Application of Cost-Benefit Analysis to District Planning in New Zealand
Cost-benefit analysis is a public policy decision-making tool used for evaluating proposed or previously enacted policies and projects in order to determine whether doing them is of public interest (Zerbe and Bellas, 2006). It is a process of identifying, measuring and comparing costs and benefits of a policy or project. Cost-benefit analysis is also used to identify between two or more policy or project alternatives that will generate the greatest net benefit (Zerbe and Bellas, 2006). To determine the net benefit of each policy or project proposal, all costs and benefits should be quantified in monetary terms and discounted to a common point in time (New Zealand Treasury, 2005). The application of cost-benefit analysis to district planning is important as government decision-makers require assurance that proposals for new spending on public policies or projects will result in a net increase in the national welfare and meet the Government’s public policy objectives (New Zealand Treasury, 2005). New Zealand’s district planning has a legislative basis on the requirements for cost-benefit analysis under s32 of the Resource Management Act (RMA) 1991 and s77 of the Local Government Act (LGA) 2002. The requirement for s32 evaluation of the RMA 1991 ensures the provision of a process for working out how best to deal with resource management issues while promoting the purpose of the Act (Quality Planning, 2008). On the other hand, section 77 of the LGA 2002 ensures the provision of a process for working out how to best deal with issues regarding present and future social, economic, environmental and cultural well-being. These statutory decision-making obligations are similar except s32 evaluation is broader while s77 evaluation is more explicit as it considers present and future costs and benefits. Although undertaking cost-benefit analysis as required under s32 of the RMA 1991 and s77 of the LGA 2002 provides local government decision-makers a consistent tool for assessing proposals, there are limitations to cost-benefit analysis. Despite of the limitations, cost-benefit analysis is an effective public policy decision-making tool. Using New Zealand case studies, this essay will critically analyse the effectiveness of the application of cost-benefit analysis to district planning in New Zealand, particularly on its application to s32 of the Resource Management Act 1991.
Cost-benefit analysis is a method used by local authorities to fulfill the statutory requirement of s32 of the Resource Management Act 1991. However, the failure to apply cost-benefit analysis principles while undertaking s32 analysis is evident in New Zealand planning practice. According to McShane (2003), s32 analysis does not require local authorities to place monetary values on intangible costs and benefits and is therefore assumed that “if benefits are not quantifiable then there is no need to analyse the costs” (p. 31). This is a major criticism on s32 analysis as it fails to apply a consistent and systematic tool for assessing proposals and plan changes which cost-benefit analysis provides. Another criticism to s32 analysis is the failure to account for discount rates. It is necessary to discount the costs and benefits occurring at different times (Zerbe and Bellas, 2006). In relation to the Northern Busway project completed in 2008, the discount rate to develop the project is higher. This means that it is best to develop the project then than in the future as costs will be higher. This is due to the benefits outweighing the costs of the Northern Busway as it provides public transport through better bus services, give people more travel options, and reduce car numbers and road congestion. As a result of the Northern Busway, the Northern Express had 55% more passengers in March 2008 than the previous month (North Shore City Council, 2008). This is therefore one indication of the effectiveness and efficiency of the project. The importance of applying and understanding the actual cost-benefit analysis process while undertaking s32 analysis is significant to ensure that policies and projects promote efficiency and effectiveness.
The application of cost-benefit analysis to New Zealand district planning is important as it provides a way for local authorities to decide on how to prioritize scarce resources consumed by policies and projects. Cost-benefit analysis also allows for efficiency as it includes environmental values in the same analysis as the concerned development (Hanley and Spash, 1993). For example, the proposed $700 million stadium on Auckland’s waterfront was rejected due to its environmental and construction costs (New Zealand Herald, 2006). It is clear from the Waterfront stadium decision that the environment, particularly the coastal marine area, was valued more than the stadium development. The environmental values concerning the Waterfront stadium project were therefore the main contributor on the decision-making criteria of the cost-benefit analysis.
However, cost-benefit analysis is criticized by many as an ineffective decision-making tool for district planning practice due to the limitations on its methodology. A main criticism on cost-benefit analysis is the “absence of any scientific method of aggregating preferences” (Zerbe and Bellas, 2006, p. 17). This means that utility cannot be measured therefore comparing utility between individuals cannot be decided objectively. However, Zerbe and Bellas (2006) state that cost-benefit analysis can aggregate preferences based on the ‘willingness to pay’ or ‘willingness to accept’ payment principles.
