Friday, 26 September 2025

The case for optimism

Kerry Howley has a superb piece in New York Magazine on the kids in San Francisco building the future.

Houses and motels turned into dorms for kids in their late teens through mid-20s, building everything from brain scanners through to an AI VC that evaluates funding pitches - with the AI having hired a person to be its real-world presence.
We head downstairs to a dark basement attached to a garage. A slight, long-haired man, a paid test subject solicited through Craigslist, sits before a computer screen, wearing a white cap that looks like a medieval linen coif threaded with wires. The screen flashes images — basil, a blazer, Parmesan cheese. With unsettling clarity, the computer will be able to resurrect the image from electrical signals in the subject’s brain. A subject considers a picture of jelly beans. AI offers a picture of similarly colored beads. A subject looks at a red station wagon; AI presents a red sedan. Until very recently, most people thought the data produced by EEGs, an 80-year-old technology, was noisy garbage. “They just didn’t understand the power of large language models,” Jonathan says. He is 24 years old.

Reading minds is what AI engineers mean when they talk about hard problems. Eventually, the tech will advance to interpret “evoked states.” “So we start with, you know, discrete smaller tasks like emotion, like positive, negative, maybe now ten, 20 emotions. And then we add more dimensionality so that eventually we can go into full sort of inner monologue,” a world of superior self-knowledge wherein we sift through our own memory banks rather than selectively recall events through a haze of misperception. “And,” he says, “we do it all in-house.”

Doing it all in-house looks like this: a server rack with LED-lit fans in the garage next to some exercise equipment and some bicycle helmets. Jonathan and his housemates built the rig themselves. “Just asking ChatGPT basically. You know, you can just ask and then order the parts you need and you learn and you debug.”
Kids partnering with AI to build things, no need to ask anyone's permission. 

Howley's kicker here... so very good. 
How do you make contact with the intelligence rising up from the machines around you? Do you build it a body? Do you offer it yours? It is perhaps tedious to point out that we are always operating under the shadow of destruction, deploying tools that might end us, convincing ourselves, not without reason, that if we don’t build the bomb, someone with worse intentions will. Not a single one of the AI kids had attempted to lecture me about a theory or suggested I read a paper; it was not me they were trying to program. Somewhere along the way, drawn into their swell, I had begun to think of large questions about the nature of AI as New York questions, millennial questions, distant from the center of things. Where it mattered, humans were not debating AI; they were merging with it. You order the parts you need, you learn, you debug. The kids carry on with the crisp clarity of engineers, integrating what is immediately useful, discarding or rewriting what is not. No one will ask your permission to build a world you do not understand.

It's like they're living in an 80s William Gibson novel. Working in spaces where policy and regulators can't really stop them. They don't care about policy papers. They're just building. 

Those spaces matter. Policy is so impossibly stupid. 

Here, Parliament's trying to figure out the best way of breaking the internet, with National wanting to copy Australia's insane social media age-gating bill, and Labour wanting to copy the UK's even worse version. News outlets cheer them on, having always figured that social media platforms are the enemy anyway. Both parties see it as crack cocaine for attracting pivotal female votes in the 35-55 age bracket. 

And I understand that Parliament's select committee looking into this is wondering whether it's possible to regulate VPNs. Because that's been the obvious workaround in the UK for adults who don't want to have to show ID to visit every darned website. So long as at least one country remains free, VPN to it and pretend to be from there. 

I'm cheering for the cyberpunks. They may be our best hope. 

Friday, 5 September 2025

Infrastructure roulette

In some respects it's reasonable to think about city council as being a kind of club.

Everyone who owns property in Wellington is a member of the Wellington Council club. The club levies itself to provide things that the club members want, and to cover off the cost of stuff that central government wants the club to provide that club members may or may not want. For some reason, renters were added as voting members of the club. But the debt that the club issues is ultimately backed by each of the club properties. We'll leave that messiness to one side for now.

The club finds that part of its infrastructure is in terrible shape - partially because of decisions of past club executives; partially because of a recent earthquake. 

The club can choose to rapidly replace all of that infrastructure. That would be very expensive. But it would sharply reduce the chances of very bad outcomes where infrastructure blows out.

Or it could choose to pace itself in that infrastructure replacement. That will be much less costly. So much less costly that you could, at least in principle, compensate anyone who suffers from those infrastructure blowouts if it's really the infrastructure that's to blame. 

The latter could be a very reasonable deal. Behind the veil, none of us know which of our properties is sitting on top of a water network pipe that will collapse catastrophically and destroy our home. But we'd all be bankrupted if we tried replacing all the pipes in a giant hurry - it's just impossible. So we're each better off if we all agree to take a more cost-effective path on the infrastructure refresh while compensating any club member who draws the short straw.

