Sunday 5 December 2010

Property rights and development constraints

I'd said of the Pike River disaster, and whether DoC was to blame:
I have no clue whether DoC regulations were the binding constraint here - the mine was under some reasonably large mountains. I'd be pretty reluctant to blame the regs absent pretty strong evidence that the mining company had been pushing for open cast. And even then, I'd still be a more than a bit reluctant to pin it on DoC. Suppose it had been a private land owner who only allowed mine access under similar restrictive conditions, and the mine owner agreed. Would we blame the land owner for putting restrictions on use of his land? I'd hope not.
Peter Wittall has sinceargued that topography made open cast an unlikely choice regardless of DoC constraints; barring evidence to the contrary, I believe him.

But other DoC constraints seem likely to have affected mine design. They used a long access tunnel rather than an above ground road to preserve the above-ground environment in the park; that made it harder for folks to get in and out. And the mining company may have delayed plans for more ventilation shafts due to the presence of blue ducks in the area. From Wednesday's Christchurch Press:
A second ventilation shaft was being considered for the Pike River coalmine, the Department of Conservation (DOC) says.

However, a formal application had not been made, DOC spokesman Rory Newsam said.

‘‘Next year, if everything had gone to plan to expand the mine further forward, they would have created a second ventilation shaft,’’ he said.

Pike River Coal chief executive Peter Whittall said there were no definite plans for another ventilation shaft, although it was considered.

A newly installed fan was enough to provide ventilation for the ‘‘foreseeable future’’.

Another option, he said, was to drive a tunnel into a nearby valley, which would have allowed other access and ventilation points.

Unite Union national secretary Matt McCarten said there was discussion about the ventilation shaft, but the idea was dropped when an endangered blue duck was found in the area.

However, Green MP Kevin Hague, of Greymouth, said yesterday that claims about the ventilation shaft being vetoed because of a blue duck and because of conservation concerns ‘‘clearly had no basis in fact’’.
Fran O'Sullivan reports that much of the construction had to work around some pretty serious DoC constraints that prevented Pike River from taking bore samples along its tunnel route.
But the story also noted that engineers had no drill hole information when costing and planning the road. The company had drilled the 2.5km mine tunnel through an area it had virtually no information about because getting access for bore holes was too hard.

Said Whittall: "Our knowledge and our predictability was hampered by being in the DoC estate."

Then there is the disaster response. Cabinet ministers Gerry Brownlee and Judith Collins attacked an Australian journalist who asked some insensitive - but valid - questions.

But Brownlee and Collins have vested interests. The Economic Development Minister has been a strong advocate for "surgical" mining in national parks where Pike River has been held up as the gold standard example, and, Collins rushed in to defend police management [EC: why even bother saying this? We can take it as read that Police Minister Collins will rush in to defend the police, no matter what.] of the disaster "rescue" without even seeming to query why there was no credible plan, let alone technological resources, in place to deal with a methane explosion.

The upcoming inquiry cannot shirk this key question of whether it was appropriate to have police leading the effort rather than mining personnel.
Let's take this to first principles. Suppose that the land were privately owned, that the private land owner provided a set of conditions to Pike River for access to his land that were identical to those offered by DoC (whatever those were in fact), and that some other mining technique would have been optimal from Pike River's perspective. Suppose further that the private land owner would be willing to accept $10 million as compensation for the harms done to his property under Pike's optimal mining strategy. If Pike River is more than $10 million better off by using the preferred technology, it pays out the land owner. We get the optimal result: if the gains to the mine outweigh the losses to the land owner, the mine compensates the land owner and uses its preferred mining technique. If the harms to the land owner would be greater than the benefits to the mine, the mine has to use a less preferred technique but such use remains optimal. The costs of paying off the land owner are no different than other real mining costs.

Next, suppose that the land owner has very very strong preferences: he demands near infinite monetary compensation for any variance from his preferred conservation plan. Sure, if he weren't the land owner, he wouldn't have been willing to pay Pike an infinite amount to shift to a pro-environment mining technique, but willingness to accept can differ from willingness to pay. It's a real choice for the land owner. When the mining company steps up and offers a cheque for $10 million dollars if the land owner changes his mind, the land owner has to think pretty hard about whether he really has preferences that are that strong. If it's a real preference, fair enough. If the land owner refuses $10 million for access to his land under conditions he doesn't like, that's a revealed real preference. And we have to respect preferences of this sort even if they're inconvenient. Just like we'd have to accept the manufacturer's demanded price for a piece of safety equipment if we wanted to make the purchase.

