Home | Databases | WorldLII | Search | Feedback New Zealand Journal of Environmental Law

Pickford, Michael --- "Economic efficiency and the Resource Management Act" [2014] NZJlEnvLaw 6; (2014) 18 NZJEL 149

Last Updated: 21 January 2023

149

Economic Efficiency and the Resource Management Act

Michael Pickford*

An “overall broad judgment” approach is used under s 5 of the Resource Management Act 1991 (RMA) to determine whether a large development proposal would promote the sustainable management of natural and physical resources. Central to this approach is the assessment and weighing of various positive and negative effects expected to arise from the proposal. A review of several recent decisions indicates that this exercise fails to promote economic efficiency. Typically, the benefits of the proposal are balanced against the environmental and other external costs. In some cases at least, these costs are limited to those not able to be internalised to the developer through the conditions attached to the consent. This framework excludes both the costs of the resources used to build the development, and any environmental costs that are internalised, apparently on the grounds that they are a private matter for the applicant, and therefore not relevant to the RMA assessment. However, from an economic efficiency perspective, private costs are as relevant as any other effect. Their omission biases decisions in favour of acceptance, and against both the promotion of economic efficiency and the protection of the environment.

*BSc, PhD. I thank Ken Palmer and Richard Fowler for their comments on an earlier draft. The usual disclaimers apply. Disclosure: I was the economic expert for Save Kapiti at the Board of Inquiry for the MacKays to Peka Peka Expressway proposal, and an economic expert representing no party at the Board of Inquiry for the Peka Peka to Otaki Expressway proposal. Email contact: mikepickford@vodafone.co.nz.

1. INTRODUCTION

Large development projects, such as wind farms, motorways and hydroelectric schemes, are expected to generate a variety of environmental and other effects, some good and some bad. The decision­maker has to determine whether or not granting the required resource consents achieves the purpose of the Resource Management Act 1991 (RMA), as set out in pt 2. Section 5 states that the Act’s sole purpose is “to promote the sustainable management of natural and physical resources”. The case law indicates that this ultimately is achieved through the decision-maker exercising a broad overall judgment in which conflicting considerations are weighed.¹ In a frequently cited authority, the High Court in Ngati Ruahine, when considering pt 2, stated:²

The job of the Environment Court involves exercising a broad evaluative judgment on whether a proposal promotes sustainable management of natural and physical resources. The judgment involves weighing competing considerations.

Likewise, in the recent decision in King Salmon, the Board of Inquiry (BOI) stated:³

It is well accepted that applying Section 5 involves an overall broad judgment of whether a proposal would promote the sustainable management of natural and physical resources. The RMA has a single purpose. It also allows for the

1. For an early discussion see S Upton “Purpose and Principle in the Resource Management Act” [1995] WkoLawRw 2; (1995) 3 Waikato Law Review 17; P Skelton and A Memon “Adopting Sustainability as an Overarching Environmental Policy: a Review of section 5 of the RMA” (2002) 10(1) Resource Management Journal 1; S Upton, H Atkins and G Willis “Section 5 re­visited: a critique of Skelton & Memon’s analysis” (2002) 10(3) Resource Management Journal 10; and P Fuller “The Resource Management Act 1991; ‘An Overall Broad Judgment’” (2003) 7 NZJEL 243.
2. Ngati Ruahine v Bay of Plenty Regional Council [2012] NZHC 2407, [2012] NZRMA 523 at [55] per Priestley J.
3. Board of Inquiry — New Zealand King Salmon: Final Report and Decision (February 2013) at 53. The central role played by the overall broad judgment approach pursuant to pt 2 has recently been called into question by the judgment of the Supreme Court on an appeal of the King Salmon decision. The Court stated that decision­makers are not to turn to pt 2, and to apply the overall broad judgment approach, when making decisions on planning applications relating to matters already fully covered by prescriptive statements in the New Zealand Coastal Policy Statement and, by implication, in other national policy statements. These prescriptive statements in effect set an “environmental bottom line”, reflecting a “protective element” within the concept of sustainable management. See Environmental Defence Society Incorporated v The New Zealand King Salmon Co Ltd [2014] NZSC 38, [2014] 1 NZLR 593 (SC); [2014] NZRMA 195.

balancing of conflicting considerations in terms of their relative significance or proportion in the final outcome. (footnote omitted)

Using an economics perspective, Easton argued that the effects­based RMA had reduced the need for cost-benefit analysis (CBA) to weigh effects, because by facilitating the proper allocation of property rights, it had opened up market­based processes in which affected parties could negotiate mutually satisfactory solutions.⁴ Subsequently, Counsell, Evans and Mellsop pointed out (as Easton had recognised) that market-based solutions could be efficient only if transaction (eg negotiation) costs were zero.⁵ As this was unlikely to be the case, there remained a role for CBA and regulation. CBA could assist in the weighing process for large development applications, because it would provide a framework in which the benefits could be set against the adverse environmental and other effects, even when some of them are of an intangible nature.

The purpose of this article is to use the CBA framework to examine whether the application of the overall broad judgment approach to large development proposals under pt 2 has served to promote economic efficiency. From a review of recent decisions I find that typically it has not, because major categories of effect are excluded. The approach used sets the benefits from a proposal against the adverse environmental effects, usually restricted to those that are not able to be internalised to (or made to be borne by) the applicant through the conditions attached to a consent. This contrasts with what is required to promote economic efficiency, where all of the effects are incorporated in the assessment. These include the internalised environmental effects, plus the resource costs of building and maintaining the structure that is the subject of the proposal. Consequently, the overall broad judgment assessment as recently applied casts the proposal in a much more favourable light than would an economic efficiency evaluation, and thereby increases the likelihood of it being consented. The balance of the article is set out as follows. Part 2 provides a brief overview of cost-benefit analysis within the RMA setting, its relationship to economic efficiency, and the quantification issue. Part 3 uses a case study to show how the overall broad judgment approach is typically applied, and why this leads to economically inefficient outcomes. Part 4 briefly reviews the decisions in several recent, large development cases that support the

4. B Easton “Is the Resource Management Act Sustainable? The Politics of the Coase Theorem” (1998) 129 Planning Quarterly 5. The link between economics and the RMA is also explored by Judge J Jackson “The Role of Economics in the RMA (or Vice Versa)” (1999) 3 NZJEL 19.
5. K Counsell, L Evans and J Mellsop “Objective RMA decision-making: Cost benefit analysis as an economic and practical framework” (November 2010) Resource Management Journal 4.

characterisation of the broad judgment approach in the previous part. Part 5 discusses the implications of these decisions for economic efficiency, and possible reasons as to why the RMA takes a non­economic approach. Part 6 concludes.

