Wednesday, 21 September 2022

Gross or net?

The Climate Commission keeps trying to push us from having a Net Zero target to having a Gross Zero target. 

Carbon News reports:

Climate Change Commission chair Rod Carr says, if left alone, the planting of pine trees purely for carbon credits will prevent the ETS from playing the part it should in reducing carbon emissions.

Speaking at the Climate Change and Business Conference in Auckland, yesterday, Carr said the government needed to address the problem urgently but in consultation with those most affected by any changes: foresters and landowners.


Climate change minister James Shaw acknowledged the commission’s concern that a glut of forestry offsets in the 2030s “could lead to a crash in the ETS price and a return to the bad old days of companies just using cheap offsets rather than actually reducing their emissions.”

The ETS's job is to limit net emissions on a path to Net Zero in 2050. Forest sequestration can be an important part of that. If it is cheaper to sequester a tonne of carbon than to prevent a tonne of emissions, then do the former. 

There can be all kinds of potential problems. If there are biodiversity benefits from native planting over pine, and those are substantial enough to warrant policy involvement, then set a subsidy for the production and maintenance of those habitats. 

Here's Shaw, from the same piece:

“Aotearoa is the only country in the world with an ETS that allows companies to offset 100% of their pollution with forestry.”

He said including forestry in the ETS had meant the cap was a very soft one. 

“That’s because anytime anyone plants enough trees to sequester a tonne of carbon, we automatically generate an NZU, which is a permit to pollute a tonne of carbon into the atmosphere.

“Which means, technically, that unlimited forestry allows unlimited pollution,” Shaw said. 

We don't have a soft cap, or at least not in this way. We have a cap on net emissions. The point of having a net emissions cap is to be flexible. Climate doesn't care about gross, it cares about net. But politicians and, seemingly, the Commission, want to force gross reductions even if that's less cost-effective. 

Caps on net emissions are great because they're agnostic about how net emissions come down, so long as they come down. If carbon capture tech aiming at USD$100/ton pans out, that sets a natural limit on ETS prices. If it doesn't, the ETS encourages finding other options instead. But if we wind up flipping to a gross target, it can't help us. 

One might start to get the impression that none of them actually care about net zero, but instead mainly care about the behavioural changes required for gross emissions targeting, for reasons other than climate change. 

Changes that would make a tonne of sense, if all of this were actually about reducing net emissions through 2050:

  • Setting a cap on the number of unbacked ETS credits that can be issued by the Crown between now and 2050, requiring that annual auction and allocation draw from that pool;
  • Considering the number of outstanding units when setting that cap to 2050;
  • Rejigging the ETS price cap to track a weighted bundle of carbon prices in credible ETS markets rather than just being some nominal amount - this would have us more easily following without exceeding prices elsewhere;
  • Using international credits to back units issued at the price cap, unless the government has immediate access to cheaper ways of backing those units - and note that government would earn money at the price cap under this mechanism rather than facing fiscal risk;
  • Taking ETS revenues and redistributing them to households as a carbon dividend rather than a slush fund for political favourites.

Tuesday, 20 September 2022

GIDI and the Emissions Reduction Plan

The Environment Select Committee invited me to provide a supplemental submission on the Emissions Reduction Plan. My initial submission had taken EECA at its word that they had received no advice about the additionality of projects funded under GIDI. More the fool me.

Recall that GIDI is the funding line to subsidise investment in lower carbon tech. Some $600m in new funding for it was announced at the last budget. And this kind of approach is all over in the Emissions Reduction Plan. 

One particularly fun bit: the consultant noted that applicants for GIDI were all over the map in their assumptions about future carbon prices and future fuel prices. That'll matter in assessing whether funding for a project was additional or whether it was something that the company would have done on its own without funding. See 3.6, below.

From my submission:

3.1 Evaluation of the documents released by EECA suggest that GIDI projects do not reduce national net emissions. EECA’s conception of additionality relates to whether a project would have been undertaken as quickly in the absence of funding, not whether net emission reductions then obtain. 

3.2 Recall that cost-effective additionality of GIDI subsidies requires that emissions are mitigated relative to the counterfactual, that those emissions are mitigated at lower cost per tonne than going ETS prices, and that government is able to reduce the number of carbon credits issued because of the measure. If the cost of abatement is lower than the going ETS price, then companies already have strong incentive to pursue mitigation without subsidy; if the cost of abatement is higher than the going ETS price, government could do better by buying back and retiring outstanding ETS credits. 

3.3 Comparison to ETS prices introduces something of a knife-edge. If a company’s investment, proposed for subsidy, mitigates emissions at lower cost than current and expected ETS prices, why is the company not already doing it? If it mitigates emissions at higher cost than the current and expected ETS price, why is the government subsidising something that is not cost-effective? The subsidy has to help the company or industry overcome some other market failure to be cost-effective. And it has to consequently allow the government to reduce the number of issued ETS credits. 


3.4 Concept Consulting’s presentation was developed to help improve the application process for future rounds of GIDI funding. The additionality of funded projects is first assessed at point of funding application; if a project is not considered likely to result in investments that otherwise would not have taken place as quickly, the project will be less likely to be funded. Concept evaluated five applications for GIDI funding. 

3.5 The presentation noted deficiencies in GIDI 1.0 that could and should be improved in future rounds, including insistence that every application use standard assumptions about future changes in fuel costs, in inflation, and in ETS prices. Applications used 2030 ETS prices that varied from $40/tonne to $140/tonne, and 2040 prices that varied from $40/tonne to $180/tonne. Gas prices in 2040 ranged from just over $10/GJ to over $20/GJ. 

3.6 It is somewhat surprising that GIDI 1.0 allowed applicants to set their own assumptions on ETS prices, fuel prices, and inflation. Treasury’s guidelines for cost-benefit assessment and its CBAx tool, for example, are set to provide a consistent approach. Projects should be assessed using the same ruler. If one project is funded, and another is not, because the projects made different assumptions about ETS prices and future inflation rates, the right decision will have been made only by chance. Worse, if applicants know that they can manipulate the process by setting assumptions painting a rosier picture of their project’s suitability for funding, it would be foolish to expect that they would not do so. 

3.7 The section on additionality says, “It appears that four of the five projects evaluated may not be additional.” Concept considered that, on the applicants’ assumptions, every proposed project would have paid itself off in less than four years, without a subsidy. And three of the four projects would pay themselves off within four years even if carbon were not priced. In other words, most of the projects Concept evaluated could and should have been undertaken by the companies on their own, even if the ETS price were zero. 3.8 Concept noted that, in some cases, small projects with high internal rates of return may not be undertaken without government support. They provided examples where resource constraints or financing constraints mean the project with an attractive-seeming internal rate of return may not make it to the top of a company’s priority list. 

3.8.1 As simple example (provided by us rather than by Concept, by way of illustration), a $10,000 project with a 200% internal rate of return might not be worthwhile if it sucks up a lot of internal administrative resources that are not appropriately costed in determining the rate of return. The real internal rate of return could be strongly negative if undertaking the $10,000 project meant diverting the attention of a project manager responsible for a $10,000,000 project with a 10% internal rate of return. 

3.9 In other words, if a project seems to make sense but is sufficiently small that a company does not find it to be worth prioritising, government support for the project may be necessary. But if that is the case, it seems quite unlikely that the project can do much to affect national net emissions. 

