between 0.1 per cent and 0.4 per cent. The higher figures lie in areas served by the central part of the route and with lower figures at the extremities in Wellington City in the south and Palmerston North and Manawatu District in the north. Using this approach would result in an estimate of the generation of about additional jobs in the RoNS corridor that would have otherwise not existed. This forecast growth of employment has been also compared with the impacts of the improved route on the employment levels in three planned development areas where accessibility would be enhanced. The areas identified were Miramar, Lincolnshire Farm and Paraparaumu, and in these it was estimated that an additional 3700 jobs would be created with the Wellington RoNS. This probably represents a conservative estimate since there are a number of other development sites along the line of the route which could potentially benefit from the improved accessibility. These figures can be compared with the total level of employment in the corridor of about 270,000 in 2012 and with a growth of 32,000 between 2000 and The forecast level of additional growth is therefore modest in relation to the size of the regional labour market (where it would represent an overall increase of just 0.25 per cent) and as a proportion of the growth in employment that has occurred within it over the period since 2000 (where it would represent about 2 per cent). Considering these three alternative approaches, the estimate of additional jobs from the first approach used in the analysis seems to be fairly modest both in relation to the potential from identified development sites and in relation to total employment and employment change in the corridor. This figure has conservatively been used for the quantified evaluation although it is recognised that a higher figure of 3700 or more might be achieved in practice The benefits from this employment increase have been evaluated both of the basis of the total increase in regional GDP that would result and on the basis of the additional tax take which would be generated. While the material set out in RR448 (Equation 18.1) would support estimates based on total GDP increases, material from elsewhere would suggest that this should be limited to the tax wedge on the increased GDP. With an allowance for the build up of the impacts over time, the tax wedge associated with the additional employment would give benefits of about $230m NPV (discounted to 2012 at 6 per cent). 2 Roads of National Significance : Economic Assessments Review NZ Transport Agency July 2010 Richard Paling Consulting vi

11 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS 6. Total Wider Economic Impacts The total benefits which result from the Wider Economic Impacts are set out in Table 4. These have been evaluated over the period from 2021 to 2060 and discounted to 2012 using a 6 per cent discount rate. Table 4 Wellington Northern Corridor RoNS : Estimates of Wider Economic Impacts Type of Impact NPV ($m) at 6% with 40 year evaluation period Agglomeration benefits 410 Imperfect competition benefits 130 Labour supply benefits 35 Changes in the patterns of demand for labour 230 Total 805 These Wider Economic Impact benefits can be compared with the total conventional economic benefits of about $2.4b, of which they represent about 34 per cent. Agglomeration benefits represent about 17 per cent and labour market effects (supply and demand) about 11 per cent. Material published in RR448 indicates that based on a selection of other projects overseas, agglomeration benefits on their own can represent up to 44 per cent of conventional economic benefits with high values achieved for major highway projects and so a ratio of 17 per cent would represent a figure in the middle of the range observed. Labour market benefits can also represent up to 28 per cent of the conventional economic benefits. The agglomeration benefits and the estimates of increased employment benefits from the Wellington Northern Corridor RoNS as a whole are therefore well within the ranges found for other projects and set out in RR448. When benchmarking against results from other countries, it should also be noted that typically economic evaluations overseas incorporate increasing values of time over time. This will give higher conventional economic benefits than the equivalent New Zealand procedures where the value of time stays constant. Evaluations overseas also typically would use a variable matrix approach allowing trip patterns to change in response to the opportunities provided by the new schemes. Applying this in the case of the Wellington RoNS would again produce higher conventional benefits. When compared against overseas examples, the share of agglomeration and other wider economic impacts may therefore reflect low estimates of conventional economic benefits for the Wellington Northern Corridor RoNS rather than high estimates of the wider impacts. The effects of the use of a 4 per cent discount rate over 40 years and a shorter evaluation period of 30 years combined with a higher discount rate of 8 per cent are set out in Table 5. Richard Paling Consulting vii

