Tuesday, 2 June 2015

Dead capital: Council ownership edition

I've worried that perhaps Councils haven't fought back against the NIMBYs because they haven't quite enough skin in the game.

The basic model in my head has run as follows:
Councillors need to be re-elected. High preference intensity local NIMBYs get disproportionate weight because they're vocal and very likely to vote. And so things like Auckland's Unitary Plan unravel: local pressure pops up, local Councillors stand by their neighbourhoods, and Council has little incentive to push back.

Any new development that goes in does add to the ratings base, but the link to Council revenues is weak: absent other changes, an increase in the value of land in one place means a greater fraction of a fixed tax bill falls there with minute and diffused cuts elsewhere; the increase in the rateable base can allow the total budget to increase if Councils are discretionary budget maximisers, but the hassle costs involved in dealing with the NIMBYs just might not be worth the small increase in Council budget that could come from it.

Maybe allowing some site to be turned into low-rise apartments would allow Council to raise another $150k/year without increasing any other property owner's taxes, but is that really enough to be worth the years of town hall meetings with angry people all promising to throw out the local Councillor because of it?

If that's the issue, giving Council a bit more of a stake in development could help out. The NZ Initiative a while back proposed, for example, giving Council the GST on new construction activity. On a $20 million construction project, that would be a $3m kick encouraging Council to allow appropriate land use. Council then has a better reason to find solutions that compensate the NIMBYs at the margin while allowing development.
That's still the model that's in my head, but what are we to make of this kind of case?

Auckland Council owns massive vacant-lot car parking spaces in Tekapuna. They could transform the space, with parking built into whatever complex went up, if there were compelling public interest in having those parking spaces there. They'd then appropriate almost the entire surplus from the project: put it up to competitive tendering, take the money from the best proposed development, use the money for other projects that compensate the NIMBYs enough to make the deal go through.

Maybe the existing use - the weekend market - is just really really important to local residents. But what of all the other surface parking lots owned by Council? They could easily be turned to commercial or residential use, with a parking garage built into the facility if needed.

Perhaps the opportunity cost of the land just isn't considered by Council when setting priorities.


  1. Oh, I know. That's the link in the piece above. What's puzzling me more is why Council stays sitting on land that could be immensely more valuable where they would enjoy almost all of the value of the uplift.

  2. You may need to tweak your mental model a little, Eric. The short version is that it is easier to lose one's place as an elected member than it was to get it in the first place. In other words political risk in local body politics is highly asymmetric with no reward for doing a good thing and plenty of punishment for getting something wrong.

    Seen in that light the "puzzle" you describe is perfectly logical.

    For a start ruining the Takapuna Market would be a huge black mark.

    There are three problems with an intensification project run by the Council. The first is that any benefits that accrue from increasing the rating base (basically spreading some fixed overheads more widely) will just be statistical noise in this case. So no-one will perceive any benefit coming to them personally.

    Secondly the council will almost certainly be criticised for putting ratepayer money at risk in a commercial venture in which they have no experience.

    Thirdly and most importantly, in NZ cities that have traditionally grown in a relatively low density format any turn towards intensification will place huge financial demands on a council to retrofit its infrastructure. And there are two further problems here: (1) retrospective makeovers of infrastructure are way more expensive than doing the same things on a greenfields site and (2) just as there is no such thing as being a little bit pregnant there is no such thing as servicing a little bit of intensity. Once they start its all or nothing implying that they will want to force intensification in the whole neighbourhood.

    In this particular case there may be enough capacity in existing networks to cope with a higher density development run by the council. Or it might be the last straw in which case the Council will be seen as causing a rates blowout to fund this "risky" development.

    If I was a councillor hoping to be re-elected I would run a mile from a project like this.

  3. They don't need to put any money into a commercial venue. Just auction off a level-ground parking lot along with permission to build up to n stories.

    The infrastructure argument is more substantive - if the trunk capacity just isn't there to service another apartment block, then it gets a bit harder. But it's a bullet they're eventually going to have to bite.

  4. I should have read the Kent Lundberg piece first. It doesn't appear to me that he has any understanding of what rates are and how they are calculated.

    I do accept that that post is a good argument for Auckland Council shifting from capital value to land value rating. It's all built into the Rating Powers Act so they could do it tomorrow (effective July1 next year of course).