3.10 In other cases, debt constraints were considered as potential hindrance against taking up projects with a promising internal rate of return. If covenants on existing debt set hurdles on taking on further debt, then some projects might not be pursued. 

3.11 But other alternatives might be available in such cases if the potential returns were substantial. A company might lease equipment rather than purchase it. Or it might seek an equity contribution from shareholders, if those shareholders could be convinced that the rate of return were high enough to warrant the investment. In general, should it be the role of government to provide grants to companies that have found themselves credit-constrained? If it is, might we expect more companies to find themselves to be credit-constrained? 

3.12 In both cases, EECA subsidy might encourage a company to change its priority ordering of projects, perhaps bringing forward a low carbon project while pushing back another project. There could be some reduction in that company’s emissions over the period in which the investment is in place thanks to GIDI funding before the company would have made the investment on its own. In that case, any benefits of the funding should only be assessed over that short interval of time, rather than over the lifetime of the equipment. And any wider cost-benefit assessment would need to consider the costs of deferring the projects that were pushed back in the priority ordering. 

3.13 Concept notes that GIDI 1.0 evaluation placed 20% weighting on economic stimulus driving domestic employment and 10% weighting on speed of spending. Neither makes any sense in assessing projects for carbon reduction but may be important for make-work projects. Make-work projects might be ill-advised when Reserve Bank views employment rates as unsustainably high. 

3.14 Concept notes that GIDI 1.0 evaluation scoring placed 10% weighting on “level of innovation and co-benefits”. Concept noted that demonstration benefits can be valuable, but “should potentially come with a requirement that information is shared with the wider industry.” 

3.15 EECA Chief Executive Andrew Caseley noted, in his defence of his agency’s view that Concept’s advice constituted author opinion, that assessing additionality is complex and requires information on a range of factors that might not have been available to Concept, including companies’ “internal decision-making processes, their risk appetite, financial measures such as cost of capital, sector norms in decarbonisation decision-making etc.” 

3.16 Concept may not have had information on each of these in assessing the five applications, but its presentation and correspondence clearly suggested that it was thinking about these issues. Sector norms in decarbonisation would be a rather plausible reason for considering the benefits of demonstration projects. Concept had to point out to EECA that the value of demonstration projects is higher if the funded business has to share information with others that might benefit from it.

Even more innovative than I'd thought

In last week's Insights newsletter, I celebrated public sector innovation and entrepreneurship. But I'd underappreciated just how innovative folks have been!

I'd written:

Entrepreneurship is highly rated. My son’s school even renamed their NCEA Level 1 economics paper “Entrepreneurial economics” and their accounting paper “Entrepreneurial finance.”

But entrepreneurship remains underrated. Entrepreneurs’ alertness to opportunity, and determination to see it through, are a fundamental source of rising living standards. 

Public sector entrepreneurialism often goes unnoticed. Results may not always be as desirable as in the private sector, but who are we to judge?

So let us recognise some remarkable public sector entrepreneurship.

Public sector bodies traditionally did not get involved in electioneering. But that missed an opportunity! Supporting a candidate who supports the agency’s views could make both better off.

Local government candidates extolling the merits of new cycleways feature in NZTA advertisements. The ads will have to stop running during the regulated period, but name and face recognition count for a lot. Voter memories might be short, but they aren’t that short.

It’s an innovative move that, somehow, seems allowed by law. So why shouldn’t they?

Public funding of sympathetic documentaries about Members of Parliament who are sympathetic to public funding of documentaries? It’s obvious win-win in hindsight, but it took entrepreneurial alertness to spot the opportunity. Kudos to New Zealand On Air.

And let’s not forget EECA’s exceptional achievement earlier this year. Deeming a consultant’s presentation as mere opinion, and out-of-scope of my OIA request, rather than in-scope advice? A masterstroke!

The Wiri alcohol licensing trust has been promoting candidates for local body elections – including election to their own board.

Unlike some other licensing trusts, Wiri has no monopoly on local alcohol sales. But friendly councillors would be helpful when central government considers tighter alcohol restrictions.

Local campaigner Nick Smale complained Wiri’s actions were unethical. But should we blame the Trust? They discovered an opportunity. That kind of gumption should be celebrated rather than discouraged.

Monopoly licensing trusts able to earn cartel-like rents could follow Wiri’s entrepreneurial example. In 2014, the Auditor General said they were “probably the least scrutinised part of the public sector.”

Lack of oversight provides tremendous opportunity for entrepreneurial innovation. Why not recycle trust cartel profits directly into billboard and radio campaigns for friendly candidates? It’s an entrepreneurial opportunity ready to be taken up.

So stop complaining about a moribund public sector. Innovation is all around us. You need only be alert to see it.

If New Zealand’s high schools taught civics, they could even rename it “Entrepreneurial politics”.

That bit about NZTA not running ads featuring candidates during the regulated period? They've been more innovative than that. And why shouldn't they? Nobody will tell them that they shouldn't, not even the Public Service Commissioner who's presumably perfectly pleased with their conduct. [Important update below!]

Jem Traylen over at BusinessDesk has been all over this file, most recently on Monday. Jem writes:

Such are the slow machinations of the state at these lofty levels, particularly when it seems the public service has embarrassed its political masters for the third time on the same issue of political neutrality in government advertising. 

Meanwhile, we’ve had ads featuring local body politicians running as early as January in a local government election year, with some as recently as Sept 2. 

The formal election period commenced on July 8 – nearly three months after Hughes was first notified of the situation by the NZ Taxpayers’ Union's April 12 complaint.

And I'd left out all of the wonderful innovations by the Mahuta-Ormsby family, and by the bureaus very happy to accommodate New Zealand's shift away from the rule of law, and from impartial and impersonal institutions, back toward kin-based contracting norms that do wonders for development

Raise a toast to all of these spectacular innovators. They will lead the country into a new age. 

Update: The Public Service Commissioner has weighed in!

Thursday, 8 September 2022

Afternoon roundup

So many browser tabs before the rebooting can happen...

Water entity debt

This really doesn't seem like a good idea.

Central Government provided sweeteners for local councils to encourage them to participate in the Three Waters Reforms. Two rounds of contestable funding for local projects. 

The first round is funded by central government. The Waikato Times reported that it's being used for all kinds of projects far removed from water infrastructure: passenger rail business cases, improving the local pool, walkways, contemporary art and more. 

That part seems silly but perhaps less harmful. Far better if the funding were being used to get the local waterworks up to spec for whatever might come in water reform.

But the second tranche seems a really really bad idea.

The Waikato Times writes:

“As we already have project ideas worth more than the $16.46m in available funding, community feedback to help council make the final project decisions will be vital," he said.

Ideas that aren't included as part of the Tranche 1 application may be carried over to Tranche 2 or form part of the new long-term plan next year.

The council says Tranche 1 funding is expected to have no direct impact on rates, as it is a grant from central government.

Tranche 2 funding will be debt-funded, with the debt transferred to the new Water Services Entities.

“As such, this will be repaid by water users of the respective entities,” the council says in its consultation document.

“How the entity decides to recover this debt and any subsequent impact on rates is unknown at this time.”

So. Local councils pitch for Tranche 2 projects that could be every bit as water-related as community art projects. They get funded by debt that's loaded into new amalgamated water service entities. 

Local councils have a complicated relationship with those proposed amalgamated entities. But if a council winds up bearing something like 1/N of the cost of whatever projects they pitch, they'll have pretty strong incentive to make sure that every dollar that their council can get through the thing goes to their council - regardless of how weak the case for it might be. 

