Friday, 18 June 2021

Contracting for buses

The Ministry of Transport is consulting on the Public Transport Operating Model.

Sounds boring as all heck, right?

You can submit on it via a survey, and boy are there some worrying questions in there. 

Let's step back a minute and consider the problem first. 

Wellington in particular screwed up its bus service. I have not seen the RFP or contracts that Regional Council put out for the bus service, but it's easy to diagnose the problem from the symptoms.

Here are the symptoms:

  • Bus services that are frequently cancelled for want of drivers;
  • Complaints about driver pay;
  • Concerns about there not being enough drivers. 
Any doctor can tell you the most likely cause of those symptoms. 

If the contract for service imposes low penalties for missed services or poor standard of service, relative to what the bus company would have to pay in higher staff costs to avoid having missed services or poor standards of service, then the bus company will optimise by running a lean staffing model. 

Bus companies compete to provide the service. Given the terms of the contract, the one able to deliver the desired service, and desired here means "follow the terms of the contract and respond to the incentives it provides in ways that are utterly predictable to the person writing the RFP if the person writing the RFP isn't an idiot", will be the one doing so at lowest cost. 

This isn't a problem of greed, or of the bus company putting profits over people, or of the bus being privately run rather than publicly owned - it's none of that. And it isn't a problem either of choosing the lowest-cost bidder either. 

The problem the contracts had to have set very low penalties for missed services. Just think about it for a minute. If it were cheaper for the bus companies to hire on more staff so there'd always be someone ready to take on a shift if a driver came up sick, that's what they'd be doing, right? Because they care about their bottom line. If it's cheapest to eat the fines and pay less, that's what they'll do. If the fines were higher, they'd eat the higher staffing cost instead. 

Now an important consequence of that higher-fine model would be that the bus company would have to make more on the route - whether through higher fares or higher council subsidy for running the route. How do we know that? We know that because the cost to the bus company would go up. 

So my diagnosis is that council was contracting on the cheap, not wanting to wear the higher costs either in fares or in route subsidies required for levels of service consistent with community expectations, and then foists blame on the contracting model, on the bus company, or on neoliberalism. 

Given that diagnosis, the potential solutions offered up in the MoT work are a bit wanting. 

They're looking at going back to public sector ownership, living wage mandates and the like. 

It misses the point. 

A living wage mandate might be a nth-best solution to the problem in that the bus company would be able to hire as many staff as the company would want at that wage, but it wouldn't solve the problem of the bus company not wanting to roster staff in case of staff not showing up. It would make that problem worse, unless the fines for dropping a service went up. Why? Because the cost of keeping extra staff around in case relievers are needed would be higher. So you might have fewer no-shows, because staff would be more worried about having to shift to some other job that pays less well, but you'd have fewer relievers ready to deal with no-shows, and there will still be an optimisation on how many relievers to keep on in case of sickness days. 

And public sector ownership doesn't solve anything either if the underlying problem is Council not wanting to stump up enough for a reliable service. 

Then there's a bunch of other stuff in the document about making it mandatory to run electric buses, despite transport being in the ETS, and about whether Councils should own and provide the bus depots to facilitate electrification. 

If this thing follows the fashionable direction of travel, we're going to wind up higher cost public transport without the desired improvements in service. 

Wednesday, 16 June 2021

Afternoon roundup

The afternoon's closing of the browser tabs brings a few worthies:

Assorted updates

Blogging has been light. These are the bits I've missed telling you about.

Self-recommending. Meaning, I'm in them, and I'm recommending them. Likely not in the better way that Tyler Cowen uses the term. 

Tuesday, 15 June 2021

Smokefree 2025

The Government's proposed approach for achieving SmokeFree 2025 is a bit over-the-top. 

The proposals would restrict tobacco sales to a smaller number of to-be-licenced R18 outlets, which could then be subject to a sinking lid; impose an annual one-year increase in the purchase age for tobacco until full prohibition were achieved; restrict nicotine content in cigarettes to very low levels; prohibit filters in cigarettes; impose minimum cigarette pricing; and further restrict flavourings.

