Subsidy city…Wellington airport

At about 3pm, the first Singapore Airlines flight to Wellington, via Canberra of all places, lands at Wellington Airport.  Wellington-boosters, well represented on the Council and the Chamber of Commerce, talk up the first “long-haul” flight to and from Wellington.  All of which would be more impressive if it were not for the ratepayers’ money being (secretly – no information on the amounts or terms of these sweetheart deals, no robust cost-benefit analysis etc) used to make it all possible.    Were the flights financially self-supporting that would be the best evidence of them being “a good thing”.  But they aren’t.  That means (a) a presumption against them being “a good thing”, and (b) a likelihood that they won’t survive for long, at least without some permanent subsidy from the long-suffering ratepayers of Wellington. It probably isn’t a subsidy to the giant Singapore Airlines –  they’ll probably just manage a normal return on capital –  but by quite which canons of social justice ratepayers should be subsidizing government departments (probably the main purchasers of tickets on the Wellington-Canberra leg, and one of the larger sources of international passengers from Wellington) is beyond me.

But at least these sorts of subsidy deals can usually be terminated with not too much notice.  Other cities have tried this sort of thing, and the arrangements have typically fallen over before too long.  There isn’t much irreversibility about them.  The same can’t be said for the proposed Wellington Airport runway extension.  If it goes ahead, very large amounts of money will be irreversibly lost.

There was a very nice, accessible, article out a few weeks ago in City Journal by leading US economist Ed Glaeser.  In “If you build it…..” Glaeser tackles some of the “myths and realities about America’s infrastructure spending”.  There is a lot enthusiasm around, especially in centre-left circles, for more – much more –  infrastructure spending, to “take advantage” of the current very low global interest rates.  Enthusiasts, of course, rarely stop to ask why interest rates are so low, and expected to remain low, but set that caveat to one side for now.   Glaeser reports on a variety of studies on just how underwhelming most government-led infrastructure actually is: too often in regions that are declining rather than ones that are growing, all too often with low payoffs (and massive cost over-runs) at the best of times, and so on.  There are plenty of specific differences between the US situation and our own – we don’t have the Senate, steering funds to lightly-populated states, but then we have by-election promises to build bridges to anywhere –  but I don’t think we have anything to be complacent about.  His penultimate paragraph is relevant pretty much anywhere

Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. Large-scale federal involvement in transportation means that the people who benefit aren’t the people who pay the costs. The result is too many white-elephant projects and too little innovation and maintenance.

Just last week we heard of the latest large cost-escalation in the hugely-expensive questionable Auckland inner-city rail loop.  “Who cares” seems to be the reaction of central (National) and local government (Labour) politicians –  ratepayers and taxpayers will pay.   In Wellington the largest regional roading projects for generations (probably ever) is underway at Transmission Gully.  The economics of the project are simply shocking, but that doesn’t seem to bother our National or Labour politicians.

And then there is the airport extension proposal.  Now, on paper, it might look like a project that might pass some of Glaeser’s tests.  After all, Wellington Airport isn’t owned by central or local government –  although Wellington City has a minority stake –  but by a company majority-owned by some fairly hard-headed infrastructure investors/operators, Infratil.

There are plenty of people around –  including commenters here on previous airport posts –  who will attack Infratil.  I’m not one of them.  Infratil is a private sector business, no doubt pursuing (as it should) the best interests of its shareholders.  And Infratil has been quite unambiguiously clear that the airport extension project simply does not stack up on commercial grounds.  In a comment on this blog six months ago, the chairman of the airport company Tim Brown put it this way:

The Airport extension is forecast to cost $300m. If airport users who get no value from it (people on smaller aircraft, people buying coffee, parking cars, etc) don’t pay anything towards it, then the estimated present value to the airport company from those who do benefit from the extension and do help pay for it may be about $100m. So on purely commercial grounds and avoiding cross subsidies the shareholders are expected to contribute that sum.
Clearly that makes it a dead duck on a purely commercial basis. Who would hand over $300m for something “worth” $100m?

Since Infratil owns 66 per cent of the airport company (WIAL) that would involve them putting up around $66m and the minority shareholder putting up $34 million.

So when people attack the idea of council or government handing over (lots of) additional money to get the project going (in addition to the millions the Council has already spent) as “corporate welfare”, they are simply wrong, at least as regards Infratil.   This project seems to be driven by the Council “boosters”, presumably why they’ve been so ready to spending large amounts of ratepayers’ money on it already.  If some branch(es) of government in fact do stump up hundreds of millions of dollars beyond what is commercially justifiable, some of it will certainly benefit some local businesses, but most of it will simply be money down the drain; spent on real resources to build an extension that simply has almost no economic value.  Other than the exercise commissioned by the airport company itself –  funded by the Council –  no one who has taken a hard look at the numbers regards the claims of large scale economic benefits as stacking up.  Of course, there are plenty of “boosters”, and others who think of (real) long-haul flights from Wellington as a nice idea, but the numbers simply don’t stack up.

