Two RONS don’t make a right

Sam Warburton
Insights Newsletter
25 August, 2017

A hard task for government is getting the books in order after a recession. A harder task is choosing how best to distribute tax revenue once stability is restored.

The National Party’s Roads of National Significance (RONS) are a case in point.

Started in 2009, the original RONS committed $12 billion to upgrade roads from two to four lanes and reduce travel times for freight operators. National’s newly proposed RONS would commit $11 billion to upgrade roads from two to four lanes and reduce travel times for freight operators.

Apart from the lack of imagination, the new RONS offer a worryingly low economic return.

To be worthwhile, it is commonly understood that a project’s benefits should exceed its costs. In technical terms, a project should have a benefit-cost ratio (BCR) greater than 1.

There are, however, a host of real-world reasons why we should aim higher – factors National Party leader Bill English will have had to manage in every Budget he authored. Not least of these is that project costs routinely turn out higher, and benefits lower, than anticipated.

Even during the surpluses of the last Labour-led Government, some government agencies were shy to seek funding without a BCR of at least 3.

Businesses are similarly hesitant when their own money is at stake. The proposal to shift the inter-island ferry terminal from Picton to Clifford Bay had a BCR of 1.3. But, when asked to contribute, businesses baulked and the project collapsed.

So, how does National’s new roads package stack up?

Public information about the value-for-money of the new RONS is sketchy, and sometimes non-existent. For those projects where information is available, most languish with BCRs between 0.8 and 1.3.

Of the ten new RONS, only a new Manawatū Gorge route looks promising, with an indicative BCR of 6.5. For comparison, about half of the original RONS offered a reasonable return on investment.

The original RONS was largely funded through a near 20% increase in petrol tax. Round two means maintaining those tax levels and likely increasing them further, but for much less return.

If, as Bill English insisted on Radio New Zealand this week, these are truly the most pressing projects, perhaps it is time to cut road taxes.

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