2. ECONOMIC EFFICIENCY

My argument in essence is that the application of the overall broad judgment approach to large development proposals under pt 2 of the RMA is not producing economically efficient outcomes. Although peripheral to this argument, it does raise the question as to whether these outcomes result from the form of the legislation or from its application: is it that economic efficiency ought to replace the sustainable management evaluation, that is being correctly applied? Or is it that the economic efficiency consideration is being misapplied under the rubric of sustainable management?

Sustainable management, as defined in s 5, is the sole focus of the RMA. Its expanded definition under ss 6 and 7 indicates that economic efficiency is only one of several relevant considerations, and that it is only a matter to which particular regard must be had by the decision­maker. Hence, in law, economic efficiency is only a mandatory relevant consideration, not an outcome that must be achieved. Arguably, for a decision­maker to decline consent on efficiency grounds (and vice versa) would involve him or her substituting economic efficiency for the statutory test of sustainable management, and as a consequence ignoring the several other factors that the legislature has mandated should be had regard to.

A contrary view is offered by Counsell and others, who criticised the stance evident in decisions that economic efficiency is just one factor among several listed in s 7 that decision­makers must consider.⁶ They based their argument on the s 5 purpose statement, which includes “economic well­being” as being central to the sustainable management of resources. For economists, economic well­being equates with economic welfare, which is promoted when resources are allocated efficiently. This in turn requires an assessment of the effects — both positive and negative — of particular allocations. Whilst a large development proposal can give rise to a variety of environmental and other effects, which require the skills of many different specialists to unravel, the overall decision framework should (at least for economists) be an economic one, and involve an assessment of the overall impact on economic efficiency.

This perspective gains some support from the case studies discussed below, which show that in most cases the decision­makers attempted some

6. Counsell, Evans and Mellsop, above n 5, at 5.

sort of weighing of costs and benefits, albeit that they fell well short of normal CBA standards, and that in at least two major cases they actually attempted to apply CBA to weigh the costs and benefits. These efforts suggest both that the application of CBA principles may not be inconsistent with s 5, and in fact may actually be desirable to better inform the weighing processes used.

In addition, other parts of the Act encourage an evaluation of costs and benefits. Section 2 defines “benefits and costs” as including “benefits and costs of any kind, whether monetary or non-monetary”, this all-inclusive definition perhaps implying that all effects (which are themselves defined very broadly in s 3) can be encompassed within the cost­benefit framework familiar to economists. Also, the changes to s 32 in the 2013 amendment to the RMA, which set out the requirements for evaluation reports relating to plan preparation and changes, seem to mandate the assessment of costs and benefits, even in the relatively abstract settings involved. Section 32(2) requires that an evaluation must “identify and assess the benefits and costs of the environmental, economic, social, and cultural effects that are anticipated from the implementation of the provisions”, and “if practicable, quantify the benefits and costs” of those effects. That said, I leave unresolved the legal question as to whether or not the achievement of economically efficient outcomes is compatible with the decision framework set out in the RMA, and return to my particular focus, which is whether the overall broad judgment approach as applied to RMA decisions on

major projects has been consistent with economic efficiency.

From an economics perspective, CBA provides a useful framework to assist in making decisions that involve weighing conflicting effects, when the objective is to promote economic efficiency, even when some effects are intangible in nature and difficult to quantify. CBA treats a development proposal as an investment project, and estimates the annual streams of future costs and benefits that would flow from it, compared to a counterfactual of what would happen in its absence (usually the status quo). This allows an assessment of the proposal’s impact on economic efficiency, meaning in broad terms, and subject to certain technical caveats, whether it would generate more in benefits than it would incur in costs.⁷ For example, for a major new road project, the benefits usually include travel time savings for drivers, enhanced trip time reliability, vehicle operating cost savings, the avoidance of accident costs, and savings in vehicle emissions. Weighed against these benefits are the costs, which typically include the initial design, property acquisition and construction costs, followed by the annual maintenance costs once the road becomes operational. In addition,

7. For a general introduction see New Zealand Treasury Cost Benefit Analysis Primer (Wellington, 2005). For more detail see Bureau of Transport Economics Facts and Furphies in Benefit-Cost Analysis: Transport (Canberra, 1999) Report No 100.

there may be other costs, or negative externalities,⁸ imposed on third parties during the construction phase and subsequently. These could include adverse impacts on local residents or the wider public from noise, pollution, dust, vibration, the loss of natural environments, and the like. Some of these benefits and costs are “intangibles”, in that they are difficult to quantify in money terms. The forecasts of annual benefits and costs over the project’s construction period and useful life, at least those that can be quantified, are summed using a discounting process. Because a large­scale project takes years to build, and yields benefits over many years, one cannot simply add up the nominal costs and benefits as they would accrue each year. As these are separated in time, one has to allow for “the time value of money”, in that a dollar received today is worth more than a dollar to be received in a year’s time. Hence, the dollar in a

year’s time has to be discounted before it can be added to today’s dollar.

The sums of the discounted values of benefits and of costs are called the “present value of benefits” and the “present value of costs” respectively. The difference between the two is called the “net present value” (NPV) of the project. The NPV is a commonly used measure of the impact on economic efficiency of an investment proposal. A positive NPV signifies that the discounted benefits exceed the costs, and hence generally that the project is economically efficient;⁹ a negative value signifies that it is not economically efficient, and that it should not be implemented.

