In the last few months we’ve published several posts which have, in various ways, touched on some important issues facing local government in Auckland. In this post I seek to summarise some key concepts that have emerged in these posts, and consider some broader implications for Council policies, especially relating to transport.
For a self-confessed policy wonk it’s been heartening to see posts on seemingly arcane policy matters such as rates, transport levies, golf courses, and heritage policies attract passionate and oftentimes informed debate. This is not to say we’ve been able to reach agreement on the issues. Indeed many people disagree, for example, on whether Auckland Council should continue to own golf courses.
In the face of such disagreements should avoid posts on these topics? Should stick to puppyhood and apple pie posts about Amsterdam, which everyone can either get behind or comfortably ignore – by virtue of the fact that it doesn’t challenge anyone’s pre-existing notions? I don’t think so. To do so would be to rest lazily back in incomplete hammocks haphazardly woven from our own subjective experiences.
Rather, it is primarily through debating controversial issues that we can begin to understand our own values, and those of others. Even if we don’t start with the same values, we might reach agreement on relative priorities. This post is written in such a spirit. Or at least that’s my intention.
Of course the “DNA” of the post was born from my own incomplete hammock. For this reason I encourage you to tear it apart and splice it back together. Democracy often works best when people with different values work together to breed superior mutant hybrid policies.
Just so we’re on the same page: I define “policies” as things that local government either invests in and/or or regulates. And when I say “invest”, I am referring both to operational investment, e.g. public transport subsidies, as well as capital investment, e.g. owning golf courses. Without further ado …
Opportunity costs. The issue of opportunity costs has popped up frequently in our posts on rates and golf courses. That is, when Council decides to invest in something, then this will reduce the money available to invest in other things, i.e. investment has an opportunity cost in the short-term.
Some Council assets, such as Ports of Auckland, generate a direct income stream. Moreover, this income can be generated at a rate that is higher than Council’s “cost of capital”. Such investments actually increase Council’s ability to invest. Other assets, e.g. golf courses, do not generate (net) positive revenues. By continuing to own golf courses, Council’s has less ability to invest in other things, including public transport and walking and cycling.
Now, many people have argued Council’s investment in golf courses is worthwhile despite their (high) opportunity costs. I’m OK with this provided people are clear about the fact that maintaining investment in golf courses will reduce Council’s ability to invest in other areas. Put another way, I want the opportunity cost associated with golf courses, and all other Council investments, to be made explicit – so we can formulate some relative priorities.
As I discuss in more detail below, Council’s ability to increase rates to fund improvements in services is constrained by our democratic “willingness-to-pay”. Opportunity costs are important and they are not something we can simply sweep under the carpet.
In Peter’s last post on golf courses, for example, it was suggested that the opportunity cost of Council’s investment in golf courses amounted to mere “pennies”. My quick back of the envelope calculation suggests Council ownership of golf courses amounts to an additional ~$100 in rates per household per annum (NB: This primarily reflects their capital value). This cost arose simply because Council has debt, on which it must pay interest. Hence owning golf courses increases the debt, and by extension the amount of interest that must be paid. This is the opportunity cost of owning golf courses.
Now, $100 per household per annum may not sound like much to some people, but it is worth keeping in mind that it’s approximately equivalent to the temporary transport levy that was recently adopted by Auckland Council (to howls of outrage from some quarters). Moreover, in just 3 years the revenue from this transport levy will enable Auckland to pursue a much more ambitious transport investment programme, especially for public transport and walking/cycling.
This is all just to highlight the importance of opportunity costs, and the potential gains that might follow from optimising Council’s investments. Which brings me onto the topic of …
Level of investment. It is useful, I think, to think about the “level”” of Council’s investment somewhat separately from the “mix” of investments.
In my previous post on rates I suggested that we should measure the level of Council investment in terms of $ per capita. The figure below highlights some broad possibilities in Council spending. We can either increase, maintain, or reduce government expenditure. Those are your options – and your homework for next week is to find out where your local Councillors stands on these issues.
Notwithstanding what you hear in the media, Council is currently holding rates constant in real terms. But because the population of Auckland is growing, holding rates constant in real terms equates to less spending per person, i.e. we’re in the blue box in the above figure.
The blue box requires either 1) cutting services and/or 2) improving productivity. If Council wishes to hold services per capita constant, then productivity improvements will need to be equal to or higher than the rate of population growth. In Auckland, the latter is humming along at 3-4% p.a. That gives you a feel for the scale of the fiscal challenge Council is currently operating under.
Productivity improvements are one area where the public sector may be able to learn a bit from the private sector. For example, Air New Zealand has committed to identifying cost savings that are sufficient to offset inflation. This is discussed in the slide below (NB: Source).
It’s key to note that Air New Zealand are, in general, looking to realise these savings not through one-off “slash and burn” type changes, but instead through sustained, incremental improvements that are made across all areas of their business, i.e. they seek to leave “no stone unturned”.
