Disincentives

My but CERA and CCDU are building a big bucket of bad incentives here. From the front page of yesterday's Christchurch Mail, unfortunately unlinkable.

HIGH STREET business owners Nicky and Joe Arts have watched their livelihood slowly die in front of them.

Almost three years on from the first earthquake, their heritage shopfront and factory remain suspended in time, as if the February 2011 earthquake were only yesterday.

A year ago, they were told their business was scheduled to become part of the Southern Frame in the central city blueprint. Since that first notification, they have not been told anything further.

They own one of many titles dividing up the 1905 heritage Duncan’s Building into shopfronts. Arts the Printers and Card Makers has been a family business since the 1960s.

After three years’ fighting to save the building, the street and their business, they say they feel like broken records.

‘‘It’s basically a nightmare for us,’’ Joe said. ‘‘ But it wasn’t the earthquakes that were nightmares, it was what came after.’’

Their frustration with the Government-run clean-up and rebuild is at tipping point.

Having been locked out of their business for two years by Cera, they have lost a lot of their customers.

While much of High St is now open and accessible, the block between Tuam and St Asaph St remains closed off. Parts of their neighbour’s shopfronts remain on the street.

‘‘We’ve become very angry these last few years,’’ Nicky said. ‘‘ What’s frustrating is the complete lack of progress.’’

Attempts to get any information out of Cera have simply fallen on deaf ears.

The owners of the adjoining shopfronts in the same building have contributed nothing to try to prop the building up.

One of them is uninsured, and the other has little hope of recovering insurance payouts.

The Arts repaired the two adjoining walls to save their shop.

‘‘We went into massive debt to stabilise those brick walls, without either of them paying a sodding cent,’’ Nicky said.

Between the September and February earthquakes, the Arts had more than $150,000 of reinforcing steel installed, meaning they now meet 73 per cent of the building code.

However, because they adjoin unstable shopfronts, they have very little hope of opening theirs.

‘‘In hindsight, we’d have been better off not to do it. We could have just walked away, but it did save lives,’’ Joe said.

Nicky is simply anxious to get some answers. She does not believe a Government offer would allow them to walk away without significant financial burden.

‘‘Cera and CCDU just do not know what they’re doing,’’ she said. ‘‘We just want to know, are they going to purchase us for the frame or not? If yes, get on with it . . . If not, hurry up and open the street. For God’s sake, they need to make a decision.’’

Does CERA really want everyone in Wellington to get the idea that it's better to make zero investments in their heritage buildings? Because that is what they're doing.

If you own a yellow-stickered Wellington building that's next door to another yellow-stickered building, you can invest in making the property safe and save lives. But if the neighbour doesn't, then you won't be allowed back in the building for three years after a quake and you will probably be bankrupted because of your investment in making the building safe. Is this REALLY the lesson that CERA wants Wellington to take? Really?

It's been darn near three years. "Oh it's complicated and these things take time" starts wearing awfully thin.

Regional heterogeneity

You can hide a lot in an aggregate.

David Farrar rightly notes that the recent CERA / Nielsen survey weighted survey responses by district populations across Christchurch City, Greater Christchurch, Selwyn and Waimakiriri. So some reports suggesting the report masked things by weighting each of Christchurch, Selwyn and Waimak equally were wrong.

But there's a potentially much bigger masking of heterogeneity.

After the earthquakes, Christchurch turned quickly into three cities, as Peter Hyde put it:

When we got power back on a week after the February earthquake, I sent out an electronic plea for more direct support and attention for the worst-affected suburbs of Christchurch.

This was in response to the "three cities" I saw developing - Rescue City in the photogenicly-ruined CBD, Shower City in the areas which had their services largely intact, and Refugee City where tens of thousands huddled amongst broken houses, rockfall and liquefaction.

When we bugged out from South Brighton for a house in Wigram on the Friday morning after the quake, it was like moving to another world. There was power. There were supermarkets. People were watering their lawns despite the sewerage system being in disarray. It was as though nothing had ever happened, barring a few chimneys. A lot of the East remains a rather thorough mess two years later.

I remember answering the CERA survey. I don't think I counted as a satisfied customer.

