Council ownership

A standard popular argument for public or council ownership over private ownership is that private shareholders are too short-term focused, at the expense of longer-term value. 

It's an eminently debatable proposition. But as always, Demsetz would say 'as compared to what?'. We always need to compare how the alternative works in the real world.

Here's Oliver Lewis over at BusinessDesk:

To mitigate rates rises and fund services, Christchurch City Council will be asking its commercial arm to frontload dividend payments and provide $47 million extra over the next three years.

The move, endorsed by councillors at a meeting on Wednesday, drew a forthright warning from Christchurch City Holdings (CCHL), which controls assets worth more than $5 billion on behalf of the council.

CCHL chair Abby Foote – who has repeatedly spelled out the constrained financial position of the group and the need to start paying down its $2.3b of debt, $440m of which was taken on at the bequest of the council for the earthquake recovery – said the new request placed the CCHL board in an extraordinarily difficult position. 

'Do not add up' 

“We cannot pay down debt, grow dividends to council and invest in the resilience and growth of our critical infrastructure,” Foote said. “These things simply do not add up. We cannot do them all, and that is what we have been saying for the last 12 months.”

...

Explaining the request for extra dividends, interim council CEO Mary Richardson said she and chief financial officer Bede Carran met with CCHL last week.  Staff believed the request for additional dividends, which was supported by councillors at the meeting, was doable to help restrain rates increases and allow the council to deliver on its capital programme.

When we lived in Christchurch, it always seemed as though Council was underinvesting in maintenance and keeping up with depreciation at the Port. 

If a private company is excessively sweating assets to benefit current shareholders, there are a few potential disciplining mechanisms. Shareholders have incentive to watch over management practice; behaviour that reduces long-term value will ultimately hit shareholders. And takeovers always remain a possibility.

A market test applies. If management is taking the piss when arguing for lower dividends, shareholders can check. Management can be replaced. Analysts skilled at figuring this stuff out can buy out existing shareholders and increase value. Nothing in this world is perfect, but there's a correction mechanism here. 

What disciplining mechanisms kick in if managers of a council-owned company say that the council owners are insisting on sweating the assets too hard? If they're right, no alternative owners can come in and replace the current ones. There's no discovery process to find out whether they're right. 

There's some chance that Council is running down the port to help pay for the new stadium. Does that seem like an entirely good idea, or an advertisement for the merits of public ownership?

Yes, it would have been tobacco prohibition

A living-wage campaigner didn't like my column on tobacco prohibition and complained to the Media Council. 

The Council didn't uphold his complaint on substance but did want the Post to have a disclaimer on our columns about the Initiative's membership base.

The Council's ruling is here. 

Here's what I'd told the Post, and the Council, in response to the complaint:

Please feel free to share this both with the media council and with Mr Herz-Edinger.

I viewed and continue to view the VLNC rules as prohibition on smoked tobacco.

In the same way that near-beers with less than 0.5% alcohol were allowed under American alcohol prohibition, near-cigarettes with less than a tiny amount of nicotine would be allowed under the VLNC rules. It is not prohibition of nicotine, which would continue to be available in vape form. But it would have been prohibition of smoked tobacco.

If we compare 0.5% alcohol beer to the average strength of beer, and the VLNC-allowed levels of nicotine in cigarettes to the average strength of a cigarette, it is roughly equivalent to a 0.2% alcohol rule for beer. So I do not think I am exaggerating here. I went through that calculus here:

“The legislation sets limits on nicotine allowed in cigarettes. The US Centres for Disease Control estimates that the average cigarette has just over 19mg of nicotine per gram of tobacco. From April 1, 2025, Very Low Nicotine Content rules will apply. Under those rules, no tobacco product can have more than 0.8 mg of nicotine per gram.

If a standard beer is 5% alcohol, the VLNC rules are roughly equivalent to banning the sale of beer with more than 0.2% alcohol.”

Those wishing to do so can check the math with a calculator. It isn’t complicated. The VLNC rules set a tighter standard for nicotine allowed in cigarettes than American alcohol prohibition set for alcohol allowed in near-beers.

