# 4 Our approach

To capture the economic impact of delays in infrastructure decisions, we consider both the direct and indirect benefits. The direct benefits include the improved network performance and safety improvements as described in Section 3.3, such as transport network performance and safety improvements.

To measure the downstream impact of the Waikato Expressway, we use a methodology used by Rokicki et al. (2021). They used a regional CGE model to capture the effect of a high-speed high-capacity motorway in Poland and its regions.

We estimate the impact of the Expressway in terms of its benefits for inter-regional trade. Products that are made in one region and need to be shipped to other regions for domestic consumption or export face a transport cost. Therefore, there is a gap between the price of a commodity at origin and the final price consumers are paying. In our study, we asked, “If the Waikato Expressway didn’t exist, how much cost would be imposed on the New Zealand economy due to higher transport costs?“ The counterfactual in our model is to not have the Waikato expressway in the economy. Therefore, our results show the annual impact of the expressway. With each year’s delay in the construction of the Waikato expressway, this cost is imposed on the New Zealand economy.

For this study, we need to first identify the direct impact from the Expressway and then estimate the flow-on impacts on businesses and households across regions.

## 4.1 Measurement of the direct benefits

For the measurement of the direct benefits, we rely on the earlier evaluation by Parker et al. (2008), cross-checked with inputs from the stakeholders to ensure the findings are still relevant after 14 years. We also use other available statistics to check on the information used in the early evaluation.

The baseline scenario of our analysis is the economy in the absence of the Waikato Expressway. Parker et al. (2008) estimated the impacts of the Expressway using the Waikato Regional Transport Model (WRTM), as shown in Table 2. Accordingly, the model forecasts an overall saving of 24.1 million vehicle kilometres travelled (VKT) in 2017, and 35.8 million in 2030 (assuming no new trip generation).

##### Table 2 Description of the Do-minimum and the Expressway scenarios
Expressway section Modelling scenarios
Do-Nothing
2007, 2017 & 2030
Expressway
2017 & 2030
Long Swamp to Te Kauwhata X
Rangiriri Bypass X
Church to Avalon 4 lane
Avalon Dr Bypass
Huntly Bypass X
Ngāruawāhia Bypass X
Te Rapa Bypass X
Cambridge Bypass X
Hamilton Bypass 4 lane X

Source: Parker et al. (2008), Principal Economics.

We suggest that the outputs of the model provide a conservative estimate of the impact of the Expressway because:22

1. The model minimises the generalised cost of travel. Since the distance between Auckland and Tauranga is shorter via SH2, the model forecasts that no traffic will leave SH2 to use the Expressway. However, this is not necessarily correct because the Expressway provides a safer and more reliable driving environment than SH2.23

2. Based on our discussions with the stakeholders, the suggested time savings are significantly smaller than their anecdotes. For example, the stakeholders suggested a peak hour time saving of 20–30 minutes for Auckland–Hamilton (North).

Table 3 compares Parker et al.’s HCV modelling outputs (Forecasted 2006–2030) with the actual 2006–2019 annual compounded growth rate for different locations (Actual 2006–2019).

##### Table 3 Comparison between Parker et al.’s HCV forecast and actual growth

Unit: % Compounded Growth Rate – annual.

ID Location Forecasted
2006-2030
Actual
2006-2019
Forecast -
Actual
B SH1 north of SH1/SH1B Junction 2.7 2.3 0.4
C SH1 below Cambridge 2.0 1.9 0.1
D SH1 below Putāruru 1.3 2.4 -1.1
E SH1 near Tokoroa 4.3 2.2 2.1
F SH1 near Halletts Bay 1.6 1.8 -0.3
G SH2 past SH1/SH2 Junction 3.0 0.7 2.3
H SH2 Waihi 1.6 1.8 -0.2
K SH2 near Ohinepanea 1.6 1.2 0.4
L SH3 Below Ōtorohanga 3.3 1.7 1.6
M SH5 near Tārukenga 2.8 1.6 1.3
N SH5 near Waipā 2.4 1.3 1.1