Fortunately, it is local body election time.  If it weren’t, I fear the project might be rammed through with as little serious scrutiny as the cosy subsidy deal to fund a movie museum/convention centre in Wellington recently was.  (The movie industry, of course, surviving on large scale taxpayer subsidies).  At present, WIAL has a resource consent application underway.  (Of course, if the project can’t get a resource consent, the economics is irrelevant.)  Somewhat curiously, WIAL recently temporarily put the resource application on ice. This was, ostensibly, to allow them to take account of points raised in the numerous public submissions. I’m a bit skeptical of that story –  surely the submissions can’t have been much of a surprise –  and wonder if it isn’t a convenient way to minimize coverage of the issue during the local body election season.  Perhaps not, but the timing is certainly convenient.

A year ago, I assumed that the Wellington City Council – which hardly ever turns down an opportunity to waste money, and which is in the thrall of an “economic development” mindset –  would simply write the cheque, shifting large amount of ratepayers’ money into a project which  –  while fundamentally uneconomic –  it would not even secure a much-increased ownership interest in.

But as the election season has gone on, I’ve begun to be a little more hopeful that perhaps hard-headed analysis might actually play some role in the eventual decision on Council funding (or indeed, central government funding, where there is little sign of much greater discipline around capital spending).   Our mayoral race is hotly contested, and so there have been plenty of surveys asking candidates for their views on the airport extension.  Here I’m drawing mostly from a survey done by my local residents’ association.

Somewhat encouragingly, of the eight mayoral candidates not one is now unambiguously in support of spending lots of ratepayers’ money on the runway extension.

One of the mainstream candidates –  centre-right councillor Nicola Young –  is outright opposed

 Opposed. Initially I thought it should funded in line with its ownership (Infratil 66%, WCC 34%) but now I believe it would be a $300million folly. Subsidising international airlines is very costly, as Christchurch Airport discovered when it paid Air Asia X millions to get direct flights to Asia; the flights were cancelled after nine months

Another sitting councillor, this time from the left, Helene Ritchie, is also opposed

I have repeatedly opposed it and any funding towards it-including Council using rates to support an application by the Company for a  resource consent.

She further offends the elites by suggesting that voters should get to make the final decision on such an expensive proposal

The Environment Court should throw it out. If it is not thrown out, then as mayor I will call for a referendum/poll of the people, on this proposed rates funded $350 million (probably likely $500million) Airport Extension, asking residents, “Do you want to pay for the proposed airport extension? Should rates be spent on “corporate welfare”-an unnecessary airport extension?”

Another candidate –  left-wing economist Keith Johnson, campaigning (I suspect) against waste rather than to be elected –  is also clearly opposed

I am opposed to the project and have submitted a substantial paper detailing my objections to the Environment Court, covering safety, environmental, budgetary and business-case concerns.
I am absolutely opposed to the allocation of $90 million from Wellington City Council to the project, as the proposal essentially constitutes corporate welfare funded from the pockets of ratepayers.

A final minor candidate is also clearly opposed.

Unfortunately, most of the more likely candidates are somewhat more positive.

Sitting councilor Andy Foster probably isn’t going to be mayor, but despite being a typical “booster” most times when it comes to council spending, on this one he has clearly been having second thoughts.

It will depend on whether it can get over some very tough hurdles: consent, demonstrated airline commitment, robust economic case and obtain funding.  If it can, I will support it. If it doesn’t I won’t.  I suspect it won’t.

The election seems set to come down to a race between the current Labour Deputy Mayor (endorsed by the Greens) Justin Lester, the current Labour mayor of Porirua Nick Leggett, and the centrist councillor Jo Coughlan.  All three have a track record of supporting spending (lots of) public money on “economic development” projects, but I am mildly encouraged by how cautious they now seem to have become.

Here is Coughlan

I support the runway extension subject to it getting a resource consent, a business case that stacks up and appropriate funding. If the city does contribute, it should be reflected in our ownership skate. It should not be a donation

On that basis, the Council would end up owning a very large share of WIAL.  It is a middle of the road line, but it is important for Wellington voters to remember that the project is fundamentally uneconomic, and whether any money was contributed as an equity stake or as a “donation” doesn’t change that.  Central government had lots of equity stakes in Think Big projects in the 1980s.  They were all financial and economic disasters.

Here is Leggett, current mayor of Porirua

I support the idea of the runway extension. Wellington has to open itself outwards and create better connections internationally to grow jobs and investment.   I don’t support the council funding the extension beyond its 33% shareholding and if the Resource Consent is not successful – or the Government refuses to offer funding – then the project won’t proceed.

Ah yes, the “idea” sounds good.  But if it were such a good idea, users would pay for it.  That is the market test, usually a pretty sound one.  One gets the impression he doesn’t actually think the project will pass a proper cost-benefit analysis for the Council –  and $200m is a lot of money.  Leggett seems to be looking to central government –  and as he must drive past the Transmission Gully works each day on the way to the office, perhaps that is no wonder.  Wasteful capex is just par for the course –  especially when it could be dressed up in current fashionable rhetoric about advancing (with subsidies) export education and tourism.

And what of the Labour (and Greens –  even though as a party they ostensibly oppose the runway extension) candidate, Justin Lester?  He has been a strong advocate of the project, and was apparently the key figure in securing subsidies for the Singapore Airlines flights to Canberra. But now….