12 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS Table 5 Wellington Northern Corridor RoNS : Estimates of Wider Economic Impacts with Different Discount Rates and Evaluation Periods Type of Impact Base Case NPV ($m) at 6% with 40 year evaluation period NPV ($m) at 4% with 40 year evaluation period NPV ($m) at 8% with 30 year evaluation period Agglomeration benefits Imperfect competition benefits Labour supply benefits Changes in the patterns of demand for labour Total 805 1, Changes in the discount rate and evaluation period have a very significant impact on the total benefits increasing these from $470m when evaluated at an 8 per cent discount rate over 30 years to $1.3b when evaluated at 4 per cent over 40 years. 7. Changes from the Previous Assessment The results from the current assessment can be compared with those estimated in the work undertaken in These had an earlier discount year of 2008 and were also based on a discount rate of 8 per cent and an evaluation period of 30 years, compared to the current use of a discount rate of 6% and an evaluation period of 40 years. The values quoted in the current evaluation are also in terms of 2012 prices rather than the 2008 prices used earlier. In addition, for the earlier assessment for the 2009 Business Case, estimates were only made for two elements of the Wider Economic Impacts for which approaches had been developed at that stage: agglomeration benefits and the impacts of changes in the demand for labour. No allowance was therefore made for imperfect competition impacts or labour supply impacts. In 2009, the estimation of agglomeration benefits was undertaken for the project within the Wellington urban area only whereas the current appraisal includes all the RoNS projects along the corridor as far north as Otaki. Not only were the 2009 agglomeration benefits based on a more limited assessment undertaken over a smaller geographical area and including only a single project, but the details of this project in terms of its scope and timing have also changed since In 2009 estimates of changes in the demand for labour were based in part on the application of factors representing the increase in employment as a proportion of the existing labour force and in part within the urban area on estimates derived indirectly from the agglomeration modelling. For the current analysis the benefits have been estimated on the basis of the proportions of the existing labour force only. This provides a more transparent approach to their estimation. In line with current advice, the labour demand benefits are based on the tax wedge generated by the new employment rather than the full increase in GDP. Richard Paling Consulting viii

13 These changes are summarised in Table 6. Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS Table 6 Changes with Current Approach to Estimation of Wider Economic Impacts Change of discount year to 2012 Change of discount rate from 8 per cent to 6 per cent Change of evaluation period from 30 to 40 years Values based on 2012 $ rather than 2008 $ Inclusion of agglomeration benefits for all projects contained within the WNC RoNS as far north as Otaki rather than just the Wellington urban component Changes to the details of the Wellington Urban projects Inclusion of estimates for imperfect competition benefits and labour supply benefits Changes in the method of calculating labour demand effects from GDP per worker to the associated tax wedge. The changes in the components of the Wider Economic Impacts are summarised in Table 7.2 Table 7 Comparison of Current Results with the 2009 Estimates ($m NPV) Wider Economic Impact Current 2009 Estimate as 2009 Estimate with Estimate published discounting to 2012 Agglomeration Benefits - Total Imperfect competition benefits 130 Not estimated Labour supply benefits 35 Not estimated Labour demand effects 230 Tax wedge Not estimated Labour demand effects GDP effects 715 (1) Total included in Evaluation Notes (1) Not included in evaluation total since tax wedge estimate now taken to be more appropriate The combined effect of these changes is to increase the Wider Economic Impacts by about 55 per cent although 35 per cent is represented by the change in discount year. Richard Paling Consulting ix

14 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS 8. Application of the Benefits The application of the Wider Economic Impacts in the overall economic appraisal can be considered in three main categories:- 1. Those for which standard procedures have been developed and set out in the EEM Agglomeration benefits $410m These benefits can be included in the scheme BCRs. 2. Those for which guidelines based on practice overseas have been set out by NZTA in Research Report 448 but which are covered by GC13/06 and incorporated in the EEM procedures Imperfect competition benefits $130m Labour supply benefits $35m These figures can be added to the scheme BCRs as a formal sensitivity test. 3. Those for which approaches are less established although procedures for evaluation of the impacts are set out in RR448. Increases in employment $230m The total increase in GDP associated with the additional jobs generated by the combination of labour supply and labour demand effects would amount to about $ b. While the lower figures of $35m and $230m based on the tax wedge for supply and demand effects respectively quoted above would be the appropriate values to include in the formal NZTA economic evaluation, the higher GDP figure would reflect the potential impact on overall regional economic activity and so would give an indication of the full impact of the scheme. Richard Paling Consulting x