A bureau like DoC faces somewhat different constraints though. First, the decision makers tend to be selected from high-demanders on environmental quality; further, they make decisions with other people's money. If the mine had offered to buy DoC an alternative bundle of land in exchange for being able to use its preferred mining technique, it's kinda hard to say what would happen. Maybe the DoC official would be a pragmatist who wanted to minimize some overall environmental loss function, and losing a few acres at one spot could be worth gaining more acres, or more important acres, somewhere else. Or maybe the DoC official would have really intense preferences against any damage being done to the particular bit of land which he was assigned to oversee. But unlike the private landowner, he doesn't really face the same real choice that forces a sharpening of thought. He doesn't own the land and doesn't receive the compensation for any of the harms done. Further, his personal conservation-money tradeoff doesn't necessarily bear much resemblance to that of voters, if we can even figure out what would be meant by voter preferences.

In short, if the private landowner sets conditions for land use and the mining company can't sufficiently compensate the landowner to make him change his mind, it's efficient that the mining company follow the landowner's wishes. But it's harder to make that efficiency case where the landowner is a government bureau. It can be done, but I don't generally buy it.

We would no more blame the private landowner for forcing a riskier technology than we would blame the manufacturers of mining equipment for that the safest equipment is more expensive, or at least we oughtn't. But we could blame a bureau for making a poor choice. @LewStoddart notes that we have greater right of recourse to decisions made by bureaus: the mine couldn't do much if somebody with crazily intense preferences owned the land, but it could appeal a DoC decision up through the chain of command. But we have to recall that it's efficient to respect the land-owner's preferences in that case, even if we think he's nuts. It's a revealed preference. DoC doesn't bear the consequences of its decisions in quite the same way. And even in the absence of any kind of agency problems up the chain from bureaucrat to bureau to the Minister to Cabinet to Parliament to Voters, there's still the rather large problem of voters' expressed preferences bearing little necessary relationship to the outcomes they'd actually prefer in a decisive environment.

I'd still be very reluctant to blame DoC prior to having some decent evidence. Folks like to find somebody to blame for disasters. The eventual Royal Commission review of the disaster will make for interesting reading if its terms of reference are broad enough. It would be nice to know whether Pike River delayed plans for a second ventilation shafts because it reckoned the DoC process to unlikely to to work out or because the second ventilation shaft wouldn't have made sense until after the mine were further developed. It would also be nice for the report to lay out explicitly the DoC constraints that were in place and the environmental value of the habitat that would otherwise have been affected. Then folks can judge for themselves whether DoC's tradeoffs were reasonable, hopefully keeping in mind
  1. the most the constraints did was raise the ex ante probability of an accident, not cause one; and,
  2. the trade-offs DoC made may well have been close to what voters would have claimed to have wanted ex ante.

Oh: I would probably have my "Canadian citizen but NZ Permanent Resident" status revoked by one side or the other if I didn't point the Kiwis to Rita MacNeil's songs in tribute to miners. The "Men of the Deep" chorus joins in about half-way through.


  1. Nice analysis Eric. There is a lot to learn yet about whether and how DoC constraints had a role in either the likelihood of the event or its consequences.

  2. It seems to me the cause of the explosion was a pocket of methane gas being breached and simultaneously ignited. Should this have been a vertical shaft mine, the outcome seems just as likely in the absence of controlled drilling and draining of methane pockets.

    As co-owner of the National Park in question, I'm pretty happy that it wasn't vandalised so some some slightly cheaper coal could be sent to India. Steel is important (especially for brewing beer) but so is protecting unique tracts of amazing landscape and biodiversity - this will be even more apparent when everywhere else has been dug up for coal.

  3. I think it would be fairly difficult to pin blame on DoC; Pike River knew what they were dealing with from the start.

    What will be interesting to find out though is what the sequence of events was with regard to DoC negotiations. It is inevitable that any initial agreement between the two parties would be revisited during the design and construction process as the situation develops and more information comes to light.

    For example did Pike River go to DoC and say from the beginning that they wanted/needed to do a detailed drilling investigation? Or did this requirement only emerge and expand some way "down the track"? Likewise the need for more than one ventilation shaft?

    I would expect that a lot of these types of issues would have only been brought to the negotiating table after Pike had already spent a lot of money, and possibly weren't discussed or articulated during the initial negotiations (I base this purely on my own experience as a civil engineer). So the question is how were future contingencies dealt with in the initial agreements if at all. The only way I could see DoC being at fault is if they were found to have backtracked from the initial agreements.

    Apart from the issue of backtracking, it would be incumbent on the mine developer not DoC to ensure these issues were sorted. They are the ones who ultimately make the initial decision about whether to go ahead with the project based on the constraints and risks.

    Of more interest I think will be the internal discussions and decisions within Pike River. How were the risks of constructing a tunnel and mine with limited drilling information articulated by the engineers to management? Even with a 'best-practise' amount of drilling information there is always some risk, with only a little information there is a bit more risk. Did the management really understand these risks which aren't really quantifiable?

  4. @hefe: I don't know what the proper tradeoff is between conservation land and development. But it would be nice to know what the value was that was saved in this case.

    @Anon: Excellent points all. Cursed impossibility of complete contracts!