I have committed to seeking the resource consent for the airport extension project. It’s too early to say whether the project will proceed because the following three caveats will need to be satisfied before it proceeds: 1. Resource consent approval 2. Financial support from Central Government 3. Commitment from airlines to fly direct routes to Asia.
This is a 50 year project and needs careful consideration before any decision is made.

So even for Lester this is too big for the Council.  It can only proceed with central government funding.

Perhaps the most encouraging bit is his final sentence.  It is a long-lived project, and the option to delay must be a real one.  Perhaps in five or ten years time we will have a more secure feel for, for example, the viability of the new Singapore flights.  And –  for those more environmentally inclined than I am –  there is always the question of sea-level rise to consider, for a very low-lying airport.  Perhaps we could have another look in 20 years time?  Who knows, by then the benefits might be so overwhelming the users might even pay for the project?

In our council system, even mayors have only one vote.  Whichever of these candidates gets elected the project might still get significant additional council funding, or not.  And as central government has a terrible record of pouring money down sinkholes –  Transmission Gully, KiwiRail, probably the Auckland CRL etc – it might get funding from there even if the Council isn’t willing to stump up much.  But it is at least slightly encouraging that the mayoral candidates, reading the tea leaves of voter attitudes, have all either come out opposed to the Council paying for the project, or hedging support around with some tests that will be very hard to pass.

I’m not usually a single issue voter –  and the debacle of the Island Bay cycleway still concentrates the mind in other directions at times –  but this time I am.  There is simply too much money at stake, to allow boosters with the public cheque book to pursue their field of dreams vision for Wellington airport.

(For those wondering, I have  not run out of ideas or enthusiasm, just energy. I hope to be back to normal soon.)

UPDATE: From page 35 onwards of this Chamber of Commerce survey there are fuller statements of each candidate’s approach to the runway extension issue.   There isn’t anything very different than in the quotes I’ve included above, but for those interested the more detailed responses are worth consulting.  I strongly agreed with this line from Andy Foster

As much as possible all information pertinent to the decision should be made available to the Wellington community so that it can be scrutinised by everyone.

 

 

42 thoughts on “Subsidy city…Wellington airport

  1. I saw that City Journal article – I wanted to stand on top of a mountain and scream it as my manifesto, holding it inscribed in stone tablets if that’s what it took. Unfortunately, there’s a reason that rent seeking is successful. And even convincing voters that their cash ought to be spent on the basis of a cost benefit analysis can sometimes be tricky (trust me, I’ve tried).

    I really hope you’re successful here, I really do. By the sounds of it, it may be sunk because voters perceive it as corporate welfare; as opposed to straightforward government owned white elephant building. The real joke is of course that a waste of money is still a waste of money, whether government or private, it’s just that as Glaeser pointed out, the private investor has the sense to identify how much they’re willing to pay.

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  2. Queenstown is already overtaking Wellington as our 3rd largest international airport. The infrastructure spending is better to be spent in Queenstown than in Wellington.

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  3. Infratil is a private company. It must exchange share ownership for the $300 million spendup on Wellington airport. The entire point of privatisation is so that the private company carries the risk. It is complete stupidity to expect the government to carry the risk of the infrastructure spend to subsidise a private companies profits.

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  4. I’d like the government to legislate that all local and central government major spending go through cost-benefit or regulatory impact assessment & the results required to be publicly published with a standard summary template that joe average can understand for transparency and accountability.

    Ideally the analysis would be peer reviewed to confirm its robustness.

    It wont stop bad decisions but at least there will be clarity.

    Over the longer term the lower bound for assessment could be lowered and simplified procedures adopted for smaller spending amounts.

    NZTA follow similar procedures but dont have a standard public reporting template.

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    • Ironically there is a requirement for local government to do something like that in the form of just about every provision related to financial management in the Local Government Act. Councils must manage their finances prudently etc etc etc. But in this context there is no need to go past s10(1)(b) of the Act that says the purpose of local government is: “to meet the current and future needs of communities for good-quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost-effective for households and businesses.”

      As it stands I don’t think either the subsidy to SIA or the proposed runway extension ticks any of those boxes. So what are they doing?

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      • Thanks Donald. The fact that such provisions exists probably only reinforces my doubts about institutional solutions/protections. They are (a little) better than nothing, but it reminds me of the old Clausewitz line that “the price of peace is eternal vigilance”. Something like “the price of effective functioning limited government is eternal vigilance”. Mind you, an effective working OIA and local govt equivalent, and perhaps pro-active release requirements, would help.

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  5. The USA, at least some States, has a beautiful system whereby de facto new municipalities form and raise finance privately via bond markets, for their own infrastructure, which they pay back from the eventual residents local taxes. While this seems too “out there” for people like NZ-ers who assume by default that centrally planned public monopolies are the only thing that could possibly work for infrastructure, the Americans take their approach almost for granted. Every so often it comes under attack for one reason or other, but it is ably defended, even against the argument that it “enables sprawl”. It actually enables efficient growth with good balances of residents, jobs and amenities – it is absurd to assume that US cities rapid expansion ever results in longer and longer commutes to city-centre jobs.