In short, the only way to get a proper cigarette would be through the black market. The Ministry's betting on folks shifting more heavily to vaping or heated tobacco. I'd expect instead that imposing all this stuff would have smokers flip to black-market excise-free cigarettes, and that smokers would be less likely to switch from those to vaping. I also wonder whether some smokers might try soaking loose tobacco in nicotine e-liquid to get the nicotine levels up, and I don't know what smoking that stuff winds up doing. Heating is different than combustion. 

Our submission on the consultation document went through a couple of weeks ago; have been a bit pressed and hadn't gotten around to blogging it. 

But it has been fun watching more stories of black market tobacco coming though. Sometimes they're sold for organised crime groups; sometimes they're sold as church fundraisers. Loose tobacco is fungible like that. 

All the talk about prohibition reminds me that I have forgotten to tell you something else important. The new season of Cocaine & Rhinestones is up. It's Tyler Mahan Coe's podcast of the history of country music, and it's superb. 

Episode 4 is on prohibition and the leadup to George Jones's White Lightning

He goes through the rather evil history, not forgetting the part where the federal government poisoned industrial alcohol and murdered a pile of people who'd previously been filtering the bad tasting stuff out of industrial alcohol. But also the history of the whisky rebels before that. Great stuff. Recommended.

In other words, the U.S. government empowered a bunch of thugs to enforce organized crime’s monopoly on illegal alcohol distribution in most major markets of the nation. This is how Chicago came under the thumb of Al Capone, who was targeted by Elliot Ness and his Untouchables, yes… But this unit of officers were called “untouchable” because of their surprising ability to resist the near-universal corruption laid bare by Prohibition.

Beats me why the New Zealand government expects better results out of tobacco prohibition.  

Monday, 14 June 2021

Turns out you can pay to get vaccines faster

Alex Tabarrok and coauthors have argued, convincingly, for substantial investment in vaccine manufacturing capacity by richer countries. 

Paying a lot up front to get vaccines faster doesn't have to be about shifting vaccines from one place to another. It can instead be about getting more resource to those companies to scale up production more quickly. And that matters because the lines can then just keep running, pumping out more vaccine more quickly for everybody. 

So, for rather some time, I've argued that New Zealand should have at least tried paying a lot more to boost capacity and to get vaccines here faster. Our border walls are expensive and less secure than they could be; getting everyone vaccinated faster reduces risk and would restore more normal travel arrangements more quickly. Getting that capacity in place matters a lot too. 

And I've often been told that that would be impossible because things don't work that way. 

Here's CTV news on how Canada got their vaccines faster by paying more.

Canada paid a premium to get more than 250,000 doses of the Pfizer-BioNTech vaccine delivered last December, weeks earlier than planned.

The detail is contained in heavily redacted contracts released to the House of Commons health committee late Friday, but any specifics on what price was paid or how the delivery schedule was amended were deleted before the contract was published.

Canada reached a deal with Pfizer in July 2020 to buy at least 20 million doses of the COVID-19 vaccine it was developing with German-based BioNTech. The first contract was signed on Oct. 26.

Pfizer Canada CEO Cole Pinnow told The Canadian Press in February that Canada's negotiations were based on an expectation the first vaccines wouldn't be authorized for use until late January at the earliest, and deliveries were planned to start after that.

But within a month of the contract being signed, Health Canada's chief medical adviser, Dr. Supriya Sharma, was signalling that her department was about two weeks away from giving the vaccine the green light.

That appears to have sent Canada racing back to Pfizer to see if its contract could be amended to get some doses delivered early. On Dec. 4, Canada and Pfizer signed an amendment allowing for that, but at a cost.

"Whereas (the) purchaser has requested, and Pfizer has agreed .... to amend the delivery schedule so that a certain number of contracted doses are delivered prior to Jan. 1, 2021 and in consideration thereof the parties have agreed to increase the price contracted doses which are delivered prior to Jan. 1, 2021," the contract says.