Source: Parker et al. (2008; Waka Kotahi NZ Transport Agency (2022, Principal Economics.24

### 4.1.1 Feedback from the stakeholders

We met in person with a wide range of stakeholders, including policy analysts involved in the process of decision-making of the Expressway, road users, business owners, social and economic entities, and discussed the process of decision-making of the Expressway. The purposes of our meeting with the stakeholders were to:

1. Cross-check the findings from Parker et al. (2008) with their information/experience of the Expressway.

2. Collect further information about the impacts that may be beyond the scope of our analysis and any other feedback about the Expressway.

The findings from the stakeholder engagement about the impact of the Expressway are as follows:

• In our discussion of the findings of Parker et al. (2008), the stakeholders confirmed the identified list of impacts. Regarding the size of identified impacts, the stakeholders suggested that the peak hour time savings are potentially larger. For example, the time savings for Auckland–Hamilton (North) trips are most likely in the range of 20–30 minutes instead of 10–12 minutes.25

• All stakeholders referred to the importance of the safety improvements and reliability. These have led to most Auckland–Tauranga travellers using the Expressway instead of SH2.

• Stakeholders referred to the importance of the Expressway for attracting skilled workers to Waikato and also the positive impacts of the Expressway on housing developments. Particularly around Huntly, the stakeholders suggested that there have been positive impacts on housing developments due to improved safety as a result of the by-pass. Also, there have been significant developments in Cambridge from taking the motorway out of the town.

• The improvements from Expressway have significantly improved freight activities across the region, particularly between Hamilton and Tauranga. Stakeholders suggested that there will more improvements in the coming years.

• The Expressway has led to Waikato becoming a logistic centre for the Golden Triangle, and there has been significant increase in warehousing and use of Hamilton Airport cargo.

Below are our findings about the importance of improved efficiency of decision-making:

• Stakeholders referred to inefficiencies in the planning phase. They particularly suggested the costly process of court hearings.26

• Sequencing of the major infrastructure projects was an important factor for civil and engineering stakeholders. They referred to the significant costs of discontinuity in major projects, through disruption in labour retaining and the depreciation of capital stock.

• A common input from the stakeholders concerned the importance of flexibility in the development process by considering small developments and providing future options (pathways). This could minimise (the impact of) uncertainties, improve interim economic activities, minimise costs and improve feasibility of future developments.

## 4.2 Capturing the downstream benefits

As described in Section 3.2, previous studies have provided a cost-benefit analysis (CBA) of the Expressway and a wider economic impact assessment of the RoNS, including the Expressway. Given the significant size of the investment, it is important to consider the allocative efficiency impacts of the Expressway beyond the impacts identified from improved productive efficiency in the CBA. The allocative efficiency impacts include the improved allocation of resources between industries and regions, and not just within industries and regions.

The previous assessments of the wider economic impacts of the Expressway do not account for regional trade. It is important to capture regional trade impacts because many products in the New Zealand economy are produced in one region and consumed in other regions or internationally exported. There is a difference between producers’ prices and users’ payments in trade costs. If the transport cost is too high, there is no or less demand for products, which means less production and economic activities. Therefore, lower trade costs increase the economic activities and therefore need to be minimised. This impact is above and beyond having a route for trade. For example, road transport was available between Auckland and Waikato even before the Waikato expressway, but the Expressway improved travel time and lowered trade margins. Hence, to capture the allocative efficiencies and the wider economic impacts of more efficient infrastructure decisions, we used our regional CGE model of the New Zealand economy.27

### 4.2.1 Our sub-regional CGE model

Principal Economics’ regional and district CGE model is a bottom-up model of the New Zealand economy, capable of modelling 88 areas across New Zealand. Our database includes information on 67 districts across New Zealand and 21 local board areas for Auckland.