    I am starting with that point, because so much of our extremely low benefit-cost infrastructure spend is because it is for projects started decades too late, to try and play catch-up, in locations where everything is too expensive – the geography, the privately-owned land needing acquisition, the disruption of existing urban activity, local community opposition, etc. Worse, much of these problems are magnified by deliberate planning approaches that seek to cram growing populations into existing urban footprints using decades-out-of-date infrastructure. The claim that infrastructure costs will be saved under this approach (relative to new expansion) is made in extremely bad faith.

    Efficient and productive urban intensification really requires planning decades ahead for low-cost future expansion, particularly corridor protection and even land acquisition. No-one in the world plans like this. Shlomo Angel, Alain Bertaud, Paul Romer and colleagues are advocating for this kind of planning, at least in developing countries where it is not too late. But in New Zealand with its particular geography, it would be a no-brainer to have a national urban growth strategy, enabling balanced dispersion-style growth where there is a maximum of benefit over cost to do so. Wellington region is a most stupid place to spend the available money; I am interested that you make examples of the airport and Transmission Gully.

    A nation the size of the USA has a hub and spoke system for air travel, probably because it is what has proved efficient in experience; why does NZ need to have several “international airports”? Of course even our “main” airport suffers from the problem I am discussing – it is not possible to turn it into the kind of new hub that has been created in the USA on low-cost greenfields land in several cases.

    Our current approach to “providing for population growth” is an “implosion in progress” in every way. Cost, sustainability, competitiveness, quality of life, social justice, etc. We have local rebellion (bureaucracies as much as activists and voters) everywhere against every proposed path – no more sprawl, nothing more in my backyard, no road widening, no “car-dependence”, no articulated densities to support public transport either. An excellent legacy for some government or PM to leave to New Zealand, would be a program of all-new, bang-for-buck “urban growth enabling” that starts with a clean sheet and does it right, in locations with the potential. Angel, Bertaud, Romer et al could be commissioned to oversee the plan foreseeing a century of growth, although they do have subscribers to their ideas in NZ already. An all-new primary national hub airport would be one significant anchor for a new “opportunity urbanism” city-region and there could be other anchors too. The sterility of new cities like Canberra and Brasilia does not have to be a given, although giving a new city the “capital” status would be another good idea. Wellington has come to take the benefits of being the capital for granted, and has lost touch with reality as a result.

    Proximity to an existing major city is better than a leap out into the regions. Canterbury has potential, so does northern Waikato, and possibly so does South Wairarapa.

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    • “The USA, at least some States, has a beautiful system whereby de facto new municipalities form and raise finance privately via bond markets, for their own infrastructure, which they pay back from the eventual residents local taxes. ”

      Isn’t that the LGFA? To a “T”?

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      • No, it isn’t LGFA at all. LGFA represents (most) existing local bodies, raises funds in its own number, and lends to the (whole) local authority. Phil’s point is about being able to tie the new debt load more closely to the neighbourhoods actually leading to the additional debt, not spreading the burden over all the local authority’s residents/ratepayers.

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      • To add to what Michael just said; in parts of the USA, a new subdivision can literally be funded this way as a body corporate in its own right, without any input from the nearest / largest existing local authority. Annexation (voluntary) frequently occurs some years down the track. But meanwhile, the “land supply” factor in the overall market is about as elastic as it could be. Central planners have shown no evidence of understanding the principle of competitive land supply – they think “larger quotas” are the solution.

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  6. Brilliant analysis, as always, Michael. Thank you for your thoughtful words, which I hope all Council candidates will read. We can only hope that the same candidates will heed their own, now much more carefully-chosen words on their support for the extension, once the election is over. Lester has never hedged his bets this much, in fact he has said in the past that we couldn’t expect to hear from a committed airline due to ‘commercial sensitivities’, a line I hope he won’t trot out again should he become Mayor when asked to loosen the $90m purse string…

    It is a completely cynical – albeit understandable, from a corporate’s perspective – decision to halt the resource consent so close to the election. Fortunately, the runway still is the major topic in most mayoral or candidate debates and I would very much like to see some public pledges on it from all candidates, before the election. The risk is simply too great that we’ll go back to the high-spending corporate welfare handouts on white elephants, if our politicians don’t get kept honest on the pledges that got them elected. A big issue is, that there are never real consequences for the architects and spenders of public money on wasteful white elephants. Not sure what the solution is to stop this squandering of public money without proper business cases in the future?

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  7. Michael it is disappointing that you make comments about Kiwirail and Auckland’s CRL based on what you read in the paper instead of a reasoned consideration of our transport infrastructure needs in the light of climate change.

    Rail, electrified, is an essential component of addressing climate change. The same rail that has been asset stripped since it was sold to private enterprise, and which still needs significant repair.

    There isn’t any evidence of a cost overrun with the CRL. The cost has always been given as a cost + or – figure, amd all estimates are still within that range. The bca for it is positive over the full range of cost + or – estimates.

    You rightly point out this is not the case with Transmission Gully, which is at a cost to the public.

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    • It is a long time since I looked at BCA estimates for the CRL. At the time I thought some of the key benefit estimates were based on some questionable assumptions about agglomeration gains etc that, to date, are defied by Akld’s actual experience. If there are more current estimates that are less reliant on such assumptions I’d be very glad to hear it.