Every detail in the contract related to the price paid for dose was deleted before the documents were made public.

The contract with Pfizer stipulated nothing would be shipped until Health Canada had authorized the vaccine, which happened on Dec. 9. The first shipment of 30,000 doses was on a plane to Canada within days and the first Canadian was vaccinated on Dec. 14.

Ultimately, Pfizer shipped 255,450 doses before Jan. 1. It has since delivered more than 22.5 million shots, and its vaccine has become the main component of Canada's effort to get all 38 million residents immunized against COVID-19.

Canada expects to have the whole country fully vaccinated by the end of September. 

Update: No rush on vaccination though really. No Covid here, no chance the Delta variant will make it through the border defences...

Film subsidies and election campaigns

I'm a bit skeptical about campaign finance restrictions in general. Money probably does less to buy votes than is generally expected, especially when we consider that candidates with a better shot of winning probably draw more money in the first place. And restrictions in one place can often just make things bulge out in another place

But we have a fairly extensive set of rules, as well as prohibitions on a lot of speech activities that might influence people during election campaigns. Third parties need to be registered and their spending is tracked. Billboards and hoardings have to come down on election day, and you aren't supposed to even tweet about your preferred party on election day. Both rules seem increasingly anachronistic where more people vote at advance polls, but the rules are still there.

So things could get really really weird if the proposed film about the Prime Minister's response to the terrorist Christchurch mosque attacks goes ahead. 

The Electoral Commission doesn't consider books about candidates to be election ads or otherwise subject to regulation, so long as the books are sold at commercial rates. And they've suggested applying similar logic to a film about a candidate. 

You could then wind up in a spot where, prohibited from seeing tweets about candidates, all hoardings pulled down, you could nevertheless hear ads for a movie about the Prime Minister while driving past billboards for the movie about the Prime Minister on your way to a movie about the Prime Minister before heading out to the polling booth, where everyone would be banned from wearing political party regalia that might unduly influence you.

Movies, best I'm aware, tend to have rather more substantial marketing budgets than books. Pretty common to see billboards and ads for movies. A lot less common to see them for books. 

And then we start thinking about the film subsidy regime.

If the movie about the Prime Minister were considered an international film production, it would get 20% of its cost back as a rebate from taxpayers - with an option for an extra 5%. If it were considered domestic, it would get 40% up to $6 million, and an option for additional grants beyond that.

Total campaign donations and loans to campaigns, in 2020, were about $7.5 million. A party's election spending limit was just under $1.2 million.

So you could easily wind up in a spot where taxpayer subsidies for a film about the Prime Minister, released during an election campaign, advertised heavily during the campaign, and shown on election day exceeded the total combined campaign expenditure of all political parties. That seems, well, really big relative to the scale of NZ election campaigning. 

I don't know if there's a fix to the campaign spending rules to deal with this kind of mess, were it ever to eventuate. But there's a simple fix to the film subsidy rules. Some projects are already ruled out. There's a line excluding film grants for pornography, for example. 

Add in a line excluding grants for films about current MPs or those standing for office. 

I covered this in this week's Dom Post column.

I'd tweeted suggesting this back on Friday morning when the film was announced. The usual film-subsidy fans and Labour supporters got mad at me, until the emerging consensus was that the film was bad because they hadn't actually gone and talked with the survivors about centering the Prime Minister in a film about the attacks. 

But to be perfectly clear:

  • I'm not saying Labour or the PM had anything to do with the film, or knew about it, or encouraged it, or anything like that.
  • I'd have said the same thing about a hagiography of John Key a decade ago, or about an attack film on Ardern today, or about some "Air New Zealand: The Chris Luxon Story" film today, or about a movie about a Green MP's refugee childhood in New Zealand, or about a Green MP's human rights work serving as lawyer for an accused war criminal. Too easy to imagine too many MPs being able to be cast as heroes or as villains depending on the slant of the team making the film. Taxpayers shouldn't be funding that.
  • I'm not saying that they'd definitely get the grant or that they even applied for it yet, but the standing rules make the project look eligible and that would be part of any sensible marketing campaign for investors in the film at Cannes.
  • I'm not saying that the film will definitely go ahead; lots of films will get pitched at Cannes and not find backing. All the more reason to get the rules changed before folks start signing contracts based on expectations of coming subsidies. 