Another limitation is the difficulty in putting monetary values to compare goods particularly intangible costs and benefits. Hanley and Spash (1993) argue that environmental resources are often under-priced nor un-priced. The incorrect set of prices leads to market failure thus resulting in the inefficient allocation of resources (Hanley and Spash, 1993). The difficulty in putting monetary value is mainly due to the differences of how people value and perceive the importance of resources. This may often result in the neglect of important values such as integrity and equity (Zerbe and Bellas, 2006). As a result, non-quantitative values such as intrinsic environmental values and social values are often ignored. On the other hand, cost-benefit analysis does not also account for the cumulative effects of decisions, in this case the cumulative effects of neglecting environmental and social values that can be a serious problem in the long term. An example to illustrate this point is that there is a strong opposition on the SH20 Waterview Connection project mainly due to the negative externalities on the surrounding environment and social community. Social values that were ignored during the cost-benefit analysis of this project proposal include the displacement of some communities, uncertainty of compensation for the possible decrease of their property values and the loss of relationship of the community with losing hectares of public open space. Cost-benefit analysis is criticized because it does not always guarantee that a compensation test is passed (Zerbe and Bellas, 2006). On the other hand, environmental values that were neglected by traffic planners are the negative effects of higher carbon dioxide emissions to the surrounding environment.
Another criticism on the methodology of the cost-benefit analysis is that the results of the analysis will often be inequitable as it does not account for income distribution and thus reflecting the existing patterns of wealth (Zerbe and Bellas, 2006). This limitation is morally criticized as values tend to be weighted by income, which often results on the displacement of equity, fairness and moral values in general (Zerbe and Bellas, 2006). This means that those with more resources (the rich) have more votes to cast therefore has more influence on the policy or project than those with fewer resources (the poor) (Hanley and Spash, 1993). On the other hand, cost-benefit analysis also treats gains and losses equally (Hanley and Spash, 1993). To illustrate this point, for example, the discounted net benefit of a project of $1000 for the rich is treated equally as the discounted net benefit of $1000 for the poor in a similar project. This criticism of cost-benefit analysis however does not apply to New Zealand planning practice.
The role of cost-benefit analysis as a decision-making tool is also another limitation on the effectiveness and efficiency of policies and projects. “Cost-benefit analysis deprives citizens of the opportunity to participate in democratic process that bear on the allocation of public resources” (Zerbe and Bellas, 2006, p. 10). Undertaking cost-benefit analysis does not require public consultation. Zerbe and Bellas (2006) argue that public policies and projects should be decided in public forums and not by cost-benefit analysis alone. This ensures that policies and projects are of interest to the public and also reduces conflicts with the affected community. In relation to district planning in New Zealand, consultation is an important component to a s32 analysis. It is required under s32 to go through consultation in order to seek the views of stakeholder groups to determine their perception on the appropriateness, costs and benefits of proposed policies or projects (Quality Planning, 2008). In particular, the consultation of the tangata whenua and local iwi groups are significant when undertaking cost-benefit analysis in s32. An example of good consultation practice in New Zealand is the public consultation on the Northern Busway. Transit New Zealand and the North Shore City Council did extensive public consultation to enhance public awareness and also to enable the local community to raise and discuss issues, constraints and opportunities in relation to the Busway project. According to Transit New Zealand and North Shore City Council, results from the consultation strategy showed that 85% of the public support the general concept, 57% support for the proposed design and a 29% support for the design with conditions (Northern Busway, 2009). The case study of the Northern Busway is an example of how public consultation is important to be included in the cost-benefit analysis process. The need for public consultation when undertaking public policy decision-making allows for a more effective and efficient policies and projects, which is evident in the Northern Busway project.
Although there are limitations to the methodology of cost-benefit analysis as explained in the previous paragraphs, the benefits of cost-benefit analysis outweigh its costs and is therefore still considered as an effective and reliable decision-making tool for district planning in New Zealand. However, changes to the methodology of cost-benefit analysis are needed in order to ensure that this tool will implement more effective and efficient public policies and projects. In the context of New Zealand district planning, the application of cost-benefit analysis through the s32 analysis should be compulsory. Cost-benefit analysis should be the main method to implement the requirements of s32 analysis when assessing proposals and plan changes. Applying cost-benefit analysis regardless of its limitations will provide a more consistent and reliable method when evaluating costs and benefits during a s32 analysis. However, it is important that s32 analysis applies qualitative analysis equally with the standard quantitative analysis when undertaking cost-benefit analysis. The Quality Planning Organisation (1998) argues that it is significant that a s32 analysis combines the qualitative and quantitative parts of cost-benefit analysis to ensure that it gives an overall qualitative efficiency rating. Overall, I believe that changes to the methodology of cost-benefit analysis and enforcing it as the main tool to fulfill s32 analysis requirement under the Resource Management Act 1991 will best promote the sustainable management of the natural and physical resources, thus improving efficiency and effectiveness of New Zealand planning practice when dealing with public policy issues.
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