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    • The Auckland CRL will cost $3.4 billion to get from the harbour to Mt Eden. This is enormously expensive. You can walk the distance within 45 min. It would have made sense if Mt Eden had been zoned 18 levels to 50 levels under the Unitary Plan. But unfortunately there is nothing in Mt Eden. It is a low density mainly single bungalow dwellings. Not even a decent shopping mall. What a waste of money.

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      • As I’m sure getgreatstuff well knows, $3.4 billion to get from Auckland’s CBD to Mt Eden is a ridiculous comment. The City Rail Loop includes that section as a small part of an enhanced suburban rail system which has shown astronomic growth in the last 20 years and is now an extremely modern, efficient and environmentally friendly foundation of Auckland’s transport system. The CRL will only add to that growth.

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      • Why do you assume that mere rezoning would result in actual redevelopment and occupancy? Can you point to any successful urban planning experiments? What has actually been happening for decades, is that Planners have been baffled by the absence of market response to upzoning, other than inflation in site values that represents the “development potential” even though it is not happening! And this is where the problem is: as Grimes and Aitken 2010 put it, “the profit potential from redevelopment is impounded in rising site values”, meaning that investors would rather buy and hold sites than actually build anything; and developers have to out-bid investors to actually get a site, then carry its vastly inflated costs through the term of development, and make a more slender margin, not a larger one as the “rising market” might suggest.

        There might be exceptional cities at exceptional times in history where a specific type of cluster was evolving, that resulted in genuine demand for more and more floor space at city-centre locations. Even then, it is worth noting that Manhattan’s fastest era of building “upwards” was at a time when the urban area was spreading with automobile based development and land costs in the entire urban economy were being suppressed by “option” or “differential” effects. As soon as you impose some kind of boundary or rationing of land for expansion, you also create a black hole in “economic rent in site values” which will slow down planned-for “intensification” regardless of what you do short of compulsory acquisitions.

        At last someone has actually analysed the correlation, at least in US cities, between expansion and intensification:

        https://www.buildzoom.com/blog/can-cities-compensate-for-curbing-sprawl-by-growing-denser

        The author does not know about the land-market distortion effect, but I think he will get it with a bit more research. He assumes that NIMBY opposition prevents intensification from happening in cities where it is “needed” or assumed to be an important part of “supply” in compensation for prohibitions on sprawl.

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      • Phil – my quick thoughts:

        Firstly, I would guess that if planners are upzoning blocks and the market isn’t responding, I would guess that the upzoning is in the wrong place. All too often in my experience Planners use zoning as a deliberate means to steer development into desired locations, but there’s nearly always also a disconnect between where a buyer actually wants to go and where a Planner might prefer.

        My second thought is that I’m not clear that intensification is axiomatically the desirable or economically efficient outcome. I know that it’s the preferred outcome for lots of very important stakeholders, but I also know that most home buyers would far rather a house with a block to a unit – and I’m not sure that attempting to override their preferences for some broadly defined ‘community benefit’ is really sensible. Those preferences are what’s working their way through into those rising prices, and it’s a sign that the planning system is getting pretty disconnected from reality.

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      • Ryan, you are correct about people’s preferences and planners being mistaken about those preferences; but the problem is far more intractable than you suggest. It starts as soon as there is a growth boundary or some proxy for it; and Planning assumes that intensification will compensate for the loss of housing supply traditionally provided by greenfields development.

        The stand-out success story in the developed world currently, for intensification, is Houston. But in general, as Issi Romem points out in the article I linked to, the US cities with the fastest intensification are the ones that are also expanding the fastest, and hence sustain low land prices. When there is demand for smaller housing units somewhere, because of the way the urban economy is evolving, it is extremely price-effective to start putting more units on sites that are relatively fixed in value. Profit potential is in fact in providing floor space, as opposed to profit potential being “impounded in rising land values” as happens with upzoning in a growth-boundaried city. If you look at RE sites and rental accommodation sites for Houston, you will see that CBD apartments are just as relatively affordable as their suburban family homes are. It would be absurd to argue that Auckland’s CBD apartments are ludicrously expensive by comparison “because of greater amenity value” – Houston CBD has more Fortune 500 Head Offices than any other CBD except Manhattan’s.

        The correct comparison is with UK cities with the same sort of utopian planning (dating back decades further) and the same ludicrous over-pricing of housing and sites of all kinds. There are numerous UK cities that, like Auckland, are not a patch on Houston as an economic powerhouse, and yet cannot provide affordable accommodation of any kind anywhere. Even in Liverpool where the trends in industry, employment and population have tracked Detroit’s over the post-1950’s era.

        John Stewart in a 2002 paper, sets out the dismal failure of Plan after Plan in UK cities, to result in actually sufficient housing supply in spite of more and more aggressive upzoning every time. Stewart himself is a lifetime urban planner, with faith in the efficacy of planning, genuinely distressed at the paradox and looking for explanations. The explanation is to be found in the perverse price-signal incentives to investors / incumbent property owners on the one hand, and to developers on the other. It is consistent with the distortions involved, that even as the UK’s housing shortage has worsened and worsened, developers have gone bankrupt or abandoned the industry in droves, employment in the construction sector has fallen, and the industry has become concentrated more and more into a small number of large players who have survived by being the best gamers of the system.