S&P had already found the water entities are going to be aggressively leveraged, and that the Crown's backstop guarantee really matters in getting a reasonable credit rating for the things. They might be even more leveraged than S&P had figured, if they're also going to be loaded up with piles of council pork-barrel projects in addition to having to fund necessary water infrastructure. 

It might not be crazy to have Tranche 2 funding available for water infrastructure upgrades in advance of amalgamation. It still seems a worse idea than having the new entities make whatever decisions make sense across their areas as a whole. But encouraging councils to run a pile of pork barrel projects that load into the debt burden of amalgamated water entities - I don't know what the heck they're thinking here. 

The background documents have the main difference between Tranche 1 & 2 being expectations around the extent of co-design and co-implementation of projects, not whether they have anything to do with water services. 

And they also confirm that the water service entities are taking on a billion and a half in debt out of this, while claiming that it's okay because water users will benefit from it, and because the value of the Crown backstop is bigger than the debt loading. 

Who will provide the funding?

The support package will be met by both the Crown and the new water services entities.

The Crown will provide $1 billion of funding towards the better off component of the package, as an investment into the future of local government and community wellbeing.

The Water Services entities will provide $1.5 billion of funding, comprising:

• An estimated $500 million towards the no worse off component of the package

• $1 billion towards the better off component of the package.

It is appropriate for water services entities to bear some of the costs associated with the support package given that future water customers stand to benefit most from reform. From the perspective of future water customers, the size of this benefit is significantly greater than the cost associated with providing some of the funding for the support package.

Moreover, given most future water customers are also ratepayers, they stand to benefit from the additional investment into community well-being. 

We also note that the proposed support arrangements provided by the Crown to the water service entities (such as a liquidity support), are expected to reduce the borrowing costs. The net present value of the reduced borrowing capacity is expected to be greater than the $1.5 billion of funding provided by water service entities through the support package.

It seems mad.  

Tuesday, 6 September 2022

Morning roundup

The morning's worthies, on the closing of the tabs:

Stupid GE bans

One cost of regulation is the innovation you never get to see. 

We know about how New Zealand's stupid ban on genetic modification is causing problems for GHG reductions in agriculture. Even field trials of promising rye grasses have to be undertaken over in the US because the government bans them here.*

Michael Donaldson over at The Pursuit of Hoppiness points to another problem. Perhaps even more important than global warming and the climate response. This one's about beer.

Before I explain just how world-leading this product is, we first need to understand thiols.

Simply, thiols are organic compounds that contain sulphur. They are present in varying levels in different varieties hops as well as other plants.

Thiols come in all sorts of chemical configurations. Most create odours reminiscent of rotten eggs or garlic while others produce can pleasant flavours such as those found in coffee or grapefruit. The thiols that brewers most want deliver potent characteristics of tropical fruit, notably passionfruit and pineapple.

Popular hops such as Citra, Simcoe and Mosaic include plenty of thiol precursors, but New Zealand hop varieties such as Nelson Sauvin, Motueka and Southern Cross have overly high levels of thiol precursors, which is why they are so prized.

Ruffell has always been intrigued by these flavour compounds.

“I’ve been thinking about thiols since around 2013. We have high levels of thiols in New Zealand hops and we don’t really know why and that’s always interested me.”

He then learned that Marlborough-grown sauvignon blanc grapes are unique in the world for their high level of thiol precursors.

Ruffell says there are number of factors that make Marlborough Sauvignon Blanc grapes so high in thiol pre-cursors. Some of it has to do with terroir, some with specific UV light in that part of the world, and he understands there is also “a stress response from plant” so machine-harvested grapes have higher levels of thiol precursors than hand-harvested grapes.

“In 2018 I had this concept which eventually became Phantasm,” he explains.


In terms of flavour delivery, Ruffell says thiols are so potent the equivalent of “thimble-ful in a swimming pool” is enough to make an impact.

“I joke about it as MSG of beer — add a little bit and it just helps everything really pop.”

At the moment, the brewers getting the benefit of this flavour bomb are in America, and there’s a regulatory reason for that: genetically-modified yeasts.

To get the best out Phantasm, it helps if you can use one of the new genetically-modified yeasts on the market, known as thiolising yeasts.

New Zealand’s strict regulation on genetic modification (and ditto for Australia, Canada and many European nations) means those yeasts are not available here.

“At the moment Phantasm is almost entirely sold into the United States and that’s because they can use genetically-modified yeasts to unlock the best characters of Phantasm,” Ruffell says.

“We’ve kept Phantasm under the radar here and we sell exclusively to America because of those GMO yeasts. We can get pretty good results with non-GMO yeasts but it’s not quite the same.”

Ruffell expects that to change in the future, noting that Omega Yeast’s Cosmic Punch is an example of a yeast that could have been developed through breeding “but they just have a precise, elegant way of doing it” in the lab. (For geeks, what Omega have done is take the IRC7 gene in the Chico yeast strain, where it’s inactive, and inserted it into London III strain and “connected the pathways” to make it active).

Where ever it’s been used in America, the reaction to Phantasm has been incredible.

Brandon Capps, owner and head brewer at New Image Brewing in Colorado said it helps him create the “ultimate realisation of what hazy IPA could be”. 

“Does it taste like citrus? Does it taste like papaya? Maybe overripe nectarine or plum would be the closest description I can find. It’s just this really interesting flavor that tastes like biting into a piece of tropical fruit.”
Emphasis added. 

Hippies are a problem. 

HT: Glenn Boyle. I'd caught the article on Twitter, saw an interesting new Garage Project beer that I wanted to try, didn't get down to the important stuff below the fold. Glenn read the whole thing. 

* A set of regulations so intractable and impossible to comply with is identical to a ban, so pedants can go soak their heads. 

Monday, 5 September 2022

Local government games

Councils find accommodating urban growth to be costly, so they use what tools they can to restrict it. Until that underlying problem is solved, they'll keep finding new ways to obstruct growth in places where people want to live, but where accommodating growth is just too hard.

Thomas Coughlan picks up on Auckland's move to designate too many houses as being under 'special character areas.'

It is understood the Government thinks what Auckland Council notified in August is unlawful, breaching the spirit and the letter of both laws, mainly because of the way the council has applied "special character area" protections liberally in Auckland's villa belt.

Government can keep setting new rules on top of councils, but it's balloon-squeezing. Until and unless they sort out the underlying mess that makes councils behave like this, they'll just keep reaching for other tools. We've already seen Greater Wellington Regional Council pull in greenhouse gas emissions as reason to block new subdivisions. 

How to fix it? 

  • Recognise that it's a deep structural problem in councils caused by decades of misaligned incentives, which have encouraged strongly anti-growth cultures to develop within councils.
  • Change the underlying incentives to make growth a benefit, rather than a cost, for councils. Do so by:
    • Providing grants to councils for every new dwelling built, so they share in the benefits of growth;
    • Enabling councils to issue long-duration revenue bonds to fund infrastructure, financed by revenues from that infrastructure's beneficiaries, separate from council main balance sheets.
  • Recognise that, until those incentives have time to work their way through, councils are going to need constraints. 
One simple set of constraints, until the cultures have time to update, which may require a lot of staff turnover, would set UDAs on top of councils as competitive issuers of resource consents and building consents. 