If you look at Appendix 2, every respondent was mailed the survey along with a username and unique survey code. So each response was tied to an address, unless they chose to blind the back-end so they wouldn't be able to tie respondents to addresses. They also had a question in there asking what address you were at prior to 4 September if you'd moved since the quake. That question says

"Please note: this information will only be used to see if there are differences between different areas. Your individual information will not be looked at separately."

Maybe they only ever wanted to aggregate up to Christchurch City, Greater Christchurch, Selwyn District, Waimakariri District level. But the data should be there for doing a within-Christchurch disaggregation. I'd be very surprised if there were not exceptionally strong heterogeneity between Shower City and Refugee City. Maybe nobody ever ran the borough-level analysis. Or maybe not - I really don't know.

If Lianne Dalziel is on her game, she'll already have an OIA request in for the data aggregated by borough. And if it shows that residents in the East - those most affected by the quakes - have reported utter dissatisfaction with quality of life, quality of government response, and pretty much everything else, I'd be pretty surprised if she weren't very vocal about it.

Happy two year anniversary, #eqnz.

Indicators

The Canterbury Earthquake Recovery Agency has been putting out a nice compilation of Canterbury-related stats for a few months.

In the October 2012 quarterly report, we find that growth in weekly rental prices in Christchurch has outpaced that in the rest of the country; rents here began from rather below the national average and are now above it. I wonder what would happen were some of those rental prices to be quality adjusted; I'd also love to see data on how easy it is for would-be renters to find accommodation.

We also see that there are far more skilled vacancies here than elsewhere; more recent figures I believe have Canterbury's unemployment rate below that in the rest of the country. I wonder to what extent lack of rental availability prevents inbound migration by those who could work on the rebuild.

I've been appointed to the external review panel for CERA's economic indicators. Academics wishing that other data were available, or presented differently, please drop me a note; I can compile useful suggestions for the next meeting.

Risk calculations

Engineering checks on the block of shoppes nearest our house has resulted in their being yellow-stickered. So long to the Bridge Street Bakehouse, the local fish and chip shop, and the local dairy.

Most surprising, at least to me, was that the shoppe owners only found out about it yesterday and were given until 5 PM to clear out. I'd stopped there on Tuesday for milk; guess it was to have been my last visit.

A Canterbury Earthquake Recovery Authority spokeswoman said the building's structure was compromised.

''Visually, the building appeared to be OK. However, upon further detailed investigation by the owner's engineers, the structural integrity of the building was found to be badly compromised,'' she said.

"With a building in such a condition, there is no choice but to put public safety first. The owner must now decide the building's future.''

South Brighton Dairy owner Sam Yang said he had no other options.

''We don't know the future. If we shut down, we lose everything.''

He would try to return the store's stock while asking friends to help him store what he could not return.

He had been unable to get insurance cover for his business since last year, when his insurance company refused to renew his policy.

''It's hard to find another place to start a new business,'' he said.

''They should have given us more time to get rid of the stock. This is not like a house. This is a business.''

Under what conditions does it make sense for CERA to force an immediate closure rather than letting the dairy have a week to clear out the stock? If the risk of an additional earthquake sufficiently large to bring down the dairy exceeds the ratio of the cost imposed upon the dairy by the hasty shutdown divided by the value of statistical lives that would be lost in case of catastrophic failure.

Let's ballpark things. VSL in New Zealand is $3.67 million. Most times I visit the dairy, it's me and Sam there; sometimes, another customer walks in while I'm there. It's busier in high summer when the ice cream traffic picks up. Let's call it $10m in expected VSL costs. The probability of a collapse-causing quake, times that $10m, has to exceed the cost that CERA imposes on Sam by not giving him a week to clear out some stock. Let's denote that cost as c. If c is $10,000, then p > 0.1% for the next week, or 5.2% for the year. If c is $5,000, halve p.

At last GNS update, the odds of a 7+ quake were below 1%, 3% chance of a 6.5-6.9, and 9% chance of 6.0 to 6.4. That's then a 13% chance of a 6+ quake in the next year. I don't know the risk decay rate over the year, but let's say there's a 0.25% chance over the next week. The expected VSL cost is then $25,000. If Sam could have avoided at least $25k in cost by having the extra week, then it was inefficient that he be shut down. If the engineering reports said it was certain the building would come down in another 6+ quake and that it were certain that the collapse would kill everyone inside. If the engineering reports said there were only a 50/50 shot of the building's coming down in a 6+, then Sam would have needed to be able to avoid $12.5k in cost to rule out the short-notice closure.

I would love to know how CERA's running its risk assessments. Because there are hundreds of earthquake-prone buildings in Wellington that could fall down when Wellington gets its earthquake, and our baseline risk in Christchurch is no more than that in Wellington and falling every day [Note that the SciBlogs link is more than a year old; earthquake hazard in Christchurch has dropped more over the period]. Why do earthquake-prone buildings in Wellington get 10-20 years to undertake repairs while our local dairy gets a couple hours? Wellington's yellow stickers advise building visitors of the building's risk and to make their own judgment. Shame Sam couldn't have had that kind of yellow sticker.

More thoughts on the Christchurch plan

Eric has covered this off well, but here are a few additional thoughts:

1. There is a multiple equilibrium story under which it makes sense to spend money on civic projects that would otherwise not pass a cost-benefit test. The idea here is that there are two potential futures for Christchurch, one in which there is confidence in its future as a strong vibrant city, and the other in which it is much reduced in size and importance. Moving to the second equilibrium rather than the first would potentially imply as large a reduction in the value of the Christchurch's fixed capital as has already occurred from the earthquake, and so there might be some value in putting in a large injection of public capital as a way of signalling the liklihood of the better equilibrium. That story works for a national injection of public funds. I'm not sure it works as a policy if associated with the new bright shining white elephants is a legacy of high rates to pay for them.

2. The stadium: The economics of this are not quite as bad as a comparison with Dunedin would suggest. First, if it is accepted that there will be a stadium, the decision on whether to put on a roof has to compare the cost of the roof versus the additional ticket revenue that a roof would bring. A roof probably fails that test, and as Sam Richardson points out, you have to also look at the spillover cost on the competing CBS arena, but the economics are not as bad as comparing the full cost of a roofed stadium to none at all. In Dunedin, the full cost was marginal. In Christchurch, we are starting from a point of Lancaster Park having been replaced by insurance money. Again, this is predicated on the idea that there will be a stadium of some sort. My problem with the stadium idea is more with their choosing to start afresh rather than look to extend the current temporary facility which is still close to the city centre in a way that preserves, but doesn't commit to, the option of a roof.

3. The convention centre: Eric has written on this, but I can't resist adding my voice. This is why the stadium doesn't upset me so much. The stupidity pales into insignificance compared to the silliness of building a purpose built facility from scracth that is able to host up to three conferences simultaneously. (Aside: from my limited experience with organising conferences, if you have choice over location and date, you choose somewhere where you will be the only conference operating at the time.) The conference centre should be small close to hotels and the performing arts centre so that larger affairs could spill out to those areas.

4. The choice of sites: Great cities evolve as a series of second-best decisions on where to locate things based on where suitable sites are available. There is a limited role for governemnt intervention through eminent domain, but mostly cities evolve through private investment, with investors required to take into account the existing value on the sites they develop via the price required to purchase those sites. The impression one gets from reading the city plan is that locations have been chosen as if were were starting from a blank slate, rather than asking how best to use the existing value.

5. The library: Why change the site from the current location, which was close to the centre anyway. And shouldn't we be waiting a few years before investing in a library to see how the move to electronic delivery of reading material affects the nature of a public library?

6. Future planning: No-one is going to agree on every aspect of any plan, and the main thing is to get some certainty around the environment and allow investment to proceed. So this statement from the plan (as reported on Stuff) particularly frightened me:

To ensure the city has high aesthetic appeal, a new design panel made up of representatives from the Christchurch City Council, the Canterbury Earthquake Recovery Authority and Ngai Tahu will consider every building consent application.

Yes, there needs to be a consent process, but it should be based on as objective as possible interpretation of well-defined requirements specified in advance, not an open-ended subjective judgement. This is not the way to encourage investors to sink costs into designs.