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      • Phil, the evidence is clear. Open your eyes and actually look rather than just read about it in books. Go to Melbourne, Sydney, Brisbane. There is an oversupply of apartments because they are building 50 to 60 level apartment blocks within a large CBD of around 2,000 to 3,000sqm. Our CBD is squeezed at the Auckland harbour around 500sqm. 2 bedroom apartments are available at discounts and costing around $500k compared with ours that start at $700k.

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      • 20 km to 30 km out of CBD in those Australian cities and you are looking at brand new 4 bedroom houses standalone at 400k compared to ours that start at $800k for houses 30km to 40km outside of Auckland Harbour. Why? because our stupid planners went out and created highrise cities in Manukau, Albany, Slyvia Park and New Lynn. Now we have to try and link those cities that are too far away and the infrastructure costs is adding up to $30 to $40 billion which does not make sense when we have only 1.5 million people.

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      • Phil – great response, your comments on NYC make much more sense in context now. That was always my great conundrum when planners tried to explain how valuable they thought they were: the amazing periods of architectural and urban design generally happened without any input from any all seeing planner, like NYC in the late 1800s or Chicago, or London earlier. Nobody goes flying all the way round the world to visit Brasilia, Canberra or Milton Keynes; and they were planned to the inch.

        As for that developer conundrum, it makes me think that after a time in an ever more complex planned construction environment, it’s not the efficient builders who will survive, it’s those who can navigate the planning system more adeptly. Which is pretty sad, but there you go.

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      • Getgreatstuff: Australian cities are NOT a benchmark that truly show up our underperformance; they are merely not quite as bad as Auckland in some respects. They are all in roughly the same range for house price median multiple. Around 9. I am asking YOU to look at cities with a median multiple of 3 and see what they are doing all the housing options for, including CBD apartments. Why use $400,000 exurban McMansions as a benchmark when there are cities with <$200,000 equivalents? Why use $700,000 CBD apartments as a benchmark when there are cities with <$200,000 equivalents? Not stagnant cities either, the affordability is a cause "OF" the fastest growth in the west.

        One of the ironies is that the urban planning that was intending to "encourage high density living close to city centres", actually hikes the prices of that housing option the most, because of the shape of the urban land rent curve. There may be temporary bubble manias driven by foreign investors, in construction of apartments; it is not in fact "supply" responding and creating "affordability" at all, the prices are still a rip-off, still in a bubble; and the over-supply will merely cause a far longer post-crash malaise – Spain's adjustment post-2008 still shows no sign of turnaround. Those Australian apartment frenzies will go the same way. Chinese investors are buying them off-plan and many of them are unoccupied.

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    • Your assumptions about the superiority of rail as a transport mode is based on a fallacy, a failure to consider “whole systems”. The advocates with a fixation on rails, are obsessed with the superior low rolling resistance and energy efficiency of a fully loaded vehicle at cruising speed. Even greater efficiency in the case of hulls on water, did not stop rails from supplanting waterways and canals as the dominant mode in the 1800’s, and then in its turn, rails have been supplanted by another system with even more flexibility, which is the key element.

      The obsession with rails with no regard to whole system efficiency, would merely lead to worse and worse wastage of public money on under-utilised services and capital investments in them. The public dollar cost at the margin, of every bit of travel or freight regained from roads, is considerably higher than simply keeping it going on the roads. The Auckland CRL is a classic case. Michael is correct that many of the “benefits” are highly questionable anyway, based on assumptions that are not supported by real life evidence. More on that below.

      Bear in mind that central planners in the former USSR had total powers; they assumed that everyone should live in apartments and catch trains. Was it inherently more efficient than what the west was doing? Was it an “advantage” that was swamped by “other inefficiencies” in communism? Actually, it was a classic case of planners fatal conceits having the worst possible outcomes. I recommend Alain Bertaud and Bertrand Renaud; “Cities Without Land Markets”.