For councils where the median home sells for more than 8x median household income, UDAs could be instructed to disregard viewshafts, frontage setbacks, height limits, balcony requirements, floor-to-ceiling limits, and whatever it is that design panels normally do when issuing consents. For councils where the median home is between 5-8x median household income, there could be a smaller set of "without regard to" things. 

These are just indicative. Don't ask me; I'm not a property developer. Ask someone like Matty Prasad. Or Arthur Grimes, who'd done the work showing the shadow cost of all the darned restrictions. Void the most costly ones when and where housing is unaffordable. Where housing is less than 5x median household income, the UDA wouldn't be put into operation.

Basically treat it as training wheels. When Council's demonstrated it can't drive the bike without crashing and making a mess of everything, put training wheels on that constrain against the most costly things they get up to. The training wheels come off when housing's affordable. 

Medsafe delenda est

The solution is still really really obvious. If two trustworthy regulators have approved a medicine or vaccine, have it automatically approved in New Zealand. Let Medsafe have a veto lever it can pull in extraordinary cases, but don't let them pull it very often. It has to be for extraordinary cases, not just because they hate the loss of control.

FDA processes already mean that vaccines run behind the curve, trying to catch up to variants. Layering more on top of that just means that government can and will always blame the pharmaceutical companies for not getting applications in, when there's little point for any of them to prioritise doing paperwork for a tiny country at the far end of the world when there are bigger markets to serve first. 

Astrid Koornneef, the director of the National Immunisation Programme at Health NZ/Te Whatu Ora, told Newsroom on Friday that Pfizer has yet to apply for either its BA.1 or BA.5 vaccine to be used in New Zealand.

"Medsafe is working with Pfizer on their plans to submit data to New Zealand on variant vaccines. This is expected to happen over the coming months," she said.

"Medsafe will be assessing this data as a priority once received."

Koornneef didn't answer questions about whether the Government's existing contracts with Pfizer cover these new vaccines or whether another agreement would have to be inked.

"Our agreements with Pfizer remain commercially sensitive and confidential, as are all our purchase agreements for Covid-19 vaccines. However, we have well-developed relationships in place with a range of vaccine manufacturers and continue to monitor progress in this space, including the development of potential new versions of vaccines as they emerge."

Pfizer did submit an application to Medsafe in August for its Covid-19 vaccine to be approved for children aged six months to four years. Currently, the vaccine is only authorised for those aged five and up.

The application is being assessed as a priority, Koornneef said, but there are many steps before a decision to use is made by Cabinet.

"Provisional approval by MedSafe is only the first step in the process. Subsequent steps include seeking Covid-19 Vaccine Technical Advisory Group science and technical advice, followed by a recommendation for consideration by the Director-General of Health."

Disinformation stuff

The Stuff papers have been checking into which candidates for local government are actually antivax conspiracy theorists.

So why are we doing this? It’s certainly not fun, or enlightening work. Mostly, it’s depressing, tedious and disturbing. In the last fortnight, I’ve swung from despair, to irritation, puzzlement, and occasionally amusement.

But facts and transparency are cornerstones of democracy. Stuff is drawing attention to these candidates because they cannot distinguish fairytales from reality. They are anti-science. They lack critical thinking and sound judgment.

And while they claim the opposite, many seek to disrupt democratic institutions. Many share a common disdain for the rules, procedures, and norms of representative governance. (In the case of VFF, they have made explicit their aims to make the country ungovernable.)

If voters elevate them to decision-making roles, they should do with this knowledge.

There are two separate things going on here.

I agree with Vance that it is dangerous to elect people who cannot distinguish fairytales from reality, and who are anti-science. But local government hasn't got a ton of remit over Covid- or vaccine-relevant stuff. An antivax local government could refuse to set vaccine/mask requirements in council-owned places where those requirements might make sense, but what else could it really do?

On this aspect, I am way more worried about councilors who believe anti-science fairytales about rent-control, zoning, and about the possibility of reducing national net emissions through council measures targeting emissions already covered by the ETS. A lot of them think that stadiums and convention centres are great for economic development. They're all wrong. Anti-science councils can really screw things up when relying on fairytales in those areas. But none of those get picked up in anti-disinformation campaigns.

The second part of Vance's argument is stronger. If those candidates' hidden aims are to throw sand into local government gears, that's a bigger problem to the extent that councils pursue objectives that are worth pursuing. 

Friday, 2 September 2022

Inflation and profits

Stuff's Daniel Smith asked me for comment on profits and inflation, and the case for a windfall tax. I'll copy below what I'd sent through as there wasn't room for all of it in the story. 

A temporary boost to profits is a consequence of high inflation, rather than a cause of it. High inflation, caused by the combination of global and local monetary responses to the pandemic, supply shocks, and high levels of government spending, pushed up consumer prices first. A lot more money was chasing a reduced quantity of goods. Firms responded to that increase in demand by raising their prices and hiring more workers. Consumer prices were bid up first. During that interval, firms earned higher profits in part because real wages had fallen: wages moved up more slowly than the prices of goods and services. Now, firms competing for workers are bidding wages up. As real wages return to normal levels, company profits will return to normal levels. 

It makes no more sense to claim that high profits cause inflation than to claim that low profits cause recessions. They’re linked, but not in that way.

A windfall tax on company profits is an exceptionally bad idea. It is not an appropriate response to high inflation. It would not help consumers. And it would further erode stability in expectations around the policy environment. 

A windfall profits tax winds up hitting exactly the firms that should be expanding. Remember that high current profits, driven in part by continued fiscal and monetary stimulus, will not be uniformly distributed. Companies seeing smaller increases in demand for their goods and services will not be seeing those higher profits. High profits in some sectors give those sectors incentive and ability to expand. They do this, in part, by bidding workers and materials away from other sectors where demand is lower. Their doing so is a good thing – it shifts workers and materials over to areas where their services are far more valuable. The profits provide the signal about where greater output is needed, and the incentive to provide it. A windfall tax blunts that signal while reducing those firms’ ability to bid workers away from areas where their services are less valuable. 

Perhaps more importantly, a surprise windfall tax on company profits would undermine institutional stability and credibility. Companies invest based on expectations about how policy works. Tax policy in particular tries to provide stability by sticking to a principled approach, with any changes being very well signalled through the Generic Tax Policy Process. Whenever that process is undermined, we wind up with bad tax policy and an erosion in institutional stability. If companies expect tax changes at random if they invest here, and particularly expect to be hammered simply for having had higher profits than expected, the burden does not just fall on those companies. It falls on all of us. New Zealand becomes a risker place to do business, so investors will demand a higher return to reflect that higher risk. Capital becomes even more scarce in a capital-poor country, which hits long-term productivity and wages. 

It is a terrible idea.

There is one area where government could and should consider redistribution of excess profits, however. 

For years, the New Zealand Initiative has advocated for a Carbon Dividend, following Canada’s example. There, the vast majority of government revenues from its carbon tax are sent back to Canadian households as a carbon dividend, to help them to make their own adjustments to a higher carbon-price world. The Initiative has advocate that the government similarly direct all of the revenues that the government earns when it auctions ETS credits into a carbon dividend. The government is likely to earn on the order of $1.7 billion dollars this year when it auctions carbon credits. Sent back to households as a carbon dividend, it could provide a family of four with about $1300. We have also recommended that, whenever the government earns higher than normal profits from its 51% stake in the power companies, for example if higher ETS prices wind up feeding through into higher electricity prices overall, those excess dividends should also be put into the pot to provide a higher carbon dividend.