15 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS 9. Summary of Results The Wider Economic Impacts potentially generated from the Wellington Northern Corridor RoNS are very substantial. On the basis of NZTA guidelines and procedures these are estimated to amount to about $0.8b over a 40 year evaluation period and represent about 35 per cent of the conventional economic benefits. Combining labour supply and labour demand impacts, the scheme is estimated to generate at least new jobs. If only three of the planned growth areas are established within the evaluation period this estimate increases to From the conservative estimate of jobs, about $265m of benefits are realised, based only on the increased tax generated by the additional workers. These benefits would increase to $1.5b if allowance was made for the full increase in GDP associated with this new employment. These results reflect the extensive area served by the projects within the corridor package with total employment in the broad order of influence of about 270,000 and with a regional GDP in 2021 estimated at $30-35b. The substantial Wider Economic Impacts give an indication of the potential for economic development in the corridor in response to the improved accessibility offered by the upgraded transport connections. Richard Paling Consulting xi

16 Assessment of Wider Economic Impacts for the Wellington Northern Corridor RoNS 1 Introduction Main Report The RoNS represent a substantial change in planning for major national transport infrastructure in New Zealand. They are lead infrastructure - proactive improvements that encourage economic growth, and as such it is appropriate to assess the scale of this economic growth. In 2009 an assessment of the Wider Economic Impacts (WEIs) for the Wellington Northern Corridor RoNS was completed. This assessment informed a business case and supported funding for the investigation and design phases of the scheme. The updated assessment which this report describes was completed in a similar manner to that 2009 assessment. It however includes updates to the scope of the analysis and the approaches used to assess wider economic benefits particularly in the light of the recent NZTA Research Report 448 3, which sets guidelines for these (included in NZTA s EEM procedures). It also includes changes to the discount rate from 8 per cent to 6 per cent and the extension of the evaluation period from 30 to 40 years in line with the changes in the NZTA Economic Evaluation Manual (EEM) set out in the NZTA General Circular Funding: No 13/06 (GC13/06) With improved accessibility, the productivity of economic activities improves as firms and their workers have more opportunities to interact and suppliers can benefit from the larger markets which they are able to serve from a particular location. These effects can include both improvements to the productivity of existing operations and changes to these patterns as levels of employment and output change in response to the new opportunities. While the processes for estimating the magnitude of these Wider Economic Impacts (WEIs) are currently evolving with some being at a more advanced stage of development it is recognised that these can be treated as additional to the benefits derived from a conventional economic evaluation which focuses on the impacts of transport schemes in terms of the savings in time and operating costs to those directly affected. The different elements of the WEIs are set out in NZTA Research Report 448. These comprise:- Agglomeration benefits for which procedures for evaluation are included in the EEM Imperfect competition benefits for which guidelines for the estimation of benefits are set out in RR448 and which are now recognised in GC13/06 Labour supply benefits again for which guidelines for the estimation of benefits are set out in RR448 and which are now recognised in GC13/06 Changes in the patterns of demand for labour through moves to more productive jobs and increases in employment. While RR448 sets out some guidelines for the evaluation of any changes, no firm processes are recommended for assessing the scale of any employment impacts. This report considers the benefits arising from each of these elements. 3 Wider economic impacts of transport investments in New Zealand, Kernohan, D and L Rognlien NZ Transport Agency Research Report 448, 2011 Richard Paling Consulting 1

17 The benefits, where discounted, are discounted to This is different to the 2009 assessment, where 2008 was used and as a result the benefits, as well as the costs, are higher. The effects of this change in discount year would by itself increase benefits by about 35 per cent before any other changes are included. Using 2012 is consistent with the revised assessment of the conventional economic benefits and relates to NZTA s time zero 1 July of the financial year in which the activity is submitted for a commitment to funding. Richard Paling Consulting 2