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  8. Michael
    I’m sure you are aware of positive affirmation bias. The tendency of people to see what they want to see and to miss what they’d rather miss. So much of your article and the comments that have preceded mine falls into that category, right down you your edited quotes from what Ive previously written in response to your blogs.
    A couple week’s ago Wellington Airport paused the consent application so it could read the submissions. That seemed logical in the context of a multi-year multi-million dollar process. Several opponents of the initiative jumped into print celebrating as they interpreted the pause as a change of direction.
    They chose a quite implausible interpretation because it suited their bias or wish-list.
    Your bold claim “no one who has taken a hard look at the numbers regards the claims of large scale economic benefits as stacking up.” is a great example of a totally subjective and selective view. Clearly in your opinion the project opponents take “a hard look” while anyone else merely casts a cursory glance over the facts.
    What you have chosen to neglect is that the Environment Court will actually have to judge the analysis of the various competing economist calculations. In due course an informed independent party will decide who has actually taken a “hard look”.
    To imply that we have paid some economic adviser to concoct a case designed to pull the wool over everyone’s’ eyes is to imply that we are dolts or worse. We have a great deal of confidence that our economic benefits case is robust and will help the Airport receive consents for the construction.
    We knew that incumbent airlines would be spending liberally on critical analysis and that the respective merits of the for and against case would be thoroughly reviewed by the Court.
    Another illustration of the one-eyed approach evidenced in your commentary is to lump our cost-benefit in with those done for a range of government (central and local) initiatives. I’m sure it is possible to cherry pick evidence to “prove” anything. That Transmission Gully has a low B/C ratio indicates precisely nothing about the extension B/C ratio (or the quality of the analysis) undertaken for Wellington Airport.
    You also note the various positions of those vying to be Wellington’s Mayor. Somehow (in your) opinion Ritchie and Young’s strong opposition is good, while Coughlan, Lester and Leggitt’s conditional support is bad.
    My inference about the motives of these 5 aspirants is not surprisingly different to yours. All but Leggett (who wasn’t on Council at the time) supported Council’s $150 million commitment to the Convention Centre and Film Museum. I have no problem about that (in fact I support it) and I presume that each person who voted “yes” did so because they believed it would be good for Wellington and because they believed it would be good for their reelection prospects.
    All political decision are driven by a mixture of “good for Wellington” + “good for me”.
    But for a politician to now make a clear statement “I will vote against the runway extension” based on the limited information now available can only be motivated by their interpretation of what they believe will be “good for me”. Carving out a position to win votes.
    It is impossible to arrive at any other conclusion because neither Ritchie nor Young have sufficient facts to decide if will be good or bad for Wellington (unlike what they will have seen on the Film Museum). And unlike yourself, neither has a philosophical problem with Council funding of commercial initiatives.
    You have a strong philosophical position about government spending and initiatives and scour the literature for supporting “evidence”. eg your quoting Glaeser rather than the recent piece by Summers about infrastructure spending.
    It is a shame you don’t aim for a bit more balance in your analysis and commentary. The runway extension project is an awkward fit with the simple cookie cutter public-funded and private-funded models, but as a Wellingtonian I hope it only happens if it is good for Wellington. I’d like to see the analysis and debate attempt to tease that out. Unfortunately your approach and that of Ritchie and Young is not aligned in that way. You and they start with “I don’t like government” or “I am only interested in votes” and then just works to select supporting evidence.
    Tim Brown

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    • Tim

      Indeed, I am aware of the risk of seeing what one wants to see. Precisely because I expected something worse, I was pleasantly surprised by the caveats and bet hedging now apparent from the big government candidates (Coughlan, Lester, Leggett).

      Just a couple of points in response.

      I’d be very happy to add Larry SUmmers to the mix. In two of his recent pieces on infrastructure spending he touches on many of the sorts of issues Glaeser mentioned in the piece I linked to.
      http://larrysummers.com/2016/09/12/building-the-case-for-greater-infrastructure-investment/
      https://www.washingtonpost.com/news/wonk/wp/2016/05/26/why-americans-dont-trust-government/

      In the most recent of those two pieces he made this point:

      “What is the highest priority? The fastest, highest and safest returns are likely to be found where maintenance has been deferred. Maintenance outlays do not require extensive planning or regulatory approvals, so they can take place quickly. And they tend naturally to take place in areas where infrastructure is most heavily used.”

      Which sounds about right to me.

      And yes I do think the poor track record of project evaluation and insisting on robust cost-benefit analysis, by both central and local government, is very relevant to the way one thinks about the likelihood of the airport extension being a worthwhile project.

      You suggested that I was cherrypicking in that quote of yours I included. I hope not, and certainly wasn’t trying to (and included the link so that people could read the full thing). My only point was to use a very clear expression by you of a point you had made several times that in pure commercial terms the extension would not stack up. Whether there are “wider economic benefits” that might justify large public subsidies is another matter.

      Since the election is the only time in three years when voters have something of the whip hand I’m very pleased that candidates have been willing to express views on the airport extension. They may not yet have the full information, but there is a lot of material out there already, and a lot of precedent of poor local body projects. To have not expressed provisional positions now would be tantamount to a “trust us, we know what we are doing” mentality.

      As for government, yes I do think there is an important role for it. We need functioning roads, drains, parks, courts, police, army. And I do think there is a place for a welfare system. But one should never simply take govts on trust – the dangers are too great and the incentives too skewed- and should be particularly wary when politicians want to use huge amounts of our money to pursue their fields of dreams visions. Sadly, there just aren’t many cases when doing so has resulted in good outcomes for the public. Voters in Dunedin no doubt look very ruefully at the Otago Stadium. I fear that the runway extension will be about as bad (and certainly don’t trust Environment Court judges to make good economic decisions – as we’ve discussed before, the RMA shlouldn’t be about assessing economic merits.

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  9. Michael
    Ive no idea if Dunedin folk are rueful about their stadium, but clearly you are fearful about the runway extension being a white elephant.
    But aren’t the key points:
    A. The economic analysis will be subject to intensive audit and review, and that’s just to get consents
    B. As a public company, Infratil’s investment (via the Airport Company) if it happens will be open to intensive scrutiny of a sort not normally addressed at government projects
    C. In due course each of Wellington City Council and Government (if one or both provides funding) will also intensively scrutinise the projects

    With all of this yet to unfold isn’t it premature to say “lets not even bother to undertake the investigation”?
    Tim

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    • Tim

      I’m not sure that B gives me any comfort, just because depending on how any funding deal is structured the interests of Infratil and its shareholders won’t necessarily be the same as those of central/local govt and ratepayers’taxpayers. That isn’t a criticism, just a realistic observation

      Re C, I would like to think it was so, but the track record doesn’t suggest that one can be confident of a rigorous process, let alone an open one. If, for example, the full business case and all supporting documents were put out for public consultation/submissions – perhaps paralleling a select committee process – I might have more confidence.