I suppose that I should also have noted that companies already pay higher company taxes when profits are high, that it's particularly odd to look at for New Zealand's oil and gas sectors. Sure, anyone pulling oil out of Taranaki is now getting higher prices for it. But that all falls under a royalty regime. You could argue that that regime should have provision in it for different royalty rates depending on what happens with prices, but that ought to be set out before companies put in their bids for exploration permits. Not ex post. 

Oh - the $1.7b is just the current ETS price multiplied by the number of units to be auctioned this year. It's a thumb-suck and will vary with what happens at the next auctions. 

Thursday, 1 September 2022

Mclaughlan on the administrative state

There's a lot going wrong. Danyl Mclauchlan documents a few of the problems in an essay for The Spinoff, building a case that they're all symptoms of government administration being run for the benefit of government administrators. 

  • Giant shortage of nurses; nobody bothers to put nursing on the priority list for automatic residence.
  • Health system falling apart for want of doctors and nurses; $11 billion project to reform the health bureaucracy;
  • $200 million so far on reforming the polytechs, the Chief Exec of the merged entity disappeared before resigning, and the whole thing is set to fall apart;
  • $120 million for business cases for Let's Get Wellington Moving, while Wellington's infrastructure is collapsing;
  • The fire service got centralised at considerable expense and is now falling apart;
  • ...but wait, there's more! Danyl writes:

In the past few months the government has created a new anti-terror research centre, committed $300 million to replace the school decile rating system with an equity number, created a a new ministry for disabled people, a new national health provider, a new health authority for Māori, a new ambassadorship for Pacific gender equality, a new supermarket watchdog. It’s hard at work creating a new mega-sized public media entity – estimated cost $350 million – and establishing four new regional wastewater entities at an estimated cost of $296 million (the total three waters reform is priced at about $2 billion). It has purchased Kiwibank for $2.1 billion. 

Some or all of these might turn out to be worthy enterprises but there’s a huge assumption in this government and on the left more broadly that they can only be Good Things – that questioning the rapid expansion of the administrative state can only be right-wing hate speech, part of a covert neoliberal plot to gut health, education, welfare. 

Aren’t we seeing an erosion in state capacity alongside all this centralisation and expansion? Aren’t outcomes in health, education and welfare trending down rather than up? What’s going on? You can’t have effective public services without bureaucracies, but it’s not clear that the torrents of money flowing into them are delivering more value to the public or to the marginalised communities some of them are named after. It’s almost as if the primary role of the administrative state is shifting from serving the people to the redistribution of wealth to the staffers, lawyers, PR companies, managers and consultancy firms that work in them, or for them. A billion dollars a year in public sector consultancy is an awful lot of money when you’re running out of teachers and nurses because you don’t pay them enough, and the fire trucks are breaking down.

The whole essay deserves reading. 

I'm not sure whether the underlying thesis is right. A permanent managerial class may have taken over, but there's no reason it has to be as stupid as New Zealand's has been. 

The people in the civil service aren't that different from the ones who were there under the last government. Many were appointed under the last government. Peter Hughes has spanned multiple governments. 

Danyl again:

Lasch mourns the decline of the mid-20th century socially democratic left; the working class movement that built the modern welfare state. And he notes that the PMC often imitates their rhetoric but primarily employs the state as a means to appropriate the public’s wealth for themselves while defecting from its core institutions. He notes: “They send their children to private schools, insure themselves against medical emergencies… In effect, they have removed themselves from the common life. Their only relation to productive labour is that of consumers. They have no experience of making anything substantial or enduring. They live in a world of abstractions and images, a simulated world that consists of computerised models of reality.”

And this disconnection from the physical world and their fellow citizens means their politics is increasingly therapeutic rather than material; it’s the politics of personal self-esteem, emotional wellbeing, self-expression, self validation, relentless positivity. Jacinda Ardern gave a nice demonstration of this in a recent interview on TVNZ’s Q+A with Jack Tame. When asked about her government’s failure to deliver across multiple policy areas and what she’d learned from these mistakes, she replied: “You know what, I would not ever change the fact that we have always throughout been highly aspirational. We have always focused on how we can make New Zealand better…  In setting out a vision for what that should look like, you will still hear me talk about New Zealand as a place that should be free of child poverty. Absolutely, because anything less in my mind… anything less demonstrates that we don’t believe that things can and need to improve.”

Danyl's dead right that vision and aspiration have been front and centre, with delivery left as afterthought at best. But I don't think that's entirely down to the bureaucrats. One of the first things that Labour did, on taking office, was abolish the targets that the previous government had set on the public service. They abolished accountability while setting aspiration as end in itself. 

Maybe it's the public sector's fault for being too ready to let Ministers get high on their own supply, but even in cases where the Ministries have been courageous in providing advice Ministers didn't want to hear, it didn't make any damned difference. MBIE warned about the problems in Fair Pay Agreements; government wanted to push ahead anyway. 

I tend to think this stuff starts at the top.

If the Minister of Finance demands evidence on value-for-money in adjudicating between different budget bids, because there will always be more bids than there's space to accommodate, that drives demand for rigour in analysis. If the Government wants everything put through a soft-focus wellbeing lens instead, then that razor gets dulled. And if you combine it with a ludicrously soft budget constraint where government borrows $50 billion, nominally for Covid, and then spends it on any darned thing that passes a comms test, you'll get what we've had. 

And it worked for the government for a while. But the Gods of the Copybook Headings eventually return. 

It all looks pretty bleak. Europe's heading for disaster if the energy futures market is anything to go by. Covid shocks were bad but what happens when European factories supplying critical parts into NZ supply chains can't afford to run? There's terrible mess ahead, we can't afford for policy to continue to be this persistently stupid, and there's no reason to hope that policy will stop being this persistently stupid.

What's perhaps even more depressing is everywhere else looks even worse.

How much ruin is there in a country?

Test to exit

It's great that Emily Harvey and Dion O'Neale have done the modelling work on test-to-exit from Covid isolation. It's crazy that policy and advice has been this bad for this long.

Recall that, way back in May, testing expert Anne Wyllie pointed out some problems in how MoH was doing things. At the time, MoH was advising people to ignore positive test results if they'd completed their seven days of isolation. But they had absolutely no evidence in support of that advice. They had looked at the average duration of infectiousness, and simply concluded that if you were above that average period, then your positive was likely false. It really was that stupid, because Ministry of Health really is that stupid

MoH updated the advice, somewhat, to say that a negative test was not necessary to leave isolation. Requiring a test to exit would have been a policy decision that would have had to have been made up the chain somewhere. But it is just crazy that they didn't say, for example, "While a negative test result is not necessary for ending self-isolation, it is strongly recommended. Those who continue to test positive are likely to still be infectious. Leaving isolation while positive, even after 7 days, puts others at risk." That would not have been a policy decision requiring higher-ups to decide something. They would have just been doing their job in providing the best possible advice. 

But that was too hard for Ministry of Health, somehow. And so bad advice has been up there for months. And because not enough people know that the Ministry of Health is utterly incompetent, they rely on the Ministry's advice. Employers who don't know better may encourage people to come back to work, following the letter of the guidelines. Schools may tell students to come back, not knowing that they're putting the rest of the class and the teacher at risk. 

The worst of all possible worlds is when government advice is viewed as authoritative but is actually terrible. It would be better that no advice were given. 