The advantage of a regional CGE model compared to a national CGE model is the flexibility to model the impact of policies, programmes, and investments that have a specific effect on regions or cross-region impacts, which sum up to the national impacts.

Our sub-regional CGE model is formed by a bottom-up structure and links a series of independent CGE models for each region that interacts through primary factors and trade. In our CGE model, prices and quantities are separate in each region. Therefore, a high-level detail on the economy makes this model a valuable tool for many regional impact assessments. Furthermore, the model’s particular design provides a unique treatment of transport costs through trade margins. This feature makes the model a perfect tool to capture the impact of improving road transport. Transport costs are defined as transport margins generated by transport services. These trade margins directly affect demand for commodities since they are part of the final price. Therefore, improvement in the road results in a reduction of trade margins, which has a positive long-term economic impact on regional development.

We estimate the impact of the Waikato Expressway in terms of its benefits for inter-regional trade using the static version of our sub-regional CGE model. Products that are made in one region and must be shipped to other areas for domestic consumption or export face a transport cost. Therefore, there is a gap between the price of a commodity at origin and the final price consumers are paying. As discussed, the counterfactual in our model is not to have the Expressway in the economy. Our results indicate the annual economic activity that would be foregone from a one-year delay in the completion of the Expressway project.

### 4.2.2 Inputs to our CGE model (shocks)

We use the findings from Parker et al.’s (2008) study to measure the size of shocks to our CGE model. As described, they used the Waikato Regional Transport Model (WRTM) and estimated that the Expressway would create $111 m in benefits (in 2006 prices) in terms of travel time savings (including vehicle and freight time) by 2030. Using infrastructure CPI, we updated their$111 m figure to $142.4 m. We use this as an input (a shock) to our regional CGE model to change the margin of road transport for inter-regional trade. We assumed that a$142.4 m saving occurs between three areas: the Auckland region and the upper North Island, the Waikato region, and the Rest of New Zealand (RoNZ). Our assessment includes the entire Expressway investment programme.

### 4.2.3 Assumptions of our modelling

Below are some of the assumptions we made for this exercise.

• We only capture the impact of travel time savings on the economy. Other effects (such as construction or safety) are not captured through our current CGE modelling exercise.

• We assume that investment on Waikato Expressway has been funded and there is no impact through investment on the economy. Therefore, we do not shock capital in our model.

• Our model is a static CGE, which means we only show the final impact of having an expressway. Therefore, we do not show the trajectory of how the economy changes over time. Given the purpose of the study – to capture the economic impact of the expressway – the New Zealand economy needs time to adjust and archives to a new equilibrium. These effects happen over time and a dynamic CGE does not provide any further useful information.

• We have aggregated New Zealand regions into three regions: North, Waikato, and South. North refers to areas above Waikato (Auckland, Northland, and Bay of Plenty), and South refers to the rest of the regions, including South Island. We assumed that cost saving happens equally between the northern and southern corridors.

This modelling is a hypothetical experiment because part of the Waikato expressway has already been completed.

### 4.2.4 Our results

Our results answer the question, “What would the New Zealand economy look like if the economy saves $142.4m annually on inter-regional trade margins due to having a more efficient transport network as a result of the Waikato Expressway?” The results show the economy after the construction of the expressway has been completed, and the economy has had enough time to adjust to the new network. Therefore, results are annual change in the economy and compare with business as usual, where the Expressway is not operating in the economy.28 #### 4.2.4.1 National economic indicators Our results suggest that the Waikato Expressway leads to an increase in real GDP of 0.08 per cent or$281m per year. Other macroeconomic variables are also improving. Household consumption, as a measure of living standards, increases by 0.13 per cent, or $243 m, as households benefit from a higher level of income and lower cost of delivered products. National exports also rise, taking advantage of the lower-paid cost to international markets. Imports increase by$548 m annually. Average real wage also increases given the profitability of firms saving costs on shipping products to final users.