18 2 Assessment of Agglomeration Benefits 2.1 Introduction and Scope of the Assessment Agglomeration benefits measure the potential increases in productivity that arise with improved accessibility as workers and firms are able to interact more effectively. As such they do not reflect any changes in the patterns of employment but reflect higher output from the same numbers of workers. These would arise for example from better opportunities for business interactions and opportunities for networking because of the reduced costs of this or from suppliers being able to serve larger markets with opportunities for product specialisation. Following the guidelines set out in the EEM, the agglomeration benefits have been estimated using a number of different model outputs both to assess the robustness of the results and also to identify the possible contributions from individual components of the proposed Wellington Northern Corridor RoNS. This work updates the earlier analysis undertaken in 2009 which focussed on the urban elements of the RoNS only. It makes use of outputs from the Wellington Strategic Transport Model (WSTM) operated by the Greater Wellington Regional Council, and individual project models developed to investigate and analyse the particular components of the overall scheme. The use of alternative modelling approaches allows consideration to be made of both the region-wide impacts of projects which are taken into account in the Regional model and the more detailed assessment of individual projects provided by the individual project models. The two approaches can then be compared to help assess the robustness of the results. The individual projects for which the outputs of project models have been used in this analysis include:- The Wellington urban components modelled by Opus Consultants Transmission Gully modelled by SKM Mackays to Peka Peka modelled by Beca Although not included in the main RoNS scheme, an analysis has also been undertaken of the agglomeration benefits from the Petone-Grenada project using the project model developed by SKM and treating this as a sensitivity test. Beca have also modelled the project from Peka Peka to Otaki and MWH the project from Otaki to Levin. However these projects are considered to be too remote from the main urban areas for agglomeration benefits to be significant and it may be difficult to model these effects reliably in a project model. The Regional WSTM covers all the projects within the region as far north as Otaki and therefore has a slightly different geographical basis to the project models. On the basis that the agglomeration benefits from the section between Peka Peka and Otaki as estimated by the WTSM contribute less than 1.5 per cent of the total agglomeration benefits in 2031, no detailed assessment has been made of these effects. Richard Paling Consulting 3

19 This is possibly the first time in New Zealand that agglomeration benefits have been assessed for a corridor project consisting of a number of components. The issue as to the extent to which the assessment of agglomeration benefits away from the main urban cores may be appropriate has been considered in the UK where the concept of a Functional Urban Region (FUR) has been used to provide guidelines in such instances. For this in summary a FUR is defined as having a core employment of at least 60,000 and a commuting field within which at least 10 per cent of commuters travel to the core and where this commuting flow is larger than any other movement outside the particular area. 4 The origins and destinations of commuting flows in the Region are summarised in Table 2.1. Table 2.1 Patterns of Commuting Flows in the Wellington Region 2006 Destination Origin Kapiti Coast Porirua Upper Lower Wellington Wairarapa Grand District City Hutt City Hutt City City (1) Total Kapiti Coast District Porirua City Upper Hutt City Lower Hutt City Wellington City Wairarapa (1) Grand Total Notes (1) Masterton, Carterton and South Wairarapa Districts Source : Statistics NZ 2006 Census This would suggest that all of the Region with the exception of Wairarapa would be included in the equivalent of a Functional Urban Region with 10 per cent of commuting flows to the Wellington City Urban Core and so it would be appropriate to consider agglomeration benefits within this area. As indicated above, the analysis uses outputs from both the Regional model and the more locally focussed project models that were developed for the individual components. Each of these has particular characteristics in relation to the assessment of the transport impacts of the project components and the way in which these are translated into agglomeration benefits. The Regional model provides an assessment of the impacts on a region-wide and potentially multi-modal basis but because of its strategic nature it is not able to model particular projects at a high level of detail. In principle it may therefore underestimate the impacts as project proposals are increasingly refined. The local project models are able to define the local area benefits for their projects in detail but do not have a public transport component or are easily able to link the project into a wider area assessment. 4 UK DfT WEBTAG Unit 2.8 Wider Impacts and Regeneration Section 8 Annex A 8.1 Defining Functional Urban Regions (FURs) Richard Paling Consulting 4