Harvey and O'Neale put up the modelling showing that 5 days of isolation, combined with test-to-exit, results in fewer overall days in isolation. Safe people spend less time needlessly in isolation; risky people are less likely to put others into isolation. 

Blogging has been far lighter than usual because Castle Crampton has been Plague Palace. The Boy tested positive on Friday evening. The rest of us tested positive Saturday afternoon. Whoever gave it to him might not have given it to him had they had to test to leave isolation. But people just follow the irresponsible Ministry of Health advice, because they believe that they can trust government. 

I've spent a fair bit of time sleeping. Hopefully back to office next week, but taking it easy, and regardless of government advice, nobody's leaving this house without a negative test. Because it would be irresponsible of us to put others at risk. 

The Ministry of Health is so incomprehensibly bad.

An odd approach to tax policy

Pattrick Smellie has had about the best summary on the messes in the last round of proposed tax changes.

Earlier this week, the government put up a pile of tweaks to tax policy. This sort of thing is usually pretty bland. But included in the mix was a change to the GST treatment of management fees on Kiwisaver funds. 

Pattrick writes:

A regulatory impact statement, which it’s not clear if most ministers had read or been briefed on before waving this proposal through at a cabinet meeting, warned that maybe $103 billion of KiwiSaver savings would not occur as a result of the changes. 

Stuff’s Rob Stock broke the story yesterday afternoon and all hell broke loose on a policy whose introduction broke every rule in the political book. 

Quite apart from apparently attacking the KiwiSaver scheme's basic premise – to build funds for the future – it was introduced without so much as a press statement. A properly prepared government would at least have tried to control how such a political hand grenade was first reported. 

No such effort was made. 

Cynics will think this was the government sneaking it in and hoping no one would notice. 

Well, maybe, but look what actually happened. 

It is equally likely that somehow, amazingly, this proposal didn’t cause even a momentary flicker on anyone’s political radar.

It's a really strange one because the change looks like it could have been defensible. 

The most recent Tax Working Group laid out the usual case for exempting financial services from GST. There can be huge valuation problems in sorting out what's the value of the service provided and what's the value of the underlying traded thing when it all gets bundled together.

I'm hardly an expert on this stuff, but I know that motivated people sometimes point to the exemption for financial services when they try arguing for exemptions on other stuff. So I'd looked at it at that point, saw that there was darned good "It's just too impracticably difficult to levy GST here so we're not going to" reasons for it, and concluded that the "let's exempt meritorious things" people were being disingenuous in pointing to the financial services exemption. 

So when news broke on a plan to set GST on financial services here, it seemed odd. Hadn't IRD already concluded this stuff is just too hard? I checked back in the papers from the TWG Secretariat and they hadn't foreshadowed any areas that could be pulled from the actually-too-hard basket. 

But those difficulties shouldn't apply when it comes to explicit fees levied in financial services. Whether it leads to other distortions and new structures to try to turn fees into margins, that's beyond me. It's at least possible and possibly even probable that the proposed change had made sense on a basic-tax-principles assessment. 

It seems the kind of thing where, if the RIA on it has, at paragraph 49, $103 billion in reduced Kiwisaver fund balances by 2070, they might have considered better preparation on this one. It's plausibly defensible, but got killed within a day through bad comms. 

The same bundle brought GST changes for platform service providers like Uber, and this one could turn into a right mess. It's very much a what-sucks-least problem, and all options are going to suck. I'm just not convinced they've picked an option that sucks least.

Recall that there's a de minimus regime around GST where if an outfit has less than $60k in revenue it isn't required to file for GST because the time and hassle for everyone involved is greater than the amount of tax that might be collected. Makes sense, right?

So what then happens if a tech innovation means a lot of new small part-time entrants are able to enter a sector, many of which will be under the de minimus threshold because it's a part-time deal for them? IRD might start worrying about base erosion and about distortions favouring the small-time operators. 

But how can you do anything about it that doesn't make things worse? All the options are bad too. 

IRD canvasses some in the RIA, and came up with the following. 

For driver-partners who work with platforms like Uber and who are GST registered, no changes. They charge GST, claim back expenses; Uber pays them a GST-inclusive price from riders and claims back the GST that they've charged. All fine. 

But for drivers below that threshold, the platform will charge GST on the ride. 

Now that's a problem because the drivers will have paid GST on their fuel, oil, maintenance, vehicle - all the inputs where GST would normally be claimed back. Remember that part of why the de minimus threshold works is because minimus is smaller than you might have thought. At the same time as they're not charging GST, they're also not claiming back GST on expenses. So the net is a lot smaller than you might have figured. 

If Uber, or Lyft, or whoever, is charging GST on the full cost of a ride, and the suppliers aren't claiming GST on inputs, then you've double-charged GST. And that's a big problem. 

IRD proposes a workaround. The platform would collect 15% GST on the full cost of the ride. It would submit 6.5% up to IRD and send 8.5% back to driver-partners as a deemed input cost proportion. 

I don't know where the split came from - whether it's some overall average of how this stuff nets out, or one specific to transport, or something else. 

But it will wind up requiring the platforms to implement a pile of new accounting to track things, which might need runway to sort out.

Suppose I drove for a few ride-share companies. Would I be able to set up one GST-registered company where all my driving for one platform gets accounted, have it take more than its fair share of the costs of fuel, maintenance, and everything else, and have my driving for the other platforms come under the deemed cost regime? Possibly isn't worth the hassle to set up, but IRD might need to watch that driver-operators aren't trying it on. 

GST normally avoids this kind of problem; folks claim back GST on expenses while paying GST on sales. But a deemed-expenses kind of set-up would break that. 

Maybe the thing is defensible if it really is less bad than potential base erosion and distortions where platforms change industry structure, but I'd hope that they'd talked with the platforms about practicabilities and implementation. It sounds like it could be tricky. 

Thursday, 25 August 2022

Afternoon roundup

It's been a busy few days. The tabs, they've accumulated. Some worthies:

Friday, 19 August 2022

OCR and other tools

When Susan Edmunds emailed asking about tools other than OCR for controlling inflation, I asked her whether she was suggesting I say Voldemort repeatedly while hoping for the best. 

There are a lot of bad alternatives, some best not spoken.

First Union suggested taxes on the richest. It's the opposite of where you'd want to target taxes aimed at reducing aggregate demand if you followed Keynesian-style arguments around marginal propensity to consume. Stopped clocks, eh?

I noted that monetary aggregates used to be targeted, but increasing difficulty in defining the targeted aggregates, combined with changes in the velocity of money, pointed to price/inflation targeting rather than money supply targeting. I also noted that the Bank's LVR rules a decade ago seemed most easily explained as an attempt to shave the peaks off of asset price appreciation, but that I didn't think it was a great idea. 

An old Labour idea of having Kiwisaver contributions vary over the business cycle also got play. It never made any darned sense: you require higher contributions at the top of the cycle and lower contributions at the bottom of the cycle: buy when high, and buy less when low, doesn't seem like all that great a default setting for Kiwisaver funds. 

Bad times make people reach for bad ideas, which worsen overall economic conditions...

Tuesday, 16 August 2022

Public transport and getting what you pay for

Carbon News asked me about the government's proposed shake-up around council public transport options. The government figures having councils run bus services again, rather than contracting out for them, would reduce national net emissions while getting better bus service.