The alternative, with no compensation, is more like the club members agreeing to play a giant game of Russian Roulette. We don't know which of us will draw the short straw, but we hope to heck it won't be us because whoever it is will be ruined. 

It could be that the numbers don't actually work out this way. But it seems a reasonable stylised example. 

And in any particular case of blowout, you'd want to be sure that the club member hadn't contributed to the failure through their own negligence. 

But if it were clear-cut, it shouldn't be a legal battle. It should just be compensation. 

I mean, if a private company accidentally drove a bulldozer through your house and wrecked it, nobody would think it reasonable to force you to go to court to get them to compensate you. Everyone would pillory the company. There would be boycotts. Some Vic Uni quasi-academic might call for the company's chief executive to be hanged. 

Here's The Post.

Wellington City Council is refusing to pay for repairs after one of its own burst water pipes triggered two landslides that has left two families facing bills of up to $600,000.

A council-commissioned geotechnical report found the Wadestown slips were “most probably” destabilised by a failed drinking water main, owned by the Wellington City Council and maintained by council-controlled organisation Wellington Water.

The 50mm pipe ruptured on August 4, saturating the embankment, and the slips forced both households to evacuate. Residents are still living in temporary accommodation.

I Am Not A Lawyer. 

But it seems likely that the homeowners could sue council for nuisance, and win, and have costs awarded against council, but the costs won't likely be anything like what would be needed to make them whole as compared to council just providing compensation. 

Council is not a good club. 

Friday, 29 August 2025

Cementing allocations

Recall that New Zealand issues industrial allocations under the ETS to avoid inefficient carbon leakage. 

Basically, if emissions are charged here but aren't charged abroad, and production shifts from here to there because of our charges, net emissions can increase rather than decrease.

That is obviously counterproductive. So industrial emitters facing competition from places with unpriced carbon get allocations of NZU. Done right, it maintains the incentive to reduce your emissions because you can sell off your surplus NZU. But it has to be done right.

The obvious way of doing it right would be to scale industrial allocations not by the NZ plant's emissions but by emission intensity overseas. If a tonne of cement abroad has x tonnes of associated CO2 emissions, then allocate x NZU per tonne produced here. Basically. Then, if emissions intensity abroad reduces, the plant here gets fewer NZU for its own production. It maintains an incentive to reduce your own emissions intensity, and avoids getting into spots where it would actually be carbon-efficient for production to shift to plants abroad that have lower emissions than plants here.

It gets messier if the import mix has stuff from places that are cleaner than here and stuff from places that are dirtier from here. If you scale to the average emissions intensity of the import mix (weighted by proportion of imports), there's still a potential problem. Suppose average intensity overseas drops and so allocations here drop. The NZ producer reduces production. But if that hole is filled by product from the dirtier plants overseas rather than the cleaner ones, you've wound up having inefficient leakage again. 

Carbon border adjustments are an alternative. But it gets messy with trade agreements. And you have to find a way of scaling the adjustment to the emissions intensity of the product. 

New Zealand's industrial allocations seem to have a bit of a problem in cement. 

In a presentation to investors in June, Fletcher Building said a carbon border adjustment mechanism would level the playing field.

Currently, only goods produced in New Zealand face liability under the emissions trading scheme.

As an energy-intensive, trade-exposed emitter, Golden Bay Cement is eligible for an annual allocation of free carbon credits.

Data released last week shows that for last year's production, the company received 488,575 New Zealand Units, worth almost $27 million at the current spot price of about $55.

But the company says that a 2023 law change means that as the country's only cement manufacturer, it is now effectively being "rebaselined" every five years against its own emissions - which means that every time it cuts emissions it reduces the rate at which its free allocation is calculated.

"Significant investment in decarbonising local manufacturing is not viable without certainty a carbon border adjustment mechanism will be in place in the medium-term," it said in the presentation.

"Given regulatory settings, we have reviewed our capital plans for Golden Bay.

"The current investment plan retains flexibility to remain a domestic manufacturer or transition to an import model."

That just doesn't make sense.  

The government is reviewing the settings. Scaling to international emissions intensity would seem obvious. A carbon border-adjustment could also work but I have no clue whether it can be squared with trade agreements.

The annual allocation of free carbon credits to trade-exposed, energy-intensive emitters like Golden Bay Cement was last adjusted in 2023.

The company says that, in the absence of a CBAM or an equivalent mechanism, it would likely need to consider transitioning to an import model by the early 2030s.

That could result in a non-cash impairment and write-down of assets of up to about $165 million, as well as potential make-good and cash redundancy costs of up to $180 million.