By valuing the costs and benefits as far as possible in monetary terms, and by discounting them appropriately, the various diverse effects of a project, which would otherwise be difficult to compare, can be weighed and summed into an overall measure of net benefit. Only then can one tell whether the project’s benefits exceed its costs, and therefore whether it is economically efficient. It is for this reason that economists consider that CBA would provide a helpful framework in which to assess the various effects of development proposals under the RMA.

A major objection to the use of CBA in the RMA setting is that intangible effects are frequently encountered, and that these can be quantified only with a large margin of uncertainty. In the Lammermoor case the High Court identified the externalities as the source of the measurement difficulties:¹⁰

8. In economics an externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit. See J Buchanan and W Stubblebine “Externality” (1962) 29(116) Economica 371.
9. Importantly, this conclusion has to be qualified in situations where the investing body is funding­constrained. In this situation, a positive NPV is a necessary but not a sufficient condition for a project to be acceptable. This is because the project in question may displace other projects that are more efficient. Here the benefit-cost ratio (BCR) has to be used instead.
10. Meridian Energy Limited v Central Otago District Council [2010] NZHC 1390; [2011] 1 NZLR 482, [2010] NZRMA 477 at [114] per Chisholm & Fogarty JJ [Lammermoor HC].

... The problem is that where all the benefits and costs are not the subject of market transactions, there is no readily quantifiable financial sum reflecting the demand or price to be paid for such benefits or the imposition of detriments ...

Underpinning this statement appeared to be a deeper scepticism about the value of using CBA in RMA matters. The Court stated:¹¹

Parliament has not mandated that the decisions of consent authorities should be “objectified” by some kind of quantification process. Nor does it disparage, as a lesser means of decision making, the need for duly authorised decision­makers to reach decisions that are ultimately an evaluation of the merits of the proposal against relevant provisions of policy statements and plans and the criteria arrayed in Part 2. That process cannot be criticised as “subjective”. It is not inferior to a cost-benefit analysis. Consent authorities ... have to respect that reality and approach decision making in accordance with the process mandated by statute. It is not a good or bad process, it is simply the statutory process.

Hence, this cautions against overplaying matters under s 7(b) or assuming that a project must negotiate a cost-benefit (or BCR) test before it can satisfy the RMA’s purpose.

Although intangible effects are difficult to quantify, techniques have been devised to do so.¹² For example, these include ways of valuing landscape, which might seem a particularly intractable proposition. The importance of quantification is discussed in the EFTEC report, which stated:¹³

One of the key advantages of valuation methods is the explicit and relatively transparent way in which they bring values into the decision­making process. Of course this can be overstated: it is possible to manipulate both economic and deliberative and participatory valuation methods. Nevertheless, if the alternative to using valuation methods is for priorities to be set with only a rough idea of what others’ values are, then some form of valuation effort appears to be an improvement on none at all.

11 At [111].

12. For example, a brief summary of techniques and a long list of sources are provided in Victoria Transport Policy Institute Transportation Cost and Benefit Analysis II (Victoria, BC, 2012) at ch 4. See also J Kahn The Economic Approach to Environmental and Natural Resources (3rd ed, Thomson­Southwestern, Mason, OH, 2005) at ch 4.
13. EFTEC (in association with Environmental Futures Ltd) Valuing Our Natural Environment (for UK Department for Environment, Food and Rural Affairs, 2006) Final Report NRO 103 at iv.

Even in the qualitative setting discussed by the High Court, all of the relevant effects — the negative and positive intangibles, together with the costs and benefits of those effects that can be quantified — have to be traded off one against the other by the decision­maker when exercising the overall broad judgment. Without quantification, reliance has to be placed on the subjective judgments of decision­makers, which leads to a lack of transparency of, and potentially consistency in, decisions. The explicit adoption of quantification methods would formalise, and make more transparent, the process that already goes on to some degree already. This would also encourage more effort to quantify effects, which surely would be no bad thing given the difficulty of exercising a broad evaluative judgment on the basis of non­quantified assessments alone, and would expose the methodology to critical scrutiny and further refinement.

Consider a hypothetical example, in which the quantifiable benefits and costs (in present value form) are $100 million and $80 million respectively, giving an NPV of $20 million (ie NPV = $100M – $80M = $20M). In judging the impact on economic efficiency, the decision-maker would then have to add the intangible effects. Suppose that such effects are all negative (ie they are treated as costs). The relevant question from an economic efficiency perspective is whether, in present value terms, they total more or less than $20 million. If they are judged to exceed $20 million, then the NPV would become negative, and the proposal would not be efficient; if they are judged to be less than $20 million, the NPV would be positive, and the proposal would be efficient.¹⁴

Further, the valuation implicitly put by decision­makers on the intangible effects when applying their broad overall judgments can be inferred. If the above application is rejected, the decision­maker must have put a value of more than $20 million on the adverse effects; if it is accepted, the implicit valuation is less than $20 million. Hence, the decision­maker cannot avoid some degree of quantification of the intangibles, even if he or she might wish to do so, in situations where some of the other effects are quantified, as they often are.

3. THE OVERALL BROAD JUDGMENT APPROACH IN ACTION

To begin the analysis of the application of pt 2 to decisions on large development proposals, it is helpful to review a recent case in some detail, in order to see which categories of costs and benefits were considered relevant, and which were ignored. This reveals that the overall broad judgment approach

14. This is subject to the previously mentioned caveat concerning funding constraints, above n 9.

ignored the resource costs to be used in building the proposed structure, which is a major omission when viewed from an economic efficiency perspective. In the brief reviews of other decisions in the following part, I find this approach to be the norm, and uncover other shortcomings as well.