Had American prohibition included a ban on the sale of near-beers to those born prior to 1900, the creeping increase in the proportion of population forbidden against buying near-beers would have been the minor point

I very much hold that prohibition on cigars, pipe tobacco and cigarettes would have begun the instant that the VLNC rules took effect: 1 April 2025. If that is incorrect, then America never had alcohol prohibition. And my article, here disputed, very clearly set out that I referred to prohibition of tobacco, not prohibition of nicotine. Nicotine would not have been prohibited. I was not taking license or exaggerating for effect or generalising. Smoked tobacco would have been under a prohibitionist regime from 1 April 2025 if the rules maintained a 0.8mg/g threshold. The effects would have been different from American alcohol prohibition, because nicotine would still be available in vape from. But it would nevertheless be prohibition of smoked tobacco.

I had thought that I had made this very clear in the disputed column. I wrote,

“Under prohibition, the illicit market would not just be a way of avoiding excise. It would be the only way of getting a real cigarette. It would be remarkable if Australian crime syndicates, or others, did not plan on supplying the New Zealand market from 2025 – had we gone ahead with prohibition

Tobacco prohibition would not have prohibited nicotine – vaping would remain legal. But illicit tobacco does not carry excise. Shifts to the illicit market provide no health benefits while reducing excise revenue. And because illicit tobacco is cheaper than taxed tobacco, smokers who shift to the illicit market would have one fewer reason to flip to vaping.”

I would have written exactly the same thing regardless of who our members are, because I believe it to be true.

It's a bit funny where total membership subscription fees from our two tobacco company members, over the entire lifespan of the organisation, are a tiny fraction of the amount that the Health Research Council gave to Janet Hoek in a single grant for anti-tobacco work and nobody ever seems to consider that a conflict. One-sided skepticism reigns.  

Competition in Consenting

This week's column over in the Stuff papers wonders about getting some competition into building consenting. A snippet:

Getting building consenting authorities out from under joint and several liability would help. And especially where the government is keen on encouraging the use of quality, lower-cost materials certified overseas.

But so too could easing the local monopoly on building consent and code of compliance issuance.

Government has already recognised that building consents and sign-offs are part of the problem. Kāinga Ora, the government’s housing provider, has its own arms-length consenting authority: Consentium. It provides consents for Kāinga Ora developments along with building inspections and code of compliance certificates.

Consentium then provides a small bit of contestability in the market for building inspection certificates. Kāinga Ora developments can ignore idiosyncratic local interpretations of the Building Act and build to a common national standard. It can also decide to try out new and innovative materials to help bring costs down while improving quality.

But only buildings that will be owned and retained by Kāinga Ora can apply for consenting through Consentium. If a private developer is building two adjacent identical houses, one for Kāinga Ora and the other for private sale, Consentium would only provide consenting services for the Kāinga Ora home. One potential reason: Kāinga Ora is not likely to sue Consentium if they discover a problem down the track.

It’s a bit of a shame.

Consentium is hardly perfect. It was reported earlier this month that it took almost two years for Consentium to decide that an above-ground stormwater storage tank didn’t impose a fire risk. But council consenting systems can be even more broken.

If building consenting authorities had to compete for business, outcomes could be different. If private developers had the option to seek consent from Consentium, both Consentium and councils could have reason to improve performance – so long as the liability issue were sorted out.

I recently returned from Vancouver where the Squamish Nation has autonomy over its Sen̓áḵw apartment tower development near Vancouver’s downtown. A New Zealand equivalent could allow iwi to establish themselves as building consenting authority on iwi-held land. In places where councils were underperforming, iwi might take up consenting for their own construction projects. That too would provide greater competitive discipline on building consenting.

Afternoon roundup

A closing of some of the tabs

First, a set from closing a pile of the week's accumulated stories from the Stuff papers. I wonder whether the people who complain about the absence of real journalism bother reading what The Post and Sunday Star Times have been putting out lately. 