For last year's production, Fletcher received 488,575 New Zealand Units, worth almost $27 million at the current spot price of about $55.

The company says it is engaging "productively" with the Government on the issue.

If cement produced abroad is more carbon intensive than cement produced here, then shifting to imports is the kind of carbon leakage that we ought to be avoiding.  

A faster track to supermarkets

Minister Willis announced measures opening retail grocery to greater competition. 

She announced a fast-track process in which retail grocery that would pass a 'does this improve competition' test could get consents that override existing district plans, access to a single building approvals authority for sites across the country, easy ability to replicate builds in multiple places, and an easier path through the overseas investment office.

Back in May, Benno at our shop put up our proposal for achieving the same outcome. Ours differed a bit. It tweaked existing fast-track processes so that a plan change would be effected that could override parts of plans with which it were otherwise inconsistent. The path would only be open to new entrants or to minor current players looking to substantial expansion. And sites would be mixed-use by default so entrants could stick apartment towers above their stores. After 5 years, the pathway would open to current incumbents. The intention here was to give new entrants a head start and a good reason to move early. And, if no entry happened, to let the incumbents go more strongly head-to-head in spots where they previously haven't. 

I think the Minister's proposed process is decent. It seems obvious that Costco will use it for speeding up its own expansion. Whether anyone else will use it is anyone's guess. The point of lowering barriers isn't to guarantee some number of entrants. It's to discover whether new entry is warranted. Maybe there just aren't super-profits here worth chasing. It's hard to tell when entry is de facto illegal. Removing the barriers lets you find out.

There's always ways this could still go wrong. But I'm optimistic. 

A few previous bits.

Friday, 22 August 2025

Banning racing

New Zealand will be banning greyhound racing

The Bill to formally end greyhound racing will be introduced to Parliament later this year. The public will be able to make submissions to the select committee as part of the process.

“It is important people get the opportunity to have their say. The decision to end greyhound racing was not one Cabinet took lightly. I acknowledge the impact that closing the industry will have on those involved.

“But globally the industry is winding down, with Tasmania recently announcing an end to greyhound racing. The bottom line is too many dogs continue to die and be seriously injured, and it is time to do the right thing,” says Mr Peters.

Ok. So the reason for banning greyhound racing is that too many dogs die and are seriously injured.

That is the basis for the ban, according to Minister Peters.

Let's go with that. 

I've asked my advisor about the rates of accident and death per racing start for greyhounds and horses.

Because we haven't banned horseracing. Indeed, we subsidise it. 

My advisor's answer, which presumably could be checked by someone with industry-knowledge:

Bottom line

Per start, a horse is more likely to die than a greyhound in racing, with the gap ranging from ~1.5× (NZ flat) to ~5× (Britain, all racing), and ~12× or more in jump racing. 

Greyhounds sustain more recorded race‑day “serious” injuries per 1,000 starts than Thoroughbreds in the datasets that exist, but those counts include categories (e.g., ≥22‑ or 43–90‑day stand‑downs) that don’t map cleanly onto how horse‑racing reports non‑fatal injuries. 

So on a first cut horses have a substantially higher risk of death per racing start than greyhounds have.

So if the government wanted to ban racing on basis of deaths, it should have started with horses.

Maybe there could be some CBA claiming a lot more benefits from horse racing per race as offset, or maybe people care more about dogs dying than about horses dying. 

But the simplest explanation here is probably the correct one.  

Friday, 15 August 2025

For a de minimus threshold for mergers

I've spent the last couple of days at the Competition Law and Policy Institute's annual workshop.

Webb-Henderson's Lucy Wright made a good case for a de minimus threshold for merger controls. Small mergers could have a safe harbour, or mergers in markets of insufficient NZ importance.

If we need to set a monetary threshold for a market of insufficient NZ importance, there's an obvious benchmark.

Same day as that session at the CLPINZ workshop, Terry Allen, former Chair of Serrato, had a piece in the Post. You'll remember Serrato. I've sometimes pointed to it as example of how the NZ Commerce Commission destroys value by chasing nth order issues when first-order issues are left by the wayside. 

Allen writes of their NZ startup:

In fact, Pioneer liked Serato software so much that when the company ran a sales process, it was the preferred bidder. Its offer not only valued the company at around $175 million, it also promised to establish a global music laboratory in Aotearoa and to grow the headcount of the chirpy little music company.

It was all going swimmingly until the Commerce Commission pulled the plug mid-2024.

The commission’s concern was that Pioneer’s parent company, AlphaTheta Corporation, already held a significant share of the global DJ hardware market.