20 2.2 Approach to the Assessment of Agglomeration Benefits Introduction The approach taken follows that set out in the EEM although to some extent the analysis has been constrained by limitations on the modelling data available. In particular while the Regional model covers movements by both cars and public transport, the project models cover cars only. Using the outputs from the Regional model which allow the effects to be considered both for car users and for car users and public transport users combined, the analysis has however explored the difference between the two approaches, which can be used when considering the estimates from the project models Agglomeration Elasticities The prescribed approach calls for composite agglomeration elasticities to be estimated for every zone based on the detailed composition of employment. Agglomeration elasticities by sector are set out in Table 2.2 which is derived from the EEM. Table 2.2 Agglomeration Elasticities by Sector ANZSIC Sector Industry Agglomeration Elasticity A Agriculture, forestry and fishing B Mining D Electricity, gas, water and waste services C Manufacturing E Construction F Wholesale trade G Retail trade H Accommodation and food services I Transport, postal and warehousing J Information media and telecommunications K Finance and insurance services M Professional, scientific and technical services N Administrative and support services O Public administration and safety L Rental, hiring and real estate services P Education and training Q Health care and social assistance R Arts and recreation services All industries Source: EEM Table A10.1 Although in principle agglomeration elasticities should be estimated for each zone, earlier work on the Wellington RoNS indicated that using a single average value gave a result that was within 5 per cent of that estimated using values for each zone. Given this limited difference and the complexities of estimating detailed agglomeration elasticities at a zonal level, especially where the zones in the transport model do not match the Census Area Units from which the detailed breakdowns of activity by industrial sector are obtained, agglomeration elasticities were estimated at a territorial authority level. This was based on the breakdown of employment by type within each of these in 2011 and used the sectoral elasticities set out in Table 2.2. These give values over a fairly narrow range except for the Wairarapa as can be seen in Table 2.3 Richard Paling Consulting 5

21 Table 2.3 Agglomeration Elasticities by Territorial Authorities 2006 and 2011 Average Agglomeration Elasticities in:- Area Total NZ Wellington Region Kapiti Coast District Porirua City Upper Hutt City Lower Hutt City Wellington City Masterton District Carterton District While the subsequent analysis is based on the agglomeration elasticities at a territorial authority level derived for 2011, Table 2.3 also indicates that these are increasing over time reflecting the growth of the share of employment in sectors which have the higher elasticities. The analysis based on 2011 values is therefore likely to be somewhat conservative compared to the likely future position Regional GDP per Worker The EEM analysis also calls for estimates of regional GDP per worker in order to value the increased outputs arising from the agglomeration impacts. Estimates of Regional GDP have recently been released by Statistics New Zealand and where appropriate these have been used as the basis for the figures in this report. However these were released for 2010 and it has therefore been necessary to update these figures to current values. The process for this is set out in Table 2.4. This essentially factors up the reported value for by the increase in GDP per worker between 2010 and 2012 to give a 2012 value. This is then increased by the historic increase in GDP/worker to give values for the forecast years. Estimates of the numbers of workers are derived from the LEED (Linked Employer-Employee Data) database and include both employees and working proprietors. Richard Paling Consulting 6

22 Table 2.4 Estimating GDP/Worker in the Wellington Region A Estimating GDP/Worker in Wellington Region 2012 Growth in GDP per worker 2010 to All New Zealand Year Price basis GDP (b) Growth Filled jobs (March) GDP/filled job at current prices Average GDP/worker in Wellington Region2010 in 2010 prices 103,100 Average GDP/worker in Wellington Region 2012 in 2012 prices 112,200 B Estimating Future GDP per worker Growth GDP/filled job at current prices CPI Index GDP per worker at 2001 prices Total Growth GDP worker at constant prices 9.2% Annual Average Growth GDP worker at constant prices 1.1% GDP/Worker Wellington Region at 2012 prices , , , , Employment Forecasts Employment forecasts have been supplied by Greater Wellington Regional Council and are set out below. Table 2.5 Forecast Employment Levels in the Wellington Region and Wellington Urban Area Year Employment In total employment is forecast to grow by about 12 per cent between 2011 and 2031 and by about 5 per cent between the forecasts years of 2021 and Evaluation Period For the appraisal set out in this report, except where otherwise indicated, the estimates of agglomeration benefits have been evaluated over the period from 2021 to 2060 and discounted back to 2012 at 6 per cent. The effects of a shorter evaluation period and alternative discount rates of 4 per cent and 8 per cent on the results for the project as a whole have also been considered in sensitivity testing. Richard Paling Consulting 7

