A welcome win for Ann

Usually, harrowing individual cases make for terrible law. In this case, it's been rather the opposite.

Ann Brower was the only survivor on the bus crushed by falling unreinforced masonry on Colombo Street in the February 2011 earthquake.

Unreinforced masonry facades are the clearest case where government regulation to save lives very likely passes cost-benefit assessment. Passers-by, or those in buses on the street, are bound by no contractual nexus with the building's owner. Falling bricks are a rather clear externality. There are a few ways of solving it. Regulatory standards can do the job, but risk over-protecting in areas with few passers-by and under-protecting in busy places. A liability standard could be preferable, as a per-casualty penalty should induce appropriate risk mitigation where coupled with requirements either to insure against the loss or to post a bond against it.

Ann's win has the government targeting those facades first. 

In the very first sentence of his press statement on changes to proposed legislation, Building and Housing Minister Nick Smith singles out the contribution of Christchurch earthquake survivor and Lincoln University lecturer Ann Brower.
Ms Brower was the sole survivor of the bus crushed by a collapsing façade in Colombo Street in the February 2011 earthquake.
“We need to heed every possible lesson from the February 22 earthquake in Christchurch in rewriting the building laws to minimise future fatalities,” Mr Smith says.
“Falling parts of unreinforced masonry like parapets and facades killed 35 people that tragic day, including every passenger on the Red Bus except Ann Brower,” he says.
“I pay tribute to her fastidious advocacy and professional research that has persuaded us to change the law and prioritise these buildings for upgrade.”
Ms Brower’s pleas that the government act to prevent such building features killing others in the next major quake were supported by many organisations who made submissions on the Building (Earthquake-prone Buildings) Amendment Bill. (See report attached)
Ms Brower’s supporters ranged from New Zealand Society of Earthquake Engineers (NZSEE) to GNS Science.
The latter had said many people were likely to die unnecessarily in the next major earthquake because the bill was pursuing the wrong objectives.
Like Ms Brower, GNS director Kelvin Berryman told NBR he felt the government was ignoring his organisation’s advice.
Mr Smith now estimates about 2000 buildings nationwide will be affected by the new category covering building parts which could fall into public space during an earthquake.
Such features in high risk areas will now have to be upgraded within seven-and-a-half years instead of 15 years and in medium risk areas they will need to be fixed within 12-and-a-half years rather than 25 years.

Next, though, councils will have to think carefully about how the facade reinforcement requirements intersect with councils' rules around heritage buildings. We may be simultaneously mandating and prohibiting some rather important work.

Land giveaways?

If you counted up how much money NZ Lotto gives out to lottery winners and compared it to the amount those gamblers paid for their tickets, you'd conclude that Lotto were an unsustainable rort on the public. The government's practically giving away highly valuable assets, given the low low prices charged.

I attended Ann Brower's talk at this year's NZAE meetings on high country tenure review. The sessions are normally Chatham House rules, but I note that Chris Hutching reported on her paper in this week's NBR.

Ann and her coauthor show that high country estates that were sold to their lessees, and were then on-sold, increased a lot in value in the interim. Hutching cites Brower as reporting that 371,000 hectares were sold into freehold, with 73,685 hectares then on-sold. Some sections were on-sold for several hundred times' their initial valuation - and that that is especially true for sections overlooking lakes that became developments.

Now the problem here is twofold. First, you'll always run into trouble caused by selection bias in this kind of study. The sections where the leaseholder struck a fabulous bargain get on-sold with their values then included in the study; the sections where the Crown did far better are less likely to turnover in the short to medium term, so their lower prices don't get recorded.

But more importantly, in my view, is that the Crown was kinda selling lottery tickets. If you get freehold tenure over a section with lake views, you'll make a killing on it if you can get resource consent to develop it. But if somebody decides that those killer lake views make it an outstanding national landscape, well, you have a very beautiful section that maybe can't be used for anything.

And that's why I'm a bit worried about counting up the value of the winning lotto tickets.

It's perfectly plausible that the Crown messed up in its negotiations and charged below-market rates in some cases. It's also perfectly plausible that the Crown should be selling some of those leaseholds at below-market rates to reflect the sweat-equity contributed by the leaseholders over generations - though that's more debatable. But I doubt we can draw generalised conclusions about the process from the 20% of the land that was turned over shortly after tenure review. The other 80% might be relevant too.