Serato was a major player in the DJ software market. In the commission’s view, combining the two could “substantially lessen competition” in the DJ software and related hardware market — even though the New Zealand market for such products is tiny, accounting for well under 1% of Serato’s sales.

The merger review took a year and cost the commission more than $500,000 to investigate, according to the National Business Review. Legal and advisory bills for both Serato and Pioneer were well north of $1m.

The decision meant the reported $175m-plus deal was dead in the water, Serato remained independent, and the promised music lab never left the drawing board.

The Commerce Commission decision did four things. First, it cost the commission over half a million dollars and both Pioneer and Serato over a million in professional fees.

Second, it took the commission a full 12 months to make a call — effectively hitting the pause button mid-track for a year. Tacked onto pre-marketing and then running the process a second time the all-up time was more like three years. An eternity in a fast-moving tech environment.

Third, it made it jolly challenging to run the company on a daily basis while its future ownership was debated and delayed. We were lucky to have a top-flight management team keeping the home fires (and DJ decks) burning.

And fourth, it forced the company to run a whole new sales process but limit the participants to financial buyers rather than trade buyers — effectively narrowing the field to private equity.

I've heard reasonable-sounding arguments that NZ ComCom stuffed this one up in part by defining the market improperly. While Serrato's software is great for hip-hop artists, it's not as popular for artists that don't use scratch. Define a market narrowly enough and weird things happen. 

Allen points to the more fundamental issue:

In today’s world, an increasing number of Kiwi companies build and sell digital services, and are global from day one.

While the commission understood that Serato’s New Zealand revenue was a wafer-thin slice of the whole, the mere existence of any local sales meant it had to run the merger through its standard domestic-competition lens.

The second is that under-resourcing of the commission means even straightforward matters can take a year to determine. In the world of global M&A, that’s an eternity — enough time for opportunities, buyers and market conditions to change completely.

Both of these things need to change if we want New Zealand to continue to grow globally significant tech companies and realise top-dollar sales when their founders exit.

Otherwise, we risk sending an unhelpful message to the world: if you want to buy a Kiwi tech success story, prepare for a year in regulatory limbo, big legal bills, and the real chance the deal won’t happen at all.

Meanwhile, a message to local founders is base your company overseas and only sell your services to foreigners.

That’s not the kind of remix New Zealand should be famous for.

Set a de minimus standard such that if the NZ market is trivially small, it isn't worth the Commission's time. 

So that venture capital won't be scared of backing NZ startups for fear that NZ ComCom will block their reasonable exit if the play pans out and a large international company wants to buy their startup. 

How to define the threshold for the de minimus standard for a market of insufficient NZ importance? A number bigger than the market for hip-hop DJ software in NZ seems like a reasonable starter. 

Tuesday, 12 August 2025

To what policy problem is this the solution?

On my drive in to work yesterday, RNZ's Corin Dann challenged the Prime Minister about one part of his meeting with Australian PM Albanese. They had apparently promised to work toward some kind of joint ID and driver license system. 

I have rented a car in Australia using a NZ driver's licence. That was ages ago now. But has that gotten harder somehow? 

I understand that passports are required for proof of age if you want to buy alcohol, with licensees not recognising trans-Tasman driver licences. But is that a problem to which a joint driver licensing system is a solution? Or is it simpler to tell licensees that they can rely on trans-Tasman driver licenses as proof of age, while supplying sample copies of the various Oz state driver licenses (and the one NZ one) so folks are familiar with both and better able to recognise fakes.

If a bar in one Australian state can rely on driver licenses from other Australian states and the world doesn't end, it doesn't seem that much harder to teach the guy at the door how to also recognise a NZ driver licence. 

What is going on here? 

The joint statement by the two PMs gives a couple of hints.

10. Prime Ministers also launched a new phase of work to deliver mutual recognition of accredited digital identity services, and commended the cooperation between New Zealand and Australian States and Territories to facilitate the verification of digital drivers licences across borders.

24. Prime Ministers reaffirmed their commitment to ensuring all Pacific countries have access to safe, secure and stable banking. They welcomed ANZ’s announcement of its long‑term commitment to the region, secured by an Australian Government guarantee, and the Commonwealth Bank of Australia stepping in to provide banking services in Nauru. They also welcomed Australia’s announcement at the 2025 PIF Economic Ministers’ Meeting of further support for secure and inclusive digital identity systems across the Pacific. Prime Ministers noted Australia’s and New Zealand’s contributions to the Pacific Strengthening Correspondent Banking Relationships Project and recognised the importance of regional action to address the decline of correspondent banking relationships.

On a bit of checking:

There has been Twitter speculation that all of this is about age-gating social media. It looks like this push started well before anyone was talking about that. 


There are defensible use-cases for privacy-preserving verification. Having a system where