• National's 'tax relief' won't be a tax cut "because the only real cut is a spending cut, anything else is just rearranging who pays what and in which generation."
• "If Health New Zealand can't find doctors, his iwi will." Some of the social services already being provided by Ngāti Toa.
• Andrea Vance asks "How did the cost of moving two schools blow out to more than $400m?"
• Promising work on methane vaccines for cows. Including great context from Dave Frame. [And here's Dave Frame and Adrian Macey over at Business Desk on methane]
• A path from John Birch through to anti-fluoride activism in NZ that runs through ZAP - a group I'd not heard of for at least a decade. Just great stuff from Charlie Mitchell here. 
• Poor response rates in the 2023 Census, and speculation that it might be the last census as we know censuses. 
• This one is just beautifully written. Joe Bennett on a walk up a hill.

  There’s a lot to be said for being a cattle beast. You live with friends. Your food is all about you. You own nothing but an ear tag. And castration frees you from the main source of worry and expense. Admittedly you make one bad journey in the end, but you don’t see it coming, and your mates go with you. And you’re spared the horrors of old age.

And the rest of the tabs. Or some of the rest. I'm drowning here but the computer needs to be rebooted.... 

• One hypothesis on why Google Search doesn't work as well as it once did.
• Another climate stress test, another finding of zero systemic risk justifying RBNZ's continued prudential excursions into climate issues. Unless prudential reg now is meant not to guard against systemic risk and instead starts from assuming that bank directors are idiots and that bank shareholders need to be protected against bad decisions.
• NZ's NPS-UD doesn't go hard enough. British Columbia's enabling apartments up to 20 stories near transit stations. 
• A new (to me anyway) metastudy on workforce diversity. Effects are significant and positive, "but insubstantial."
• "If the government believes making it more difficult to recruit offshore is going to get 50,000 people off the dole they are as deluded as all those who came before them who wanted to believe the same thing. I get the politics. I don't get the economics."
• RBNZ now investigating whether we should have a central bank digital currency.
• The Government really ought to push ahead with the Rule of Two for Medsafe Approvals. It would unlock access to RSV vaccines. Come on......
• Taiwan wants NZ to do more in supporting anti-authoritarianism. I wonder whether we ought to be doing more in supporting scholarships for promising students from the Islands to study in NZ.
• After my Insights column on the Christchurch Cathedral cost-benefit assessment, a reader pointed us to the business case for a major Tauranga city redevelopment project. I'd hope that, if central government is putting money into this, it pushed hard on checking whether the increases in tourism are plausible (and net national rather than within-country diversion). And whatever arguments one wants to have about appropriate discount rates for social projects as compared to infrastructure projects, expect infrastructure spending (like museums) to be portrayed as social investment where the lower discount rate allows a higher NPV for purported benefits. Bit of a Lil Lisa's Slurry problem here. 
  
  
  

Still no prudential regulation case around climate change

The Reserve Bank of New Zealand desperately wants to find reasons to have workstreams in climate change. 

It makes little sense. 

They've run another stress test on the banks looking to see if they could find a prudential regulation case. 

They couldn't. 

They found no systemic risk from a harsh scenario, just losses absorbed by shareholders of banks that don't respond adequately. And while that might make the banks less resilient against further shocks, that ought to just mean that the RBNZ's prudential side makes sure that bank capitalisation remains high enough. 

Here's their report on it. 

They conclude:

The Climate Stress Test, and preceding Risk Assessments, have shone a light on the potential effects climate-related risks can have on our large banks’ balance sheets. Climate-related risks, if not managed, could significantly reduce bank dividends, profitability and raise credit risk-weighted assets over the medium to long-term which would lessen the resilience of the system to other shocks.

I come to a different conclusion.

The Reserve Bank's prudential and monetary roles should be split across two separate agencies. A monetary authority with independence in the use of monetary policy to keep inflation within tight bounds. And a prudential side restricted to dealing with actual prudential risk.  

Despair - construction consenting edition

Kainga Ora is the government's house building agency. It's been building a lot of social housing.