23 It should be noted that for this appraisal all costs and benefits are discounted back to This is a later year than was used as the basis for discounting in earlier work and the use of this will increase the discounted benefits (and costs) compared to the earlier work by about 35 per cent. The effects of changing the discount year are discussed in Section 7. The evaluation using the regional model has been based on the modelled results for 2021 and This does not take into account any benefits arising before this date, but as later analysis shows the effects of this appear to be fairly small Growth of Benefits over Time For the appraisal, in line with the procedures set out in the EEM, it has been assumed that the benefits grow linearly over the period between 2021 and This represents an approximation to the step changes that would occur as individual project components become completed over the period. From 2031 onwards it is assumed that the benefits would grow reflecting increases in general productivity, estimated in Table 2.3 to be about 1.1 per cent per year. This is a fairly conservative assumption since it does not take into account the growing benefits from the relief of congestion from the completed projects even if the network is not developed further and the continued growth of the workforce. The effects of this are particularly marked in the light of a lower discount rate and a longer evaluation period Use of Regional Model Outputs The assessment of the agglomeration benefits has been based on the average generalised costs for car and public transport users estimated from the regional model, and covering the AM peak. However, because the individual project models produce outputs for car travellers only, estimates of agglomeration benefits from the Regional model based on changes in car travel times and costs only have also been made which can be used in comparing the results from the project models Projects included in Regional Model Outputs The Regional Model has provided outputs for 2021 and 2031 for two scenarios 5 for the Do Something situation (excluding the Petone-Grenada project which was included in earlier modelling and two scenarios 6 for the Do Minimum case. The list of components included in each of these is set out in Table and and Richard Paling Consulting 8

24 Table 2.6 Projects included in Regional Model Outputs Scenario Year Road Project Description BasinR Basin Reserve Improvement X X MtVicDup MtVic Tunnel Duplication X RuahineSt Ruahine St improvement X X Nga_Aotea4L Widen Ngaranga to Aotea from 3L to 4L X X SH58GS 7 Grade Separation of SH58 X X M2PP Mackays Crossing to PekaPeka X X PP2O PekaPeka to Otaki X X TG Transmission Gully X Adelaide_Rd_Improvement 4 Lanes between Basin and John St with one bus lane and on traffic lane X X Johnsonville_Triangle 4 Laning of Moorfield Rd and Broderick Rd, signalised accesses to Mall X X Aotea_Quay_Improvements Roundabout at Tranzrail yard access X X Terrace_Tunnel_Duplication 2-laning southbound direction SH1_Otaihanga_Rdb New Roundabout at SH1/Otaihanga Rd X X ICBP_improvements Roads improvement around ICBP and Basin Reserve X X PT Project Description PT_Routes_AM Base PT Services - AM Peak X X X X PT_Routes_IP Base PT Services - Inter Peak X X X X PT_Routes_PM Base PT Services - PM Peak X X X X Bus_Review_AM Wellington City Bus Review PT Services - AM Peak X X X X Bus_Review_IP Wellington City Bus Review PT Services - Inter Peak X X X X Bus_Review_PM Wellington City Bus Review PT Services - PM Peak X X X X Rail_Plan_Option_1_AM Rail Plan 1 AM (Services headway 20min) X X Rail_Plan_Option_1_PM Rail Plan 1 PM (Services headway 20min) X X Rail_Plan_Option_2_AM Rail Plan 2 AM (Services headway 15min) X X Rail_Plan_Option_2_PM Rail Plan 2 PM (Services headway 15min) X X Spine_Corridor_Bus_Lane Bus lane from Bus Station to Hospital (with no reduction in capacity for cars) X X X X X 7 Although this has been modelled as part of the package for 2021 and 2031, it does not form part of the overall RoNS scheme. However the effects of this on the overall agglomeration benefits would be very small. Richard Paling Consulting 9