In 2013 the NZ Transport Agency (NZTA) applied for consent for the Peka Peka to Otaki (PP2O) section of the Wellington Northern Corridor Road of National Significance (RoNS). The Assessment of Environmental Effects (AEE) report listed all of the anticipated “actual and potential effects of the Project, both positive and adverse”, the adverse ones being those that were not able to be avoided or reduced through the integrated design process.¹⁵ These were broken down into three categories: “positive effects”, “temporary adverse effects” and “other adverse effects”.

Nine positive effects were listed, covering the effects that would arise once the expressway became operational, including: making safety improvements; promoting economic development; improving connections between Kapiti communities, and between Kapiti and Wellington; reducing road congestion and travel times, and improving trip reliability; improving route resilience and security against natural disasters; achieving consistency with key strategic planning instruments for the Kapiti district; and the greater removal of contaminants from stormwater through the provision of swales beside the road. Thirteen temporary adverse effects were anticipated to arise during the construction phase, including: the movements of construction traffic; erosion of dunes; ground settlement; groundwater drawdown; sedimentation in streams; impact on a population of velvet worm; impeding migratory fish movements; dust nuisance; adverse impact of piling works; construction vibration and noise;

visual effects; and the adverse impact on people living close to the route.

Nineteen other adverse effects listed the long­term effects expected from the project. These covered, in summary form: losses of a wetland, bush remnants and part of a reserve; loss of habitat; loss of natural character, amenity and visual impacts; impact on possible archaeological sites; drainage and possible flooding problems; loss of dune landforms; traffic noise; visual severance from the raised road platform; and less easy access to some properties.

The various adverse effects identified were proposed to be mitigated through the use of management plans and conditions for the delivery, operation and management of the project.¹⁶ One of the founding “Principles for Project Delivery” was that: “The construction and operation of the Project will avoid, remedy or mitigate adverse effects to an appropriate level ” (emphasis added),¹⁷

15. NZ Transport Agency Peka Peka to Otaki Expressway — Assessment of Environmental Effects (March 2013) at ch 11.
16. At ch 30.

17 At 346.

which suggests that at least some of the negative effects could not be mitigated away altogether.¹⁸

The applicant’s characterisation of the effects of the project invites the decision­makers to trade off the “positive effects” against the “temporary” and “other” adverse environmental effects (both subject to mitigation and offsetting measures) when applying their overall broad judgment (OBJ), as follows:

Equation (1)

OBJ = Positive effects – Adverse environmental effects

If the OBJ were positive, the inference is that the adverse environmental effects are worth bearing in order to obtain the benefits, and that the project would pass the pt 2 test. The contrary inference applies if the OBJ were negative.

However, this summary of effects is inconsistent with the promotion of economic efficiency, because it overlooks the costs to be incurred in building and operating the expressway. In economic terms, all of the resources used in that endeavour — the land, construction materials, equipment, specialist skills and labour — are not costless, because they have alternative uses. They could be used to produce other valued outputs. The loss of these other outputs is a measure of the “opportunity cost” of their use on the project in question. Economic theory demonstrates that when the relevant markets are operating efficiently, the opportunity costs of the resource are measured by their prices.

Adding these “resource costs” to Equation (1) allows the impact of the project on economic efficiency to be assessed:¹⁹

Equation (2)

NPV = Positive effects – Adverse environmental effects – Resource costs

As the resource costs of the PP2O proposal were proportionately large — the construction costs alone (undiscounted) were about $251 million — the application of the overall broad judgment approach under pt 2 in that case substantially biased the decision in favour of acceptance, relative to the economic efficiency assessment.²⁰

The bias effect can be illustrated using the previous hypothetical example, and assuming that the environmental costs would be $40 million (in present

18. That continuing adverse environmental effects were to be expected was reflected in NZTA’s acceptance that the road would impact adversely on the values of some houses.
19. This assumes that the normal discounting process is used in both cases.
20. Although I have relied upon the applicant’s overall assessment of the effects of the PP2O proposal, the BOI also made no mention of the resource costs when it applied pt 2. See Final Report and Decision of the Board of Inquiry into the Peka Peka to North Ōtaki Expressway Proposal: Volume 1 (February 2014) at 182–183.

value terms). The OBJ equation indicates that the proposal should be accepted, as the benefits exceed the adverse effects by $60 million (ie OBJ = $100M –

$40M = $60M). However, the NPV test indicates that with the resource costs of $80 million included, the proposal should be declined as it is economically inefficient (ie NPV = $100M – $40M – $80M = –$20M). Adding the resource costs turns a net benefit of $60 million under the OBJ test into a net loss of $20 million under the NPV test.

In the PP2O case, the adverse environmental effects implicitly considered relevant were those remaining after efforts to avoid, remedy or mitigate them had been made. The costs incurred by NZTA in those efforts became part of the project’s costs, and were then ignored. These serve to add to the size of the resource costs, and thus to the bias in the overall broad judgment approach, as I discuss in the next part.

4. CASE STUDIES

In this part I briefly review several other, recent, RMA decisions on large development proposals. These reviews support the finding in the previous part that the overall broad judgment approach routinely ignores the resource costs of proposals, and also finds that mitigation costs to be incurred by applicants are excluded as well. In the following part I consider the reasoning apparently supporting this economically irrational approach.

4.1 Transmission Gully Proposal

The Transmission Gully Proposal (TGP) is one of the major components of the Wellington Northern Corridor RoNS. The application by the NZTA for resource consents was followed later by those for adjoining sections (see below). These cases are interesting in that the NZTA had already conducted a CBA on each of them, as part of its internal process of evaluating alternative road projects. These CBAs included the benefits and the construction and operating costs, but largely or completely ignored the environmental effects.