Worst of both worlds

Unsafe buildings impose probabilistic costs on passers-by. There are two basic ways of solving the problem. You can make the building owner liable for damages his building imposes in case the downside cost eventuates, in which case he buys insurance against that potential liability and is charged insurance premiums proportionate to the risk he imposes, or you can enforce mandatory standards on building owners limiting the maximum risk the building can impose. Either one can yield decent outcomes. In the former case, building owners invest in safety improvements up to the point where they're no longer worth the cost, and if liability is roughly right, that's also roughly the socially optimal amount of safety investment. In the latter case, outcomes are a bit less responsive to heterogeneity in actual imposed risk but at least we avoid terrible outcomes.

But things go a bit screwy when you socialise downside costs, don't charge building owners any actuarily-adjusted insurance levy for provided insurance, and don't enforce the actual building code.

And so 605-613 Colombo Street fell onto a bus, killing 12 and leaving only Ann Brower to write about the failures in building regulations. Before the earthquakes, Council failed to enforce the building code despite pretty serious problems. After the September and December quakes, when the building became incredibly unsafe, Council didn't let the building owners tear the thing down. Ann writes:

At the beginning of February, the Royal Commission of Inquiry heard two days of evidence about this one building that caused 12 deaths and my injuries. On Day 1 of the hearing, we heard the building owners say that re-attaching the façade that had separated from the cross-walls by 44mm would have cost $200,000. Repairing the building enough to make it safe to occupy was impossible (the $200,000 strapping job would have protected passers-by in the street, but would not have made the building safe to occupy). So, the building owners approached the council with their plans to demolish the building due to imminent danger to the public of the façade leaning out over Colombo Street, which is after all the main street of town. Council staff replied that they had no choice but to follow a consent process, which would take six months at least to complete. So on Day 1, the building owners blamed the council for delaying demolition with the consent process. Council solicitors blamed the Resource Management Act (RMA) for requiring consents and said that they had no discretion in the matter. The Council solicitor asked the witnesses, “Is it your testimony that we could just flout the RMA?” Council’s hands were tied, they said.

The trouble is that, in September, a unanimous Parliament had untied Christchurch City Council’s hands. Parliament gave the City Council precisely the power to flout the RMA in order to protect public safety.

On Day 2 of the hearing, council staff admitted that they were aware of this power, but found it draconian, so used it only three times. Neither heritage nor the RMA was to blame here. Council ignored the powers that Parliament granted. Since when can a city council second-guess a unanimous Parliament?

I should also add that this hearing was originally scheduled for early December. But, Council solicitors requested it be delayed for several months after new evidence about Council’s delays on demolition and its failure to put up a fence posed “reputational issues” for the Council. “These two buildings are particularly fraught,” the Council solicitor said in The Press.

There weren't heritage regulations preventing Council from allowing that the building be demolished. But whether the insistence on drawn-out consenting processes for the demolition stemmed from Council worries about annoying heritage activists, or just from the love of process... who knows.

Either moving to a liability system or enforcing a stricter set of earthquake building codes on older buildings is sufficient for fixing things. And both will put a ton of pressure on owners of older buildings, some providing substantial heritage amenities, to tear them down in favour of newer buildings. Moving to a system that pays owners of older heritage buildings to strengthen them moves the burden of heritage protection onto the public that enjoys the heritage amenity and encourages a focusing of effort on the most important buildings.

In praise of liability

Christchurch City Council helped ensure that a dozen people died last February. Ann Brower, who lectures at Lincoln, narrowly missed being one of them; she was the only survivor when an old dangerous building fell on top of the bus she was in. She catalogues the failures that led to her very close brush with death.

Regulatory failure at its most murderous made Colombo St run red that day. Responsibility falls at the feet of the building owners, Parliament, and most of all the Christchurch City Council.

In the Building Act 2004, Parliament encouraged and enabled, but failed to require, councils to enforce a minimum safety standard for known "earthquake prone" buildings.

Christchurch City Council chose a "passive" policy, of no strengthening requirements. Parliament failed to require, the council failed to enforce, and the owners failed to reinforce - in 1982, in 1991, in 2005, after September 2010, and after December 2010. For 30 years, the owners and the council did nothing.

On Day 1 of the hearing, the building owners blamed the council, for delaying demolition with the consent process. Council solicitors blamed the Resource Management Act, for requiring consents, and said they had no discretion in the matter.

Council's hands were tied, they said.

Yet, on September 14, 2010, a unanimous Parliament untied council's hands when it passed the Canterbury Earthquake Response and Recovery Act 2010. It gave the Crown power to amend or repeal any law, in the interest of public safety and earthquake recovery. Then they issued an order in council that expanded the situations in which council could demolish without consent. City council had the power.

...

The evidence, five centimetres thick, makes it searingly obvious that everyone knew what would happen. It was predicted but not prevented. It's not a case of trying, but failing, to protect public safety. Everyone failed to try, likely because neither council nor the owner bore the risk of deaths and injuries.

ACC bore the risks. I bear the scars. And 12 died. Under ACC, the government absorbs all liability, no matter who is at fault. So to the owners, safeguarding the building was all cost and no benefit. Since council failed to enforce building standards, why repair? Absorbing all liability creates a moral hazard. That's economist-speak for unwittingly encouraging risk by cheaply insuring against it. This rewards irresponsible behaviour by failing to penalise it.

The regulatory framework in place on February 22 forced taxpayers to subsidise risks that should have been borne by building owners and their insurers. Subsidies render unaffordably risky activities affordable, like repeatedly failing to reinforce an unreinforced brick building less than 200 kilometres from the Alpine Fault.

Without the taxpayers' subsidy of the risk through the no-fault ACC Act, many of the unreinforced masonry buildings would have been too expensive to insure, and the 12 who travel with me might still be alive. If there are to be subsidies, it is better to subsidise safety with public funding for earthquake strengthening than to subsidise risk.

I wonder to what extent other nested bits of regulations caused problems. I've often heard rumours about that some of Christchurch's charming deferred maintenance on older buildings stemmed from that getting consents to do any upgrading triggered requirements to bring older buildings up to newer code. And then this will interact with regulations on heritage buildings making any particular level of structural engineering upgrade far more expensive and time consuming. Small marginal upgrades that could have made small bits of difference for some buildings, if that's correct, then required owners to take on reasonably large upgrading costs. In worse cases, heritage regulations effectively barred earthquake strengthening altogether, although 603-13 Colombo was not on the Heritage Register. [Update below]

What's a way forward?

1. Require building owners to carry liability insurance for risks their buildings pose.
2. Establish Council funds, to which people would be invited to provide supplementary voluntary contributions, that would pay owners of buildings with heritage amenity value an annual subsidy for the positive contribution they make to the City. The burden of heritage preservation ought to fall on those enjoying the external benefits; that's best captured through payments by Council and voluntary contributions from high-demanders.
3. Abolish existing heritage protection legislation and fix the RMA - make it extremely easy for building owners to demolish or make safe their buildings. While CERA can stomp on RMA in Christchurch for the time being, I wonder how tough it is for an owner of an older Wellington building to get the permissions to fix it.

New Zealand building insurance markets seem relatively seized up; it could take a few years before private insurers are willing to start writing contracts on these risks. But that's no reason not to start the ball rolling. Announce this year that liability insurance will be required as of say 2018 and that the regs easing up on demolitions and building strengthening will be in place for 2015. That gives Councils a couple of years to start figuring out which buildings really merit subsidy and for owners to figure out whether their buildings are viable in a world in which they bear the risks of failure.

If the choice were between ACC and America's broken tort system, I pick ACC. But I'm not sure that we can't make improvements at the margin.

Full disclosure: Ann is a coauthor of Canterbury's Phil Meguire and, back before the earthquakes, sometimes joined us for drinks at Canterbury's Staff Club. I hope to be able to buy her a drink when the staff club is repaired and when she's again up for the trip out to Ilam.

Update: Ann emails:

Also it was a category 4 heritage building, meaning it was municipally (not regionally, nationally, internationally) significant and it was desirable (not important, very important, or essential) to keep it.  So under the city's own plan, they had the discretion to demolish without consent, even without resorting to the special powers granted by parliament.

Council staffers were far more rigid than the legislation required. Rigid structures collapse in earthquakes. We can't afford non-ductile Councils in earthquakeland. See also this excellent post from TheAntiplanner.