25 2.3 Results of the Appraisal of Agglomeration Benefits for All Projects Combined using the Regional Transport Model Overall Results From the outputs of model and following the approach outlined above in Section 2, the agglomeration benefits based on the generalised costs for all travellers and for the Region as a whole are set out in Table 2.7. Table 2.7 Agglomeration Benefits from the Regional WSTM Based on Car and Public Transport User Costs ($m) Annual Benefits in Annual Benefits in Total Discounted Benefits (NPV) 410 The figures in Table 2.7 indicate that the agglomeration benefits of the corridor upgrading are substantial and increase sharply over time. This reflects both growing employment and congestion and also the effects of the addition of new components of the corridor package by 2031 as indicated in Table 2.6. Changes to the definitions of the package for 2021 also give rise to lower estimates than were determined in earlier work in 2009, but the effects for the later years are much smaller. This again would contribute to the sharp increase between the two modelled years. To provide an indicative benchmark, the total benefits can be compared with the estimate of the conventional economic benefits which from the latest information from Opus is about $2.4b. This would give agglomeration benefits at about 17 per cent of the conventional benefits within the range typically observed for major highway projects. When considering benchmarking against overseas results, it should be noted that typically economic evaluation overseas incorporates increasing values of time over time. This will give higher conventional economic benefits than the equivalent New Zealand procedures where the value of time stays constant. Evaluations overseas also typically would use variable matrix evaluation allowing trip patterns to change in response to the opportunities provided by the new schemes. Applying this approach in the case of the Wellington RoNS would again produce higher conventional benefits. The share of agglomeration benefits when compared against overseas examples may therefore reflect low estimates of conventional economic benefits for the Wellington Northern Corridor RoNS and its components. The time stream of benefits is set out in Figure 2.1 and Table 2.8. These illustrate the rapid growth discussed above and the effects of the different assumptions about the growth of benefits over the period from 2021 to 2031 and in subsequent years. Richard Paling Consulting 10

26 80 70 Annual Agglomeration Benefits ($m) Figure 2.1 Assessment of Agglomeration Benefits from the Regional WSTM Based on Car and Public Transport User Costs Benefit Time Profile Richard Paling Consulting 11

27 Table 2.8 Assessment of Agglomeration Benefits from the Regional WSTM Based on Car and Public Transport User Costs Benefit Time Profile Year Annual Agglomeration Benefits ($m) Richard Paling Consulting 12

28 The growth of the agglomeration benefits as derived from the Regional Model output can also be compared with the growth in conventional economic benefits over time and this is set out in Figure 2.2. Annual Benefits ($m) Agglomeration Benefits Conventional Economic Benefits Figure 2.2 Comparison of Build-Up of Agglomeration and Conventional Economic Benefits Both sets of benefits increase steadily to At this point the growth in the agglomeration benefits reduces being limited to the growth in GDP per worker, whereas the conventional economic benefits (CEBs) are assumed to continue growing at the same average increase as experienced over the period to 2031 extrapolating the annual growth experienced before As an example of the difference in 2032 the CEBs are assumed to grow by about 3.3 per cent extrapolating the growth over the earlier period whereas the agglomeration benefits are assumed to grow by just 1.1 per cent Breakdown by Area As well as estimating the total benefits it is also possible to get an estimate of the spatial distribution of the benefits. The definition of the sectors used for this analysis is set out in Figure 2.3 and the benefits are set out in Table 2.9. Richard Paling Consulting 13

29 Airport/Miramar Roseneath and South Wellington West+Inner North Inner East CBD South CBD North Thorndon and J ville Northern Wellington Porirua South Kapiti Coast North Kapiti Coast Upper Hutt Sectors Abc Wrapa Abc West+InnNth Abc Uhutt Abc ThorndonJv Abc SthKC Abc Rneath+S Abc Porirua Abc Nwell Abc NthKC Abc Lhutt Abc InnE Abc CBDS Abc CBDN Abc Airport/Miramar Lower Hutt Abc undefined Figure 2.3 Sector Definitions Wairarapa Table 2.9 Assessment of Agglomeration Benefits from the Regional WSTM Based on Car and Public Transport User Costs : Spatial Distribution of Benefits Agglomeration benefits Area WSTM Zones ($M NPV) Per cent of total Airport/Miramar % Roseneath and South % West and Inner North % Inner East % CBD South % CBD North 36-39, % Thorndon/Johnsonville % North Wellington % Porirua % South Kapiti Coast % North Kapiti Coast % Upper Hutt % Lower Hutt % Wairarapa % Total % Note : Totals may not equal sum of items because of rounding Richard Paling Consulting 14