In his submission to the BOI, Mr Nicholson, a senior NZTA manager, expressed the view that the CBA results were not a relevant consideration. The BOI responded as follows:²¹

Mr Nicholson contended that issues related to funding are not relevant to the Board as it is up to NZTA to decide whether or when TGP is funded, in

21. Final Report and Decision of the Board of Inquiry into the Transmission Gully Proposal: Volume 1 (June 2012) at 78–79. The LTMA is the Land Management Transport Act 1993.

accordance with NZTA’s statutory function under LTMA. He was correct that the allocation of funding to TGP is a function for NZTA. However, while it is not for the Board to tell NZTA how to spend its money, the efficient use of natural and physical resources is a matter to which the Board is required to have particular regard pursuant to s7(b) RMA. That particular regard extends to issues of economic efficiency.

Thus, the BOI in this case (and in related RoNS cases mentioned below) was receptive to evidence about NZTA’s CBA findings. Nonetheless, in its next paragraph the BOI stated that it understood that the TGP was not “driven primarily by economic imperatives but rather by the need to address the existing problems with SH1 and to provide a secure alternative”. The BOI’s “CONCLUSION ON PART 2 CONSIDERATIONS”, set out in a single paragraph, reflected this non-economic focus:²²

Our overall conclusion in respect of Part 2 matters is that approval of the notices of requirement and resource consents to enable TGP to proceed will promote the sustainable management of natural and physical resources. Providing a safe, alternative inland route to the existing coastal route for SH1 will enable people and communities to provide for their social and economic wellbeing and for their health and safety. Although there are a number of adverse effects we do not consider that the scale of those effects outweighs the benefits which we have identified. TGP has avoided adverse effects on the environment to the greatest extent possible and where avoidance is not possible proposes remedial or mitigatory measures which in some instances constitute environmental gains.

The resource costs of constructing the road — estimated at the time at about $1 billion, and subsequently increased to $1.3 billion — together with the ongoing operating costs, were not amongst the effects thought to be relevant to the pt 2 weighing process.

4.2 MacKays to Peka Peka Expressway

The MacKays to Peka Peka Expressway (M2PP) proposal was the second of the major sections of the Wellington Northern Corridor RoNS to seek resource consent. After summarising its pt 2 findings, in which s 7(b) and the resource costs were not mentioned, the BOI concluded:²³

22. At 250. Of course, to an economist the downplaying of the economic focus is unfortunate. 23 Before the Board of Inquiry Concerning a Request for Notice of Requirement and

Applications for Resource Consents to Allow the MacKays to Peka Peka Expressway Project: Final Report and Decision (January 2013) at 277.

... standing back and applying the overall evaluative balancing act as required by Part 2 and the authorities cited, we are more than satisfied that the Project meets the requirements of Part 2. We are satisfied that approval of the notice of requirement and resource consents on the basis of that evaluative balancing will promote the sustainable management of natural and physical resources. The expressway, and associated roading matters, will introduce a safer, more resilient route for SH1 which will enable people in communities to provide for their social and economic wellbeing, and for their health and safety. While accepting that there are a number of adverse effects and the scale of those effects, we are satisfied they do not outweigh the benefits identified. The Project has avoided adverse effects on the environment to the greatest extent possible. Where such avoidance is not possible, remedial or mitigatory measures proposed are appropriate, and in a number of instances will constitute environmental gain. (emphasis added)

The italicised portion above and the broader context suggests that neither the resource costs of constructing the road, then estimated at $630 million, nor the ongoing maintenance costs, were amongst the various effects included in the overall broad judgment. The use of the expression “a number of adverse effects and the scale of those effects” implies that the other adverse effects were significantly large, raising the question as to whether, if the resource costs had been included, the assessed benefits would still have exceeded the costs.

4.3 Buller Coal

The case concerned Buller Coal’s application to develop an open­cast coal mine on the Denniston Plateau, a wilderness area on the West Coast of the South Island. In its interim decision on the appeal against the proposal, the Environment Court summed up the pt 2 balancing of effects as follows:²⁴

• [333] ... In this case we find the [balancing] task more than usually complex. The proposal provides significant enablement in the form of high quality employment in the Buller District. It provides enablement to the New Zealand economy by stimulating a “shuffling upwards” in the labour market. These benefits are not to be underestimated.

• [334] Alongside this enablement, the proposal, if implemented, will have adverse effects of some proportion on areas of significant indigenous

24 West Coast Environmental Network Inc and Royal Forest and Bird Society of New Zealand Inc v West Coast Regional Council/Buller District Council and Buller Coal Ltd [2013] NZEnvC 047 at [333]–[334].

vegetation, including locally and nationally endangered plant species and ecosystem [sic]. Together with these effects there are effects on wetlands, perhaps of lesser significance because of what will remain on the plateau, and a considerable reduction for some time in the amenity of the mine site and its surrounds. In addition to these adverse effects which are not avoided, remedied or mitigated, the life that the rehabilitated ecosystems support on the mine site will be less fit, rich and diverse than those presently existing ...

The Court stated that “[o]verall this case is quite finely balanced”, with much depending upon “whether appropriate conditions can be worked out”.²⁵ It seems reasonable to infer that the Court, in indicating that consent to the development was likely, would have been of a different mind had the resource costs of the proposal to be incurred by the private developer been included in the effects, even after allowing for the value of the coal to be produced.

4.4 Turitea Wind Farm

The case concerned the application by Mighty River Power to build a wind farm along the northern part of the Tararua Range, and on adjacent farmland, on the outskirts of Palmerston North. The benefits found included primarily the contribution of around 1.7 per cent to national generation capacity, with the accompanying reduced reliance on fossil fuels for power generation, and local benefits from the construction expenditure on the wind farm and the employment of permanent staff to maintain it.²⁶ The adverse effects included the impact on the outstanding landscape and on areas of ecological significance, together with areas of public and private amenity. The BOI chose to mitigate the major impacts primarily by requiring that turbines be eliminated from some of these areas, resulting in a reduction in their number from 104 in the revised application, to 60 in the final decision. Once again, no mention was made of the resource costs of building and operating the wind farm, except for the implications for local employment.

4.5 Lower Waitaki

The case involved the application by Meridian Energy to take water from the Waitaki Dam Reservoir into an underground 34­kilometre tunnel — called the

25 At [335].

26 Final Report and Decision of the Board of Inquiry into the Turitea Wind Farm Proposal: Volume 1 (September 2011) at 19.6–19.7. The report follows an earlier judicial review in Friends of Turitea Reserve Society Inc v Palmerston North City Council [2007] NZHC 705; [2008] 2 NZLR 661 where the High Court rejected a challenge to the council entering an agreement with Mighty River Power to progress the energy proposal on a local reserve.

North Bank Tunnel Concept (NBTC) — thereby substantially reducing the flow in the Waitaki River downstream for 30 kilometres, and then to discharge the water back into the river after generating electricity at a power station, either built underground close to the dam, or downstream above ground at the tunnel outfall.²⁷

The Lower Waitaki decision was the first where the Environment Court specifically advanced the proposition that s 7(b) might require a CBA. The analysis undertaken, although unusually extensive, falls short of that required to assess the economic efficiency of the project. The benefits were found to be primarily the value of the electricity produced, with others being: the local economic benefits during the seven-year construction period; the ongoing local employment benefit thereafter; the avoided greenhouse gas emissions; and certain smaller effects that could not be quantified. Significantly, the Court accepted the submission of the applicant’s economist that the construction cost “was a ‘private cost to Meridian’ and therefore not something that we should take account of ”, yet did not see any inconsistency between this and the netting off of the operating and maintenance costs (also private costs for Meridian) from the sale value of the electricity.²⁸

The Court found that there were a wide range of environmental effects, falling into different categories: those that were beneficial; those that were completely neutralised by remedy and mitigation measures proposed; those only partly or uncertainly remedied or mitigated by the measures proposed; and those that were not remedied or mitigated at all.²⁹ Unlike the previous decisions cited, the Court stated explicitly that the adverse effects were relevant to its consideration only to the extent that they were not mitigated or remedied:

[513] ... We consider that the environmental costs should be remedied or mitigated through the imposition of conditions, and the costs imposed on Meridian. To the extent that this can be done, those costs are internalised into Meridian’s financial assessment and are excluded from our cost benefit analysis. Only those displacement and other adverse environmental impacts that cannot be remedied or mitigated form part of our consideration of efficiency.

The Court then described its role and findings as follows:³⁰

27 Lower Waitaki River Management Society Inc & Or v Meridian Energy Ltd NZEnvC Christchurch C80/09, 21 September 2009.

28 At 208.

29 At 222–228.

30 At 229.

Our role is to determine, firstly, whether there is an overall net benefit, taking account of both the measured costs and benefits and the unmeasured externalities that remain after remedy and mitigation. ...

Considering both the measured benefits and the positive and negative externalities that remain, we conclude that the NBTC does produce a net economic benefit.

After discussing s 7 and other matters, the Court then conducted its overall weighing of all relevant matters under s 5. The Court found that the substantial positive effects of the electricity generated would come very close to being outweighed by the negative effects of water abstraction on the mauri of the river, on the habitats of indigenous fauna, and on wetlands on the lower river. It was not satisfied with the proposed mitigation or compensation for the last two. It went on to conclude:³¹

Provided we are satisfied on the above matters then, taking into proper consideration all the matters we have identified as relevant and assessed we judge that the NBTC with its adverse effects mitigated or compensated for

... will achieve sustainable management of the lower Waitaki and provide a greater net conservation benefit and net economic benefit than the alternative (the status quo). That is because it will enable people and communities throughout New Zealand to promote their welfare by providing electric energy, a commodity which is essential for modern living in New Zealand ... while recognising and improving the current very degraded state of the lower Waitaki riverbed and margins and wetlands and the degraded state of the water body in the main stem ...

This decision is notable for mentioning the costs of building and operating the project, even though only the latter was included in its assessment, and for explicitly stating that the environmental costs that are internalised to the applicant by the consent conditions are not relevant. I discuss the latter proposition below.

4.6 Lammermoor

The Lammermoor case involved an application by Meridian Energy to build a wind farm, claimed to be the largest in the southern hemisphere, on the

31 At 239.

Lammermoor uplands in Central Otago.³² The Environment Court, as in Lower Waitaki, considered that “section 7(b) requires a comprehensive and explicit cost­benefit analysis of the proposal”.³³ The CBA explicitly excluded the construction cost of around $2 billion, and the annual operating costs were netted off the value of the electricity produced on the grounds that it was the contribution to value-added that mattered. The quantified benefits and costs generated a net benefit, but against this had to be set the subjectively assessed, and largely adverse, impacts on landscape, heritage, recreation and tourism. In its overall assessment on pt 2, the Court concluded as follows:³⁴

After adding all the matters identified (each with the weight discussed) and considering all the evidence and submissions we conclude by a majority of three to one that the scales come down on the side of refusing consent under the operative district plan because it would be inappropriate to place the huge proposed wind farm in such a nationally important natural landscape despite its very large potential contribution of energy to the National Grid.

Further, the Court had agreed that the CBA should be conducted on a national basis, which is the standard approach, but by overlooking the implication of this

— that transfers between entities within the country are neutral — it introduced another anomaly:³⁵

We agree that transfers between private New Zealand individuals (e.g. Meridian to the landowners) are neutral and have no net benefit. However, transfers from a private New Zealand individual (e.g. Meridian) to the public (e.g. Central Otago District Council) are not neutral and so are a benefit.

This non-standard CBA approach seems to have been justified by the need for a regional as well as a national perspective. The problem is that these alternative perspectives are mutually incompatible.

5. DISCUSSION

The decisions on large development proposals mentioned above all show that, in broad terms, the application of the overall broad judgment approach typically

32 Maniototo Environmental Society Incorporated and Ors v Meridian Energy Limited and Ors NZEnvC Christchurch C103/09, 6 November 2009 [Lammermoor EnvC]. The Environment Court decision was partly set aside by the High Court on appeal, above n 10.