Kainga Ora has its own (but independent) consenting authority, Consentium. 

It's a neat idea. Rather than have to deal with building consents across each different territorial authority, Kainga Ora can run building consents, inspections, and Code of Compliance Certificates through Consentium. 

I really really like the idea of making building consenting contestable. 

Councils have local monopolies on this stuff. Having alternative sources of building consents and certificates that follow a national standard rather than whatever bespoke view councils might have introduces some competition. If councils are being weird about approving something, developers could seek consents instead from the alternative agency. 

And an outfit like Consentium signing off on new building methods with innovative materials might help other building consenting authorities have confidence in approving similar things. 

And then I read Brent Melville's piece in BusinessDesk. You really should subscribe to BusinessDesk. It's regularly and reliably very good. 

But despair. 

I'll snip from it here as the piece is now more than a week old and hope that they don't get too mad at me for it. 

In what's been described as a win for common sense, and after an exhaustive 18-month process, the building regulator has determined that water tanks are "unlikely" to be a fire risk. 

The Ministry of Business, Innovation and Employment (MBIE) clarified this week that an external water tank proposed under a consenting application for a Kāinga Ora development in Henderson, West Auckland, didn't represent a fire risk to neighbouring properties.  

The determination, announced on March 28, was sought in July 2022 by the housing agency's dedicated consenting consultancy, Consentium, was in reference to a new, two-storey detached dwelling and whether an above-ground stormwater tank near the property boundary complied with C3.6 and C3.7 of Clause C3 of the Building Act. 

At the time, Consentium, as the authority, held the view the stormwater tank didn't comply with part of the Building Code concerned with limiting the spread of fire between properties.  

The application was accordingly changed to specify a metal tank to replace the 2.95-metre-long plastic tank supplied by Thin Tanks. 

The regulator duly entered into a year-and-a-half of discussions, consultation, independent fire reviews and deliberations.

Go read the whole thing. If we'd written this as a satirical column in our Insights newsletter, it would have seemed too harsh on officials. 

And yet. 

Even more competition in provision of building consents would be a good thing....

Reader mailbag: really long tunnels edition

I'd been wondering about the proposal to dig a really long tunnel to route through traffic away from Wellington's central city. 

It seems the kind of thing that you might decide to do, after running congestion charging for a while and seeing that the project is warranted, rather than deciding on ahead of having that information from revealed preferences and prices. The thing won't be cheap. 

So I was happy to see this in my inbox this afternoon to help me think through it. 

The Wellington Long Tunnel could be a transformative project to take enough traffic out of the city, especially Te Aro, but also the Quays along the waterfront and Oriental Bay, to improve amenity, relieve congestion at bottlenecks at the Terrace and Mt Victoria Tunnels and make it easier to walk and bike, as well as move buses, delivery vehicles (and cars) within central Wellington. Plenty of other cities of broadly have taken traffic out of their downtowns through purpose-built bypasses, such as Bergen, Antwerp, Basel and Tampere. Bergen is paying for some of the cost of its bypass with a toll.

Saving 15 minutes between the airport and the Hutt, Porirua and the rest of the region seems worthwhile, but both the travel time (and fuel) savings, and uplift of amenity would come at considerable cost. In 2021 Let’s Get Wellington Moving estimated the project might cost $3.1b, but we know how reliable such forecasts have been lately.

Yet it poses the obvious question. If Wellington got time-of-use pricing (congestion pricing) introduced during weekday peaks, focused on the CBD (leaving SH1 out of it as a bypass to a cordon), would the change in behaviour it enabled be enough to relieve congestion on SH1, and so determine then if the Long Tunnel idea was still worthwhile?

The answer is probably yes, although high-level modelling of a cordon pricing option by LGWM suggested that travel times southbound on SH1 would worsen, it would appear because the Terrace Tunnel has insufficient capacity in that direction (one-lane) to accommodate the traffic redirected around the CBD off of the Quays. That could be addressed by putting a higher price on that traffic which could justify building more capacity at that bottleneck.