They're nuts. But the union isn't nuts for supporting it. They'll probably do well out of going back to council monopolies. 
But will the plans – which could see most public transport back in public hands after a decade-old experiment in privatisation – deliver the promised reductions in carbon emissions?

The response from the NZ Initiative’s chief economist Eric Crampton is as predictable as it consistent: transport is covered by the ETS and therefore the proposals will make virtually no difference to overall emissions.

“Because transport is covered in the Emissions Trading Scheme, bus operators, whether Council- or privately owned, have plenty of incentive to weigh up whether to provide electric or diesel busses,” Crampton says.

“An all-electric bus fleet would simply free up emission credits for others to purchase and use instead.”

Former IPCC lead author and Massey University emeritus professor of energy and climate mitigation, Ralph Sims, on the other hand, says the ETS has done nothing to encourage public transport use to date and there’s nothing to suggest that it’s likely to have much impact in the future.

Yeah, this is one of those "We're all part of the equilibrium" days. If carbon prices going up to $200/tonne (or whatever it gets to) as the ETS cap drops on the path to net zero doesn't encourage flips to public transit, that is perfectly fine. The cap limits net emissions. It finds the most cost-effective ways of mitigating net emissions. We don't have a public transit maximand, we have a net emissions target. I'd expect, with fuel being maybe $0.30-$0.40 more expensive, some folks would flip to public transit. But the binding cap binds regardless. If they don't, that just means emissions reductions in other spots are more cost effective, so the emission reductions happen there instead.

I swear these people have a billion non-carbon objectives and then damn the ETS for not achieving them. 

And they've fundamentally misdiagnosed the problem, mainly because they just hate private provision through contracting of stuff they think should be provided by government or councils.

And that’s a point of view echoed by the NZ Initiative’s Eric Crampton. 

“People should not get their hopes up that councils taking over bus services will improve outcomes. While there have been obvious deficiencies in service in some places, the problem is not that some bus services are privately owned and operated. The problem rather is that councils have gotten exactly what they have paid for. Councils set contracts with fairly low penalties for missed or cancelled services.

"To win tenders, given council specifications, bus operators ran lean staffing models. Avoiding cancelled services means having enough drivers on staff to provide coverage even if many drivers are out sick or on leave. If Council had wanted fewer missed services, it would have had to set greater penalties for missed services. But it would have had to pay bus operators more to provide the service,” Crampton says.

If there's poor quality service, don't blame the private bus operator. Blame the terms of the tender for service. If council wanted frequent, reliable, non-cancelled, luxury services, they could have contracted for that. But it would have been really expensive. The costs would have been transparent. 

All kinds of worthy-sounding things could have been included in a contract for service:

  • Reliable, frequent, non-cancelled services. How? Set a large penalty for missed stops and cancelled services. But the operator would demand to be paid a lot to run the route. A thin staffing model wouldn't have worked.
  • Cleaner, more environmentally friendly buses. How? Require that every one of them pass an emissions test (SOx, PM 2.5) every four months (or whatever interval). But the operator would demand to be paid more to run the route, because they might have to upgrade the fleet to meet those requirements. 
Shifting it over to council owner-operators will mean either far higher and more opaque cost, or worse service, and probably greater risk of transit strikes where unions see councils as pushovers. A private bus operator is using its own money. Councils use ratepayers' money. And know what's something that encourages people to keep a car that they might not otherwise need? Threat of transit strikes. 

The few things not currently stupid and broken are being broken. 

Morning roundup

The morning's worthies:

Monday, 15 August 2022

Market Studies and Section 43

My column in the Herald last week, ungated here, on the Commerce Commission's market studies powers and their ability to look into previously forbidden places.

I wish they'd have just kept my title: The Spice of Competition Must Flow. 

In Frank Hebert's classic Dune series, the Bene Gesserit sisterhood's supernatural abilities extended only so far. There was a place where their powers could not see – a place that repelled and terrified them.

Over thousands of years of careful influence over royal marriages, the Bene Gesserit sought the birth of the Kwisatz Haderach – the one able to look where they could not and shorten the way.

The Commerce Commission's relatively new market studies powers may not quite make them the Kwisatz Haderach.

Nevertheless, there are parallels.

The Commerce Commission has long been able to pursue anti-competitive activity. Cartels are illegal. Some cartel conduct can draw criminal penalties.

Anti-competitive activity running short of cartels is also prohibited.

But there has been a place the commission has not been able to look.

Section 43 of the Commerce Act exempts activities authorised by government. If a law or Order in Council authorises an activity, that activity is allowed even if it appears to be anti-competitive.

There is some sense to the Section 43 exemption if you think that government generally works well. Parliament and the ministries, at least in theory, will have weighed the public interest and considered any effects on restraint of trade when setting laws and regulations.

A statutory regime may have anti-competitive effects but still be desirable on balance.

In an ideal world, ministries overseeing these regulatory regimes would be running rolling reviews to ensure the regimes continue to be beneficial.

But successive governments have done an abysmal job in ensuring that regulatory and statutory regimes remain fit for purpose.

Reviews of regulatory regimes, when undertaken, tend to have a narrow focus. They do not look at how a regime intertwines with other agencies' regulations and practices and its effects on competition.

Statutory regimes have been the place where the Commerce Commission has been unable to look.

I conclude:

In both its review of grocery retail and building materials, the commission turned its gaze to the place it had not previously been able to look: statutory regimes exempted by Section 43 that combine to thwart real competition. And it found things in serious need of remedy.

Like Dune's Kwisatz Haderach, the commission's market studies authority is powerful and just a bit dangerous.

The commission's very detailed work documenting what had been well understood by sector observers at a high level was not without cost.

Supermarket executive teams would have been tied up for months responding to requests for information while also trying to run supermarkets during a pandemic.

Some future ill-intentioned minister could direct the commission to undertake market studies on areas he wishes to punish. The study process itself imposes a substantial cost, regardless of its findings.

The commission would do well to provide its minister with a list of areas most in need of future investigation. And top of that list should be the places where it previously has been barred from action by Section 43.

Conditions of competition in the provision of medical services would make for a superb market study.

Earlier this year, it was reported that some 150 foreign-trained doctors living in New Zealand have been unable to practice because the rules require them to take up a supervised training position first.

Those positions do not exist for foreign-trained doctors.

The simplest explanation for regulations setting impossible conditions is that the medical professionals who help to set the standards wish to prevent competitors from entering the market.

If we are to have a Kwisatz Haderach, best it be directed in beneficial ways. Let the spice of competition flow.

I chose not to elaborate on the risks of jihad and war that could engulf the known universe, in part because the Commission is only resourced to do one of these a year. 

Tuesday, 9 August 2022

Three waters and revenue bonds

Will be up at Select Committee tomorrow, along with Nick Clark, to talk about three waters reforms.

The Initiative is a member of the Local Government Business Forum - a peak body of organisations that interface with local government. The Initiative didn't put in a submission on the Three Waters bill (there's just so much on) but the Forum did, and I helped a bit with that. Nick Clark is the Forum's secretary and did much of the drafting. 

The Forum's submission is here. As always, not all members of any peak body outfit will agree with every word on a consensus document - some will be part of organisations that have decided to stay out of the fray on 3 Waters. But it isn't far from my own views either.

We just don't see any of the proposed reforms as being necessary. 

There's a real problem that the legislation is trying to address, but it's gotten itself bogged down in piles of other issues. 