##### Table 4 Regional employment and wages

Unit: % Change and $million; annual. % Change$m
Real GDP 0.09 281
Household consumption 0.13 243
Exports 0.05 541
Imports 0.05 548
Average real wage 0.10

Source: Principal Economics

#### 4.2.4.2 Regional impacts

The Expressway has positive impacts across all regions, driven by the lower trade margin for all regions. The GDP gains to Auckland, Waikato and RoNZ are $86.2 m,$161.8 m, and $32.7 m, respectively. Waikato benefits the most, given that the Expressway leads to a significantly higher portion of regional trade passing through Waikato via road. Better access to transport networks reduces the cost of production in the Waikato region and improves regions’ access to both domestic and international markets. The Expressway improves households’ wellbeing through the improved consumption of goods and services. This is driven by a reduction in final cost of products, because of the lower trade margin, and also the by improved (real) income levels, because of higher economic activity – as described above. ##### Table 5 Industry-level outputs Unit:$ million (2022 prices); annual.

Auckland the
upper North
Waikato
region
Rest of
New Zealand
Real GDP 86.2 161.8 32.7
Household consumption 81.2 116.3 45.7
Exports 190.8 202.5 148.1
Imports 204.3 182.5 161.2

Source: Principal Economics

Table 6 shows the regional impact of employment and wages. The national level of employment is fixed (explained in the closure part of the report); however, workers can move between regions/sectors. Our results indicate an increase in the employment level in the Waikato region as labour forces move towards a higher level of income, which is reflected in real wage improvements.29

##### Table 6 Industry-level employment

Unit: % change; annual.

Auckland the
upper North
Waikato
region
Rest of
New Zealand
Employment -0.01 0.29 -0.04
Real wage 0.08 0.38 0.06

Source: Principal Economics

#### 4.2.4.3 Industry-level impacts

The industry-level result shows a reduction in road transport sector output. This change is because of more efficient transport networks, leading to fewer vehicle kilometres travelled (VKT) and, therefore, less income and production for the sector. However, the benefit of the expressway is positive in almost other sectors, depending on where they are located. Nevertheless, for some industries, we can see a negative impact on the output (for example, wholesale on the South Island) because economic resources are moved to more profitable sectors/regions, especially in Waikato. In general, most industries benefit from the lower cost of trade in New Zealand. For example, the tourism sector includes domestic tourism, export tourism, and foreign holidays. Time savings between home and destination will improve the tourism sector overall output

The reason for a smaller GDP of the road transport sector is the decrease in the cost of road transport, which leads to an overall smaller GDP for the sector. However, this leads to improved outcomes for the other sectors of the economy and, overall, a more productive economy.

Unit: $million (2022 prices); annual. Auckland the upper North Waikato region Rest of New Zealand Total (New Zealand) Retail 13.0 17.3 2.8 33.1 Wholesale 20.7 9.5 -2.4 27.8 Horticulture -3.5 34.0 -2.1 28.4 Dairy production 14.7 55.2 12.9 82.8 Mining -2.4 37.4 -10.4 24.6 Other food and drinks 1.5 0.6 -1.5 0.6 Manufacturing 29.8 50.7 -18.4 62.1 Utilities 3.8 7.6 4.3 15.7 Construction 14.4 14.3 -1.5 27.2 Services 109.8 80.4 46.7 236.9 Road transport -45.9 -43.4 -35.4 -124.7 Rail 0.4 0.4 0.2 1 Other transport 4.8 1.0 0.2 6 Education 1.0 3.4 2.5 6.9 Tourism 2.1 4.4 1.9 8.4 Source: Principal Economics The industry-level employment shows improved employment outcomes for almost all sectors in Waikato. The most significant improvements are in the mining, horticulture, retail, rail and dairy production sectors. There are a range of negative impacts on the employment of sectors in other regions, due to improved attractiveness of Waikato’s job market, which leads to the migration of skilled labour to Waikato. The overall economic impact from this migration is positive for New Zealand because of improved allocative efficiencies. ##### Table 8 Regional employment and wages Unit: % change; annual. Auckland the upper North Waikato region Rest of New Zealand Retail 0.03 0.51 -0.02 Wholesale 0.06 0.39 -0.06 Horticulture -0.11 1.54 -0.05 Dairy production 0.14 0.48 0.02 Mining -0.27 2.50 -0.23 Other food and drinks -0.02 0.12 -0.04 Manufacturing 0.06 1.04 -0.09 Utilities 0.01 0.00 0.01 Construction -0.01 0.17 -0.03 Services 0.01 0.24 -0.01 Road transport -1.00 -3.65 -0.63 Rail 0.07 0.49 0.01 Other transport -0.02 0.06 -0.03 Tourism -0.04 0.09 -0.02 Source: Principal Economics ## 4.3 Total forgone economic activity from IDM delays In Section 3.3 we presented a range of direct impacts, including economic and social, network performance, and sector-specific impacts. Our estimated benefits of$281 m include the impacts from improved transport network transport and the impacts on different sectors of the economy, including tourism. In addition to these (downstream and upstream) benefits, we identified a total of $53.35 m in annual benefits from improved road safety. Accordingly, the total foregone benefits of one year delay in the Expressway is equal to$334.4 m.30

In Section 2.1 we suggested that there is a potential to reduce decision-making timeframe by 7 years (that is, a decrease in IDM time of 15 years to eight years).31 If we assume that the Waikato Expressway had been completed 14 years earlier, the New Zealand economy would have saved a total of $4.7 billion (over 14 years). Compared to a total cost of almost$1.9 billion,32 the IDM delays have led to a total of $2.3 billion foregone economic activities, which is equal to 1.2 times its total capital cost. 1. This is consistent with the findings of Stuart et al. (2018).↩︎ 2. Between 2009 and 2019, the HCV’s Annual Average Daily Traffic (AADT) increased by 22 per cent at SH1 near Huntly and by 26 per cent at SH2 near Apata.↩︎ 3. We derive heavy vehicle traffic counts using the heavy vehicle percentages noted in Waka Kotahi NZ Transport Agency datasets on traffic volumes for the years of 2005–2009 and 2015–2019.↩︎ 4. The stakeholders’ current experience of the impact of the Expressway excludes the under-construction phase between Lake Road interchange and Tamahere. The stakeholders suggested that the positive impacts on travel time and labour force migration, will be even larger once that phase has been completed.↩︎ 5. As discussed, RM reform aims to address this issue.↩︎ 6. Another important reason for using CGE in comparison with CBA is to capture the impacts that in a CBA would be assumed as unchanged. A CGE model captures all the interactions across economic agents (that is, industries and households).↩︎ 7. We acknowledge that part of this effect has already happened in the economy as parts of the Expressway are completed. However, since the overall purpose of our analysis is a hypothetical assessment of the impact of the Expressway, we suggest that the already-realised effects do not have significant implications for the results of this analysis.↩︎ 8. Technically, in the General Equilibrium analysis, any gains to labour take the form of higher wage rates, in contrast to Richard Paling Consulting’s (2010) partial equilibrium, in which the gains manifest as higher employment – as shown in Section 3.2.↩︎ 9. We suggest that the estimated time-savings used as inputs into our model provide a conservative estimate of the benefits of the Expressway. The stakeholders suggested that the time savings could be twice as large as the estimated figures.↩︎ 10. We suggested that, in the case of the Expressway, there was potentially a 40-year delay. Using the 15-to-8 ratio, the IDM delay for Expressway was potentially around 20 years.↩︎ 11. We have observed some differences in the cost estimates, in different papers. Using Infometrics’ (2010) estimate of capital cost, the total cost is$1.86 billion in 2022 dollars.↩︎