Wednesday, 9 June 2021

Bindingness and the ETS

The Commission's final report came out today. It has a series of recommendations that cannot do much to affect net emissions when they run up against the binding cap on net emissions in the Emissions Trading Scheme.

So the Commission decides to claim that the cap is really non-binding. 

Concern was raised by several submitters that the NZ ETS has a 'neutralising effect' on emissions reductions achieved by other policies. They cited that in an ETS with a fixed emissions cap (limit on total emissions), every tonne not emitted by one party will be available for someone else to emit.

The NZ ETS, however, does not have a fixed cap. This is partly the legacy of how the NZ ETS was run in the past, which has led to over 130 million units banked in participant accounts. This represents significant oversupply beyond what is likely needed for annual demand and hedging purposes.

The lack of a fixed cap is partly by design - recent reforms have implemented price measures to either withhold or release units, to put a brake on the emissions price from going above or below certain levels. These reforms reflect the political context in which the NZ ETS operates, where policy makers are concerned not just about efficiency but also about where costs fall. 

This is not unusual. Every functioning ETS in the world today contains market stability mechanisms that alter the number of units available depending on the market price or other factors. This means that ETSs are hybrid instruments, with safety valves to manage price or adjust the cap in response to economic changes - given the inherent uncertainty in setting a cap based on forecast emissions.

The recent NZ ETS reforms also implemented a flexible, five-year rolling cap. Emissions reductions that are expected to be achieved through other policies can be factored in when the cap is set. 

The cap can be adjusted over time to reflect actual emissions reductions achieved through other measures, or reductions to emissions not covered by the NZ ETS. This is important in Aotearoa, as significant emissions are not covered by the NZ ETS, such as agricultural emissions and emissions and removals by some forests.

The combination of oversupply, price measures and a flexible cap in the NZ ETS mean that it will not necessarily guarantee a specific emissions outcome. It also means that the NZ ETS can be managed in conjunction with other policies so that emissions reductions or removals from other policies are not a wasted effort (see Chapter 19: The direction of policy for Aotearoa of the 2021 Supporting Evidence for more information). 

The Commission is wrong about the implications of legacy units, and wrong about how the ability to re-jig future limits makes it desirable to pursue complementary policies.

Let's take them in order.

The Commission is right that people stockpiled carbon units when the price was cheap against a time when prices were expected to be higher. And the Commission is right that more units would be released if ETS prices hit the cap. 

But the setting of the cap is sensitive to those. Here's how the Ministry for the Environment explains it. The website is dated April 2021, so I doubt it's changed since. 

Calculating NZUs available at NZ ETS auctions

The overall limits are reached by following a series of steps to determine the total number of NZUs that will be available for sale at NZ ETS auctions.

We start with the total volume of the emissions budget, then:

  1. Forecast emissions from outside of the scheme are removed to calculate the NZ ETS overall limt.
  2. Any required technical or forestry-related adjustments are made.
  3. An agreed volume of units is removed to drive stockpile reduction.
  4. The number of units projected to be freely allocated, or provided through negotiated greenhouse gas agreements are removed.
  5. A limit is set on international units
  6. The remaining volume is available to auction.

Point 3 says how they deal with the accumulated stockpile. They reduce the number of units created for sale into the system by the government so that more units are sold from those stockpiles. The expected sales from the stockpile are in the cap. If, in any given year, the number of sales from stockpile are higher than expected, they must consequently and necessarily be lower than otherwise expected in some other year. And future iterations of the cap would then come with revised expectations about flow from that stockpile. It does not plausibly affect Net Zero 2050 unless those with the units expect to do best by holding those units until 2050 and selling lots of them at that point. 