7. Asset Sales: What is it about asset sales that brings out nonsense from all parties? As Eric has repeatedly pointed out, it makes sense to constantly ask whether assets would be better held privately or publicly, and a time of massive change suggests that the optimal mix might change. It is silly for the city council to take an emotional view of its holdings of the Lyttleton Port Company or the Christchurch Airport, but it is even sillier of Gerry Brownlie to suggest that asset sales will enable the financing of the planned white elephants.

Poison pill

Imagine that you're in NZ Central Government. And imagine that you believe that local government in Christchurch is kinda hopeless. You know local government has had an odd fascination with expensive legacy projects. The mayor wants a light rail system with his name on it. And Council, rather than being satisfied with a perfectly functional temporary stadium, wants to hike rates or go into debt to throw money at a bigger one.

You know the literature showing that light rail in a city like Christchurch isn't particularly viable. You know the literature showing that stadiums provide no real economic benefit and that Dunedin's has almost bankrupted the town. Moreover, you know that most people in Christchurch strongly resent that big spending on stadiums be put ahead of other priorities (at least if whatever polling National's doing roughly matches what shows up in the Press's polling).

So, what do you do? Put the stadium into the big central plan. Not just any stadium: the most expensive option of those under discussion - a huge covered venue able to seat just under 10% of the total city population. Say Council has to come up with the funding. Then lean on Christchurch that it cover its share of the overall rebuild costs (stadium and convention centre, among other things) by selling other assets rather than by just issuing debt or raising taxes. You know there isn't much that Christchurch Council hates more than the suggestion that it sell Council-held assets. Finally, put the stadium in a spot where you're guaranteed to get substantial local opposition because it'll mean tearing down a heritage building that a local couple have just re-opened after investing substantial amounts of time, effort and money: a couple that are clearly willing to fight hard to keep it because they love it. And not just any heritage building: an art gallery venue that only just finished hosting a pretty popular exhibit. Arts aficionados will overlap substantially with heritage buffs. We all found out in the last month that the city's main art gallery will be out of commission 'till the end of 2013 because they're entirely redoing the foundations to add in earthquake shock absorbers; the proposal would have one of the few galleries left torn down before the main one is back online. The kinds of art folks whose approbation the Mayor, and the Mayor's wife, might seek may not be entirely pleased with him for tearing down a heritage building art gallery in favour of a covered stadium.

Am I crazy for putting maybe a chance in 5 that this isn't National trying to force a stadium on Christchurch but is rather the dad coming across the 8 year old with a cigarette and forcing him to finish the pack to see how well he likes it?

So you think the stadium at Addington that you can't fill isn't good enough, eh? You want a bigger more expensive one? Sure. Have a really big and really expensive one. But you're going to pay for it. Not the easy way with debt that could add to the country's systemic risk. But by selling the things you seem to hold most dear and by earning the shame of those whose approbation you value. Go ahead. Have it. Go on. 

It's likely entirely too subtle a potential play.

As for compulsory acquisition of the Ng Gallery: you can make a decent argument in favour of compulsory acquisition in the face of strategic hold-out problems where individual owners might try to extract the value of the project by refusing to sell except at a high premium. It's not a great argument because buying options can do the same job without coercion, but it's defensible.

Maybe I'm easily duped, or maybe the owners are some of country's better actors, but I can't watch the Campbell Live interview and believe that they're doing any of this to try to force the government into paying them some exorbitant premium for the place. They seem rather to put very real and very high value on it. It's hard to imagine anybody putting that kind of work into an old building in Christchurch just for expected financial returns; it's a labour of love. Compulsory acquisition to get around owners who place real high personal value on a property isn't a fix to a strategic hold-out problem - it's more like theft. And a city that's rebuilt on theft hasn't very sound foundations.

Update: And see Sam Richardson on the stadium and convention centre.

Update 1.5: The Stadium also would knock out one of the new Casels & Sons bars.

Update2: NotPC's linking to a clip from The Castle is apposite. I'm going to steal his work in finding the clip and embed here, but do click back to Peter there.