I think Council needs a similar approach. It’s better to identify efficiencies consistently, rather than wait until major cuts are required. In this context, I think it’s reasonable for people, like Peter, to identify areas where savings might be made, such as golf courses. Other people may disagree. That’s fine, provided they have alternative ideas on how to either 1) find savings and/or 2) increase revenues.
Finally, I should say that I place “user charges” under the general rubric of “cutting services”. This is because if something was previously provided free, and we change it such that people now have to pay, then this is effectively a cut in service. This is *not to suggest* that user charges are necessarily a bad thing. I support, for example, user charges for things like wasterwater, parking, and development where they encourage the right kind of efficiencies. Which brings us nicely to the next topic …
Effectiveness and efficiency. This is an important distinction, which I think is frequently conflated – probably because the concepts are not always easy to separate.
From a public policy perspective I think of “effectiveness” as a question about whether a policy contributes to wider strategic objectives, including consideration of (potentially unintended) consequences. Efficiency, on the other hand, considers whether policies are well implemented. It may be, for example, that a particular policy supports strategic objectives, i.e. is effective, but nonetheless is implemented in an inefficient manner, such that the benefits are not as high as they could be.
While I tend to despise wish-wash diagram spam, I do think the following figure illustrates the distinction between effectiveness and efficiency quite nicely for y’all.
Let’s say, for example, that Aucklanders collectively decided that Council ownership of golf courses was an “effective” policy, insofar as it contributed to wider strategic objectives. The next question people like Peter and I would ask is whether Council was delivering golf courses in the most efficient manner?
We might then put forward questions such as:
Do we own the right number of golf courses and are they in the right location?
Are Council golf courses priced/sized appropriately? E.g.:
Should we increase green fees so that the users covered not just operating costs but also some of the opportunity costs?
Should we convert 18 hole golf courses to 9 hole golf courses? And If so then should we create public parks and/or residential/commercial development?
So even if we conclude that continued Council investment in things like golf courses is effective, we might still want to consider ways to make that investment more efficient. And that latter in turn would realise savings to invest in other Council services, and/or lower rates …
Focus on public transport. How might these concepts relate to public transport? Most Aucklanders, myself included, appear to be of the view that public transport is “effective”, i.e. our aspirations for the city see a larger role for PT.
But is Auckland’s public transport system efficient? Well, no not really. Or at least not yet.
It is true that sustained capital investment in public transport has started to flow through to “the bottom line” in terms of higher farebox recovery. For the uninitiated, farebox recovery measures the percentage of operating costs which are covered by fare revenues. Recent trends in Auckland’s farebox recovery over time are illustrated below.
You can see that in the last year or so it’s increased from ~46% to ~48%. This is heading in a positive direction, but is still quite low in comparison to many high performing cities overseas (with the notable exclusion of Australia – which is something of an outlier in terms of its operating costs, mainly for rail). Amsterdam, for example, achieves 75%, while Edinburgh, London, and several German cities achieve closer to 100%. The implication? All other factors being equal, these cities will have more money available for other things.
So how might we improve the efficiency of public transport in Auckland?
Well, the first thing I think we should do is to remove subsidies for cars where it is effective/efficient to do so. Cars are currently subsidised in terms of the parking they use, as well as the externalities they generate, such as congestion, noise, and air pollution. By charging people more to use cars, we would increase demand for public transport and hence generate increased revenue from the existing system. Such actions are, however, relatively slow to bear fruit, so we need to also look elsewhere.
In terms of the public transport system itself, we know AT is currently working on a range of things like growing HOP uptake, implementing PTOM (i.e. new bus contracts), rolling out bus lanes, reducing rail dwell times (and possibly staffing), the New Network, and the CRL. I am optimistic about these changes and their collective potential to improve the efficiency of our PT system. For those who are interested, my colleague Jarrett Walker has written some interesting stuff about making PT more efficient.
As mentioned above, improving the efficiency of PT is a means to an end, not necessarily an end in itself. More specifically, reducing PT operating subsidies frees up money within the existing PT budget to invest in efficiency-enhancing infrastructure, such as more bus lanes. In this way, improving the efficiency of our PT system gives us the opportunity to reinvest in the system, and thereby make it more useful and more abundant.
Key message? Operating PT efficiently allows us to provide it more abundantly. And abundant PT is what many of us want. For this reason, if you’re keen for PT to become more widely available and/or more widely-used, then you should also support initiatives that seek to make it more efficient. These measures may make trade-offs that involve cutting services in some areas, simply because the “opportunity cost” attached to those services is too high. I don’t think we should shy away from such decisions; we can’t make a great PT omelete without throwing away some bad PT eggs.
In short, if we can improve the effectiveness and efficiency of Council spending across all areas, then we can all look forward to more abundant public goods and services. This applies to golf courses, public transport, libraries, and indeed everything else that Council invests in.
Now I think I’ve said enough and it’s time to hear what others have to say …