And if government is worried about that threat, they could presumably legislate a use-by time fuse on the stockpiled units such that they would no longer be accepted for meeting surrender obligations after 2040. 

The right comparison for the stockpiled unit volume isn't annual emissions, but total net emissions over the path to 2050. That path has to include release of fewer units by the Crown, offsetting the emissions that come from the stockpile. That's it. The cap continues to bind. Figure 1 from MfE makes it really abundantly clear. Look at the picture. It's split into two halves. One half is the uncovered sector, that still needs to face emission prices - agriculture. The other half is covered by the cap. On which side of the line is the grey pie slice titled, helpfully, "stockpile reduction volume"?

Again, this is MfE's explainer on how the cap is set, dated April 2021. Free industrial allocations? They're in the cap. Stockpile reductions? They're in the cap too. Neither of them makes the cap non-binding. Because they're part of the cap. 

Next, the price cap. Yes, the ETS has a price cap. But that does not affect the bindingness of the ETS's cap on net emissions. Rather, it introduces fiscal risk for the Crown. 

Why? 

The cost containment reserve
The cost containment reserve is a reserve of NZUs which are available for sale only if a trigger price is reached in the auction. Making these extra NZUs available at auction eases demand for emissions units.

The effectiveness of the cost containment reserve in dampening the overall NZU auction price is dependent on the volume of units available and the demand for them.

Cost containment reserve units need to be backed by the Government
If any NZUs are sold from the cost containment reserve, causing the emissions budget to be exceeded, then the NZUs need to be backed by the Government. This means the Government would need to procure equivalent emissions reductions, for example by purchasing international units or funding activities that reduce emissions domestically.

So if we hit the price cap and the government releases one more NZU, the government must simultaneously find a way of avoiding a tonne of emissions. Allowing one more unit while reducing one more unit means net zero relative to the existing cap. 

It does not affect the bindingness of the cap. It cannot, unless you think that the government will renege on its obligation to back units. 

If buying credits in Europe is the most tractable way of backing an NZU, and European prices are higher than the NZ ETS price, then the Crown has potentially substantial liability. That liability increases the political risk that a future government might renege. 

But there's a simple solution. 

Update the cap so that instead of tracking $50 plus 2% per year, it just anchors in the European price. Whatever the European price happens to be at time of auction is the price cap at that auction. If the price cap gets hit, the government could just use the money it gets by selling those extra units to buy European ones and shred them to back the NZU released. Simple. Effective. Obvious. 

Finally, what about the Commission's view that the effects of complementary measures can be considered when setting the subsequent years' caps? 

It's true, but misses the point. 

The government can reduce the cap more quickly, with or without implementing complementary measures. 

If the government is *very* lucky, its regulatory solution is one that wouldn't have been found by ETS participants - perhaps there was an underlying real market failure that was getting in the way. In that case, the regulatory measure could be easily justified on a standard CBA laying out the intervention logic and the costs and benefits. 

If the government is *only* lucky, its regulatory measures will replicate the least-cost solutions that would have been found by simply reducing the cap without taking those regulatory measures.

But if the government is *not* lucky, it will find interventions that cost more than the going ETS price. It could have done better by reducing the cap more quickly - without also implementing measures like EV subsidies or petrol vehicle bans. 

So the problem isn't then that the the government can't offset things by lowering the cap more quickly, it's that the measures taken have a high hurdle to pass if we want to know that we're doing the most good possible. Because if it costs the country a billion dollars to reduce emissions through some regulatory measure costing twice the current ETS price, the government could instead have cut the cap by (roughly) twice as much for no greater cost to the country as a whole. Don't we want to be able to cut the cap faster rather than slower?

The way that caps are set isn't secret. The Climate Commission has to have known that stockpiled units don't make the cap nonbinding except in the most meaningless of ways - in any particular year, you'll get overs and unders around the path to net zero. It simply doesn't matter. And it also doesn't make complementary policies more desirable.