The Plan

The Christchurch Grand Plan is now out. I'm going to have to sit and think about this a while longer. But some initial thoughts:

• I had a call from one of the radio stations asking if I'd come onto an afternoon show; they wanted to know how the plan was to be funded. Told them that I hoped they could figure it out because I haven't much clue. Some bits are explained in the planning documents. But it looks like Christchurch Council would have to find the funding for a big covered stadium that Prime Minister John Key thinks is a great idea (Dunedin?!). I support Council asset sales in general. But selling something useful to fund the building of a stadium that, in all likelihood, will not cover its costs and will fail to bring any substantial real economic benefit, is a remarkably bad idea. Should an individual sell off part of his retirement portfolio to buy something really immediately necessary - maybe to cover a medical bill that would otherwise attract large late fees? Of course. Should he sell it off to fund a vacation to the Caribbean? Not likely.
• There's a big path from here to there. If we were there, it would be a nice place. But I'm not sure whether there is possible from here. There's more than a whiff of "if you build it they will come", though some projects, like the EPIC tech hub, seem very solid. 
• I had understood that the massive secrecy around the plan and the siting of anchor projects was mostly to facilitate negotiations with property owners. In short, it's a remarkably bad idea to tell any individual land owner whose land you're trying to build into a larger package just why you're doing it. Otherwise, each owner might try to extract the entire surplus that the project might bring: the classic hold-out problem. There's a way around this using the purchase of options as a form of dominant assurance contract, but that can be more expensive than compelled sale: the Government's had the Public Works Act in its back pocket to encourage negotiation. I could understand the secrecy. Turns out now that the plan has all the sites listed with what they want on them, but they've not concluded negotiations with the many owners of the underlying land. So I'm a bit perplexed about the reasons for the initial secrecy. 
• Pinning hopes on a convention centre seems a bit risky. The things tend to be dead zones when not in use. And, it's not clear that whatever benefits you get from having a convention centre couldn't be gotten by having hotels site themselves in the same spot with skywalks between them allowing larger conventions to span multiple hotels' facilities. Sure, the hotels would prefer having a free convention centre. But, like one wag on Twitter, I'd like a free helicopter service to Pomeroy's Pub as part of the Transport Plan; doesn't mean it's a good idea.
• Nobody's yet saying what's going on with Town Hall - the venue previously used by the Symphony, among others. Presumably that's because nobody yet knows. 
• Most buildings are subject to a seven-story height limit. I expect this is being done not for earthquake risk (as tall buildings can afford to have very very good foundations and, as I understand things, are often less risky than mid-height buildings) but rather to avoid there being an oversupply of downtown office space. The same goal motivates the green belt around the south and east of downtown: fill up downtown space with parks until things are busy enough to justify expansion and, by so doing, force things to concentrate in a smaller space. There's at least one problem with this. A whole pile of the businesses that formerly operated along Manchester Street, among others, were cool but low-rent kinds of operations: second hand bookshops and the like that ran out of very old brick buildings. They never could generate the cashflow to replace the capital stock, but they were awfully fun. Getting a more compact downtown by pulling land out of use keeps that sort of business from coming back downtown in cheaper buildings - the tilt-slab stuff everyone here seems to love to hate. The plan suggests a covered market somewhere downtown to give space to that kind of low-rent business; Victoria Market in Melbourne is nice, but it provides a very different kind of amenity. 
• If I were a property owner who had wanted to rebuild a business in what's now supposed to be a park, and if I were getting the big push to sell out to turn the land into a park, and the compensation weren't enough to buy another site in the new-and-compact downtown, I'm rather sure I would not take it very well. And if I'd just spent a ton of money fixing up a heritage building because I loved heritage buildings only to be told it would be stolen from me acquired at a price less than that which I'd be willing to accept were it not for the threat of compulsory acquisition under the Public Works Act and bulldozed to make way for a stadium...  
• The designated precincts sound very nice, but I share Project Free Range's concerns about the dearth of mixed use. 
• The planned stadium will block what was one of the main east-west corridors at the south side of downtown: Lichfield Street. There's always been talk of getting rid of those one-way streets in hopes of encouraging people to slow down and stick around downtown. But if there isn't a widening of Moorhouse Ave, folks on the east side of town just won't have good ways of getting to employment on the west side of town (or vice versa). The east then becomes less viable. Let's hope Council's quest to push people out of cars doesn't further isolate the east side of town.