However, it’s one thing to think of how the roads might be run as a rational business, but reality has some complications:

1. The Long Tunnel is about more than traffic. Arguably it can unlock property value uplift by removing a lot of traffic from existing streets, including taking a lane each way off of the waterfront route to enable a second public transport corridor along it, and more development along the waterfront, as well as removing much of the blight of traffic from Te Aro. The value of all of this is unknown, but as the Long Tunnel is as much about amenity as transport, it is important although caution needs to be taken around exaggerating these benefits (as much as applies to those pushing light rail’s benefits).
2. Congestion pricing for Wellington should probably exclude SH1 for public acceptability, at least at first. A downtown cordon is relatively easy to implement, as trains and buses pretty much all converge on it, and most drivers have reasonable alternatives. Having a good bypass helps to encourage traffic to flow more efficiently around the priced area (this has been seen in Stockholm and Oslo), although it would be wrong to wait until the Long Tunnel is built before introducing congestion pricing.
3. Politics around use of the money. Greens want congestion pricing to raise money to pay for public transport boondoggles, it seems likely National wants it to pay for road boondoggles. Arguably, a road boondoggle that at least benefits those paying the congestion charge is a better waste of money than one that doesn't. It would be better to use pricing revenue to offset rates funding of roads, or enable lower off-peak pricing of roads (if RUC was set by location), or just used for the best projects to upgrade roads in the region, but no jurisdictions do this.
4. The politics around building a Wellington bypass. For over thirty years the issue of fixing the route between the motorway and the roads approaching the airport has been highly politicised.  The current road layout generates congestion all-day during weekdays and much during weekends, and is clearly inefficient as it encourages diversions along routes not well suited to through traffic. The Basin Reserve is the biggest part of that problem, and indeed past BCR assessment of proposals to upgrade it indicate that fixing the Basin Reserve is worthwhile. If the Basin Bridge had been approved by the Key Government, then we probably wouldn’t be talking about the Long Tunnel, but the politics around putting a bridge between Mt Victoria Tunnel (including a new one) and the Arras Tunnel (and maybe a new one to take eastbound traffic off of Vivian St) are complex.

The Greens and Mt Victoria Residents who want nothing built. In Wellington, stopping the “motorway extension” was a cause celebre in the 1990s for the Greens (in their formative years) that succeeded largely due to fiscal constraints, and we are where we are as a result. However, there are also allies in friends of the Basin Reserve who love that cricket ground. The Minister for Infrastructure is one of those people.  The below ground conditions at the Basin are not conducive to tunnelling underneath because of the geology including an underground stream, so it’s a bridge there or a deep tunnel somewhere else. The Minister of Infrastructure is likely to not look friendly upon a bridge (although I wonder if putting a artificial hill to the north of the Basin to conceal a bridge might fix that). 

Unfortunately, the politics around "build no new road projects because cars are bad" from most of the Greens, encourages the Nats to go the opposite "quick build a big project so they can't stop it, and when it opens everyone loves it”.  This transport culture war (which Labour tended to not be a part of, as seen by the road building under the Clark Government) generates a reflex response to build more and bigger.

If there were a more rational, bi-partisan approach, then Wellington could get congestion pricing, a bridge at the Basin Reserve, and perhaps more incremental improvements to SH1 built as merits stack up.  Of course, that wouldn’t deliver the “big bang” amenity transformation of a single big tunnel, but it would likely deliver most of the travel time benefits, many of the amenity benefits, with the only question being whether the costs of disruption and construction in building a cut-and-cover tunnel between Vivian Street and the Arras Tunnel start to rival the Long Tunnel.

This is where the focus of NZTA’s investigation should be in the coming months:

1. Model Wellington traffic with congestion pricing to the downtown (and then again on SH1)

2. Estimate the costs and benefits of the Long Tunnel vs. incremental upgrades to the existing alignment, and whether the transport user benefits and amenity/property uplift benefits are worth it.

I still like the structure that was set out in the 1998 Better Transport, Better Roads proposal.