      On your final question, I’d have said that was so perhaps 18 months ago. I was genuinely surprised to find quite how weak the economic case seemed to be when the WAIL/Sapere documents were published late last year. (Yes, I know other people read them differently – my point is really just that there is a lot of material out there already, including the reactions of expert reviewers of the WAIL material

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    • Lets not bother because Wellington airport needs to be relocated within the next 30 to 50 years anyway due to climate change. Protectiing against coastel erosion, rising oceans, increasing insurance costs or even non existent insurance policies is going to cause Wellington airport to be abandoned anyway.

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  10. The Ombudsman, the authority appointed to monitor the official information disclosures of government agencies, has investigated the council on the information it released, and concluded that no other written documents exist.

    The release suggests Lavery neither sent nor received a single piece of correspondence on the request, commissioned no analysis on Wellington Airport and Singapore Airlines’ claims about the route, or had any written contact with Singapore Airlines on the payment whatsoever.

    http://www.stuff.co.nz/business/84679670/wellingtons-multimillion-dollar-singapore-airlines-subsidy-creates-almost-no-paper-trail

    Looks like there has been a abuse of process or the complete lack of process. Wellington City Councillors should be sacked or imprisoned!!!

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    • A sadly deplorable story. Highly inappropriate that this sort of decision was delegated to the Chief Executive at all (that is the fault of the councilors) and at least as bad that a major financial decision of this sort was made with no supporting robust analysis at all.

      And as citizens/ratepayers we still have no idea how much of our money is being paid out under this deal – on such non-existent analysis – to serve the “boosterish” interests of a group of leading councilors and the outgoing mayor.

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  11. Surely the failure of Christchurch to establish itself as a long-haul destination (Singapore being an exception) is a red flag for Wellington? Air New Zealand , Korean Air, Air Asia, even British Airways in the 1980s, have all tried and failed to establish any viable long-haul routes into Christchurch. The idea Wellington has a large enough population supported by the lower North Island doesn’t stack up. Christchurch has a potential population of one million plus from around the South Island to draw from, not to mention the scenic beauty available to inbound visitors. Yet little has proved viable. Chinese Airlines have recently commenced long-haul services to Christchurch but their long term viability remains to be seen.

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    • I think the argument is that Wellington has much more of a business/government traveller market, on which the airlines can command higher fares. By contrast, chch passengers are mostly mass market tourism.
      I still doubt the economics stacks up, especially given the high cost of extending the wgtn runway, but that is the sort of argument some of the more serious advocates advance.

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      • Yes the market is different but I still don’t believe Wellington and the surrounding regions have the critical mass to support such an investment. Surely Air NZ has run the numbers in the past and subsequently shown little interest in anything long haul.

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  12. The Dominion Post has reported the 10-year subsidy is worth up to $800,000 a year, but Lavery would not reveal the agreement, citing commercial sensitivity.

    “We don’t want to lose out to competitor cities that would love to have the deal we have with Singapore Airlines,” he told Radio New Zealand.

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11719165

    The problem with this subsidy being so secretive and so exclusive to only one party rather than subject to a tender process crosses the line into what is usually called a criminal act. Lavery should be jailed.

    Definition of a bribe

    “Bribery is the act of giving money, goods or other forms of recompense to a recipient in exchange for an alteration of their behavior (to the benefit/interest of the giver) that the recipient would otherwise not alter.”

    “Many types of payments or favors can constitute bribes: tip, gift, sop, perk, skim, favor, discount, waived fee/ticket, free food, free ad, free trip, free tickets, sweetheart deal, kickback/payback, funding, inflated sale of an object or property, lucrative contract, donation, campaign contribution, fundraiser, sponsorship/backing, higher paying job, stock options, secret commission, or promotion (rise of position/rank).”

    https://en.wikipedia.org/wiki/Bribery

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    • I’m leaving this up, as a statement of your opinion. But I seriously pondered deleting it, as it seems to come very close to crossing a line. I should therefore stress that I do not agree with the conclusion of this comment.

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    • Michael, any CEO with any credible experience would know there is always a danger of crossing the line in terms of what constitutes a bribe versus what is marketing programme expenditure. Any sum of money above a certain threshold is usually handled with utmost care. Usually a number of tender offer participants are involved. You do not give away $800k a year sweetheart deal a any one party ie Singapore Airlines without a process of inviting other like commercial parties to participate. It opens up the CEO towards favoritism and challenges of bribery. If they had followed normal commercial practices and involved a number of participants through a advertised offer process we would not be wondering whether Lavery has crossed the line.

      At the moment it is far too secretive and it opens up Wellington City Council to legal challenges from the other airlines why they were not given the same opportunity to participate.

      The question is not whether my statements crossed the line because it certainly has not, as what Lavery has done comes well within the definition of a bribe.

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  13. See my post today. I’m quite sure he will have had ample political cover, and see no reason to think he wasn’t acting within his legal delegations.

    (Which does not mean, for a moment, that I am happy with the deal itself, or the process)

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