33 At [242].

34 At [750].

35 At [537].

involves weighing the expected benefits of a project against the adverse environmental effects, but with the resource costs generally being excluded. In the two exceptional cases (Lower Waitaki and Lammermoor) where CBAs were attempted, the ongoing operating and maintenance costs were included (by being deducted from the value of the benefits), but the construction costs were not. In addition, the courts in these two cases stated explicitly that only the adverse environmental effects that were not able to be internalised to the applicant by the consent conditions were relevant to their balancing exercises. The internalised costs became part of the costs of the project to the applicant, and hence disappeared from the evaluation, contrary to the requirement of the economic efficiency standard. In the other cases reviewed above, internalised costs — indeed, all costs of applicants — seem not to have been mentioned at all.

The promotion of economic efficiency requires that all costs (and benefits) be included, yet decisions under the RMA routinely fail to do so. The reason is unclear, but may stem from the overall broad judgment approach being based on three premises that limit the range of effects that decision­makers may consider. The first premise is that the economic viability of a proposed development is a matter for the applicant, not the courts. In Ngawha Wild J stated:³⁶

I consider that the cost of developing the Ngawha site for a prison, even compared with the cost of developing an alternative site, is a matter for the Minister and was not a consideration for the Environment Court. I agree with Chilwell and Greig JJ that decisions on the cost and economic viability, or profitability, of a project must sensibly be regarded as decisions for the promoter of the project. Otherwise, the Environment Court will be drawn into making, or at least second­guessing, business decisions. That is surely not its task.

The second premise is that the courts should only intervene in private resource allocation decisions when decisions impact on third parties (ie there are externalities). It is the presence of externalities that provide the rationale for intervention under the RMA. The High Court in Lammermoor stated:³⁷

We think the correct interpretation of the RMA is that it is up to individuals and groups of individuals to decide what they want to do with their resources (where those resources are in private hands). However, that right is tempered by the fact that private use of resources can impose adverse effects on

36. Friends and Community of Ngawha Inc v Minister of Corrections [2002] NZRMA 401 at [20].
37. Lammermoor HC, above n 10, at [119].

neighbours and upon the wider community. Hence the justification for the national, regional and district planning instruments, and the associated concept of resource consents, all of which lie at the heart of the RMA.

The third premise is that by imposing conditions on proposed developments to avoid or mitigate adverse effects, the courts can, at least in part, internalise the costs on the applicant. In the Lower Waitaki decision the Environment Court stated:

[201] We conclude that the role of a consent authority, when having particular regard to section 7(b), is, where possible, to internalise the effects of a proposal, so that the cost [sic] of the externalities are imposed on the consent holder. It is then left to that person to decide whether their proposal can compete against others in the market. Consequently it is not usually necessary to consider alternative uses of the resources in question, or the use of alternative resources to obtain a similar benefit.

These three premises are brought together neatly in the Environment Court’s Lammermoor decision, where it stated that private costs, including the internalised costs, were not relevant to its deliberations:³⁸

We agree ... that if a cost is fully borne by Meridian then it is part of the financial equation that Meridian calculates in assessing whether a project is viable, and that is not of concern to us. Whether the revenue from a project is sufficient to cover the costs that Meridian will have to pay to generate that revenue is purely an internal matter for Meridian. The question for us is “does the cost fall fully upon Meridian? or does it fall, in part or in whole, upon the community?”. If it does fall, even in part, on the community then we need to assess the magnitude of the cost, and include it in our consideration. (footnote omitted)

Clearly, neither the resource costs (apart from the annual operating costs) nor the internalised costs of environmental effects were considered relevant to the pt 2 decision.³⁹ Yet weighing the project’s benefits against its non-internalised costs will not lead to an economically efficient outcome, because the assessment

38. Lammermoor EnvC, above n 32, at [618].
39. The Environment Court in Lammermoor also stated at [587]: “We are not required to be concerned for the financial wellbeing of corporate entities or with their use of their financial resources. As such, we are not concerned with how much the project might cost Meridian

... .” There are a number of similar statements in the Environment Court’s Lower Waitaki decision, above n 27, at [485], [494], [513] and [518]. Statements in both decisions suggest that, as a result of this approach to costs, the overall weighing approach may be an iterative

of economic efficiency requires that all of the costs, including the externalities (whether internalised or not), should be incorporated. The reason is that all of the effects are social effects, even though some of them — including the resource costs incurred directly by the applicant — are internalised to the applicant as private effects. The economic efficiency analysis differs from that used by the economically rational applicant, for whom only the internalised effects are relevant, because they alone determine the profitability of the proposed development from its private perspective.⁴⁰

The courts’ approach is also internally inconsistent in the way that benefit is treated. In cases involving private developments, the benefits would be captured in large part by the applicant through the charges made for sales of the services or goods produced by the project — ie the benefit is internalised to the developer.⁴¹ However, this has not stopped courts and BOIs from including the full amount of such benefits in their decisions. For example, in Lammermoor the principal benefit found was the value of the electricity produced, even though the revenue from its sale would accrue to the applicant.

The potential for economically inefficient outcomes to result from the application of the overall broad judgment approach can be illustrated using the earlier hypothetical example. The project would be privately profitable for the applicant as the benefit exceeds the resource costs (ie Profit = $100M –

$80M = $20M), and would remain so even if, say, $15 million of the $40 million environmental cost were internalised through conditions imposed by the consenting process (ie Profit = $100M – $80M – $15M = $5M).⁴² The court would presumably set the non­internalised environmental cost of $25 million against the benefit of $100 million, and find that the benefits greatly exceed the cost (ie OBJ = $100M – $25M = $75M). However, neither of these would measure the impact on economic efficiency, which would include all of the costs, and would show the project to be economically inefficient (ie NPV =

$100M – $80M – $40M = –$20M).

The only situation in which the OBJ approach would generate economically efficient outcomes is one where all of the external costs (and benefits) were able to be internalised by the imposition of conditions. Then the project would

process, in which a project that initially fails the test may have further conditions imposed, with the test being repeated, until a positive net benefit results.

40. See the definition of “opportunity cost” in part 3 above. Oddly, the High Court in Lammermoor, above n 10, at [114], stated to the contrary that the underlying purpose of internalising externalities was to enable all costs and benefits to be quantified so that they could be included in a CBA.
41. Under an economic efficiency assessment, the benefit would also include the consumers’ surplus. See Kahn, above n 12, at 94–96.
42. This assumes that the firm would incur $15 million in extra costs to reduce the environmental cost by $15 million. The actual cost incurred by the firm would be the relevant cost. This would also be a social cost.

be privately profitable if the revenue generated exceeded all of the costs, both resource and internalised. Likewise, the project would be economically efficient if the revenue exceeded all of the costs, bearing in mind that the revenue would measure the benefit in terms of the value of the output produced.⁴³ In these circumstances, though, a court would not need to reach an overall broad judgment conclusion; it could simply approve the application with the required comprehensive set of conditions, knowing that whichever way the firm chose to go, an economically efficient outcome would result.⁴⁴

However, the situation just described is an extreme one that is unlikely to apply often, if at all, for three reasons. Firstly, it seems unlikely that all environmental costs could be internalised through the imposition of conditions. For example, it seems improbable that building a four­lane expressway will not have some adverse impact on local communities, no matter how comprehensive the mitigatory conditions imposed. Secondly, there may be limits to the effectiveness of conditions, since they are apt to be vaguely specified, and may be difficult to enforce.⁴⁵ Thirdly, the example assumes that the applicant is a profit-seeking entity that is able to capture the benefits from the project through the charges it makes for the services provided. However, some cases involve government agencies, such as the NZTA, that are not profit-seeking, and whose proposed developments generate benefits that are not able to be captured through charges (ie they are externalities, such as travel time savings). These agencies may proceed with projects that are not economically efficient, perhaps for political or other reasons.⁴⁶

Hence, it seems unreasonable to rely upon applicants making economically efficient decisions that take into account the externalities involved. The overall broad judgment assessment must be applied, and if economic efficiency is the goal, as I believe it should be, it must include all of the effects of a proposal, whether private or not.

43. With the caveat that revenue is likely to understate benefits because it does not include consumers’ surplus, and also not the external benefits claimed in some cases.
44. Perhaps this scenario is what Easton, above n 4, at 6, had in mind when he referred to “the extinction of a CBA in resource management decisions” under the RMA.
45. To internalise costs effectively requires that: (a) the relevant externalities have been identified; (b) the externalities found are able to be internalised through the imposition of conditions on the proposed project; (c) the conditions imposed reduce the adverse effects to the levels expected in the counterfactual/status quo; and (d) the conditions are effectively monitored to ensure that they are fully complied with (as the applicant will have an incentive to avoid full compliance where possible to reduce costs).
46. For a review of NZTA road building priorities see M Pickford “State Highway Investment in New Zealand — The Decline and Fall of Economic Efficiency” (2013) 9(3) Policy Quarterly 28.

6. CONCLUSIONS

In this article I have argued that the overall broad judgment approach as applied under pt 2 of the RMA to large development proposals is not consistent with the promotion of economic efficiency. In essence, this approach deems that all resource costs, or in some cases, costs falling upon the applicant — the resource costs of the development plus the costs of the adverse environmental effects internalised to it by the consent conditions — are not relevant. Rather, the decision focuses on the adverse environmental effects not internalised to the applicant, and these are weighed against the benefits of the proposal (even in cases where these are also largely internalised to the applicant). In contrast, the promotion of economic efficiency requires that all of the costs of a proposal should be weighed against all of the benefits.

One can understand why the courts do not wish to be drawn into judging the merits of alternative possible developments, and whether the proposal applied for represents the most efficient use of resources. But the approach apparently adopted to avoid interfering with the market mechanism — that of narrowing the focus to the environmental costs not able to be internalised to the applicant

— is inconsistent with an economic efficiency assessment. This results in the overall broad judgment decision typically being based on a considerable understatement of the costs, and therefore on a considerable overstatement of the net benefits, leading to the RMA’s stance towards large development proposals being considerably more permissive than one based on an economic efficiency standard.

The leniency of the overall broad judgment test helps to explain why all of the eleven BOI decisions to date have approved the developments proposed,⁴⁷ even when some of them had unfavourable CBAs. The TGP, M2PP and PP2O proposals all had negative NPVs (as calculated by the applicant) even without the adverse environmental effects being included, and yet had little difficulty gaining resource consents because the benefits were perceived to be greater than the adverse environmental effects.

Given (from an efficiency perspective) the pervasive and serious under- statement of costs in the application of the overall broad judgment approach, it is perhaps surprising that in several cases the decision­makers found that the weighing process was finely balanced. In some cases the net benefit was only marginally positive (Buller Coal, Lower Waitaki); in others the imposition of significant output­limiting conditions was required for approval to be granted (Turitea, King Salmon); and consent was declined altogether in one

47. The King Salmon came closest to being denied, in that only some of the proposed sites were consented. I have also argued that the BOI process is biased heavily in favour of applicants, especially when the applicant is a government agency. See M Pickford “Board of Inquiry Process under the RMA” (2014) NZLJ 35.

case (Lammermoor, in the Environment Court). As the benefits included in the weighing process were found to be substantial in all of these cases, the closeness of the decisions implies that the adverse environmental effects must have been substantial as well. For example, in Lammermoor, the ongoing benefit was found likely to be in excess of $107 million per year,⁴⁸ yet given the negative decision, one can infer that the annual environmental costs — primarily the impact on the landscape — must have been larger.

Hence, it seems reasonable to conclude that although adverse environmental effects are not being undervalued, it is hard to claim that the RMA’s purpose of promoting “the sustainable management of natural and physical resources” is being achieved when proposals are approved that have both a substantial adverse impact on the environment, and very likely a negative impact on economic efficiency.

48. Lammermoor EnvC, above n 32, at [698].