30 The benefits are fairly widely distributed with about 53 per cent accruing to Wellington City, 25 per cent to the Kapiti Coast, 13 per cent to Porirua, 6 per cent to Lower Hutt, 3 per cent to Upper Hutt and just 1 per cent to the Wairarapa. Excluding the benefits to the Wairarapa on the grounds that it is outside the scope of the agglomeration benefits as discussed in Section 2.1 would have an insignificant impact on the results Assessment of Agglomeration Benefits based on Car Travel Costs Only A separate analysis has been undertaken of the agglomeration benefits based on the changes in car travel times and costs to provide comparability with the results from the project models. The results of this are summarised in Table Table 2.10 Assessment of Agglomeration Benefits from the Regional WSTM Based on Car Costs Only Annual Agglomeration Benefits ($m) Per cent of benefits based on car and public transport costs Benefits in % Benefits in % Total Discounted Benefits % Overall the benefits based on changes in highway costs are higher than those based on a combination of highway and public transport costs particularly for future years, when there are a number of project components away from the main urban areas which are likely to have little impact on public transport Sensitivity Testing Two further sensitivity tests into the outputs of the Regional model have been undertaken. Because the approach developed was based on agglomeration elasticities calculated at a territorial authority level the first (Sensitivity Test 1) examined an alternative approach based on determining the impacts of using an average agglomeration elasticity based on the breakdown of employment in the region as a whole rather than figures based on the individual territorial authorities to assess the sensitivity to the approach used. The second (Sensitivity Test 2) considered the effects of assuming that there is no growth in benefits after the second forecast year of 2031, a test that had been requested in earlier assessments. The results of these sensitivity tests are set out in Table Table 2.11 Assessment of Agglomeration Benefits from the Regional WSTM Sensitivity Testing Base Case Sensitivity Test 1 Sensitivity Test 2 Benefits in Benefits in Total Discounted Benefits Alternative approaches to applying agglomeration elasticities have no discernable impact on the overall benefits. Curtailing the growth in benefits after 2031 would reduce the discounted total by about 8 per cent. The results are therefore reasonable robust in the light of the changes examined in these sensitivity tests. Further sensitivity testing looking at broader issues is reported later in this report. Richard Paling Consulting 15

31 2.3.5 Overall Findings for the Assessment of Agglomeration Benefits for the combined Package using the Regional Model An assessment of the potential agglomeration benefits from the projects included in the Wellington Northern Corridor RoNS has been undertaken based on outputs from the Wellington Strategic Transport Model (WSTM) looking at the combined effects of the component projects in 2021 and These indicate that the benefits are likely to be substantial, of the order of about $410m. On this basis these would amount to about 17 per cent of the current estimates of the conventional economic benefits, within the range typically observed for major highway schemes. 2.4 Assessment of Agglomeration Benefits for the Wellington Urban Area using the Opus Wellington Traffic Model Introduction The projects within the Wellington urban area form part of the proposed package of work for the Wellington Northern Corridor RoNS. Opus Consultants have developed a detailed SATURN project model covering a large part of the Wellington City urban area to undertake the traffic assessment and to provide estimates of the conventional economic benefits derived from road user time and operating cost savings. The area covered by this model is set out in Figure 2.4. Richard Paling Consulting 16

32 Agglomeration benefits have been estimated using data on travel times and distances from this local area project model and combining these with employment data from the Regional WSTM. The approach taken follows that taken earlier in 2009, although both the Regional model and the Opus model have been updated since that date Approach Figure 2.4 Coverage of the Opus SATURN model The approach to calculating the agglomeration benefits is in line with that described above for the Regional Model. The outputs of the Opus model are in terms of travel times and costs for car users and these have been combined to give generalised costs using values from the EEM. The values used are set out in Table The average speed assumed is in line with that derived from the modelling. Richard Paling Consulting 17