The real problems are water quality enforcement and monitoring, which is already being dealt to by a new regulator, and access to funding and financing tools to ensure that the pipes are up to spec and can be rolled out to support urban growth. 

That latter problem is serious, but seriously doesn't need forced amalgamation into four enormous water service entities. Just let councils issue long lived infrastructure bonds backed either by special rates on serviced properties, or by user fees, or by volumetric charges, or by connection charges, or any combination of all of them. How? The Local Bodies' Loans Act 1913 isn't a bad place to start. It's how councils used to be able to fund the building of stuff, back when it was possible to build stuff. 

Don't need complex new governance arrangements that open up piles of additional contentious issues. Just let councils issue ring-fenced debt. If solving water's what Parliament actually cares about. If they have some other agenda, they can just keep going as they are - but it won't work and it'll get overturned come a change in government. 

Monday, 8 August 2022

Poachers and gamekeepers

May 2020 seemed like the perfect time to start building on a hospital expansion. 

The Eden-Epsom Residential Protection Society disagreed. 

It's been tied up in the courts for the two years since then. 

Their successes in blocking a hospital expansion, during a pandemic, might seem surprising. Except that their President is sufficiently expert in Resource Management law that he's the guy that Labour asked to head up their review of the Resource Management system. 

Randerson's involvement with an organisation working to oppose a private plan change that would allow a hospital expansion was disclosed by Randerson before his appointment.

My column in the Stuff papers.

Auckland Council notified the proposed plan change on March 21, 2019.

The Eden-Epsom Residential Protection Society organised meetings to block it.

A spokesperson for the society, who did not want to be named, was quoted on March 31, 2019: “We are not opposed to hospitals per se and part of our case is there are suitably zoned areas of the city laid down under the Unitary Plan which could accommodate this activity.”

Hospitals are fine, you see, but Not In My Backyard – even if they are situated on a reasonably major thoroughfare.

Auckland Council approved the plan change in May 2020, with a few modifications.

Think back to May 2020.

New Zealand had just finished its first substantial lockdown.

Building more hospital capacity, so we would be ready if Covid got here, is the kind of thing that a sane place might do.

And May 2020 is exactly when the Government, and a lot of economists, were expecting unemployment to be heading toward double-digits. The Government planned a lot of make-work projects, some of rather dubious value, to ensure that construction workers would not flee overseas.

The hospital project could have been shovel-ready. It would have been a perfect project for May 2020.


The Eden Epsom Residential Protection Society appealed the decision.

It has been working its way up through the courts. The High Court is scheduled to hear the case in September of this year – more than two years after Auckland Council had provided its initial stamp of approval.

In its submission of May 9, 2022 to the unitary plan team, the Eden Epsom Residential Protection Society highlighted the importance of the three affected properties to the designated special character area.

Later in that same submission, the society argued that “intensification is best directed to the CBD and metropolitan centres rather than the fragmentation and ultimate destruction of irreplaceable areas of special character”.

Allowing a hospital in the area would not just affect properties considered significant, it might also set a precedent of allowing people to build things.

It is an indictment of our resource management system that a hospital expansion can be tied up in the courts for two years during a pandemic.

Can a country that worries more about a special character designation than about hospital capacity in a pandemic really be considered sane?

The Government has wished to progress an ambitious urban growth agenda, including a National Policy Statement on Urban Development requiring councils to enable more housing, and the Enabling Housing Supply legislation requiring Tier 1 cities to allow far more intensification.

David Parker, the Minister for the Environment, launched a comprehensive review of the resource management system in July 2019.

Tony Randerson, QC, chaired that review, which was completed and has been reported back to the Government. He is eminently qualified. There will not be many who better understand the system.

His panel’s review forms the blueprint for the Government’s approach to resource management reform.

The Eden Epsom Residential Protection Society’s submission of May 2022 lists Tony Randerson, QC, as the society’s president.

In answer to a written Parliamentary question on any potential conflicts in Randerson’s appointment to chair the RMA review, Minister Parker stated that, “Hon Tony Randerson CNZM QC declared that he was the president of an incorporated society that was going to oppose a private plan change request by Southern Cross Hospitals. A management plan was put in place to address the potential conflict and the treatment was that Hon Tony Randerson will not be involved in any hearings.”

This ironic coincidence has not previously been reported, but has been open secret in some parts for at least a year. 

Funny old country, New Zealand.

Saturday, 6 August 2022

Rent controls and vacancies

In the latest edition of the Journal of Urban Economics, some evidence that easing rent controls reduces vacancies

One housing paradox in many markets is the simultaneous presence of high costs and high vacancy rates. India has expensive housing relative to incomes and an urban housing vacancy rate of 12.4%. We show how insecure property rights in India, as a result of rent control and weak contract enforcement, increases vacancy rates. Using a two-way linear fixed effects panel regression, we exploit changes in rent control laws in the states of West Bengal, Karnataka, Gujarat, and Maharashtra to find that pro-tenant laws are positively related to vacancy rates. A pro-landlord policy change liberalizing rent adjustments could potentially reduce vacancy rates by 2.8 to 3.1 percentage points. Contract enforcement measured by density of judges is negatively related to vacancy. We estimate that a policy change in rent control laws would have a net welfare benefit and could reduce India’s housing shortage by 7.5%.

If the risk of being expropriated by a tenant goes down, landlords are more likely to rent out a vacant spot. 

Friday, 5 August 2022

The Vogons Return

In 2015, New Zealand's Vogons killed iPredict.

Money laundering was implausible, but considered too great a risk.

Today, the CFTC announced its withdrawal of its no-action letter for PredictIt, the US-facing site that Vic Uni maintained after iPredict went down. They haven't noted which of the conditions of the no-action letter was violated. I don't trade on PredictIt; not straightforward for Kiwis to do so. So I've no insights.

It's just a shame. 

Around the traps

A few bits from me in these:

Tuesday, 2 August 2022

Stadium co-governance

Oliver Lewis over at BusinessDesk had a look through Treasury documents on the Christchurch Stadium.

Treasury suggested a Council-led approach, both to reduce the fiscal risks to the Crown, and to avoid the challenges of a co-governance approach with Council.

As for a co-led approach (like the city rail link project in Auckland, with the council and the crown both holding shares of City Rail Link Ltd), the Treasury recommended against it, especially if the council had a majority shareholding in the jointly held special purpose vehicle.  

The crown would be assuming risk, officials said, but may not have sufficient influence. 

"Experience working with council to date indicates that a co-governance approach is likely to continue to be challenging and could result in time delays and cost overruns,” the briefing said. 

Later in the year, following meetings between Woods and council officials, the Treasury was tasked with providing advice on two options: a collaborative approach between the council and crown delivered via an autonomous vehicle, or a locally-led option. 

In an October 2019 briefing, the Treasury again affirmed its preference for local leadership on the project and referred obliquely to potential relationship issues should ministers opt for the co-led approach.

There may be some parallels to water.

Under the Three Waters proposal, the Crown takes on enormous backstop risk. They're effectively guaranteeing debt issued by the new entities. 

Treasury warned that Crown-Council co-governance over a stadium may be fraught. 

“For this approach to succeed, crown and council would need to reach alignment on the investment objectives, prioritisation of time, cost and quality, and the best path forward for the project,” officials said. 

“This has not been achieved to date and has proved challenging.”

I'm not sure why co-governance in waters would prove simpler. 

Afternoon roundup

Another long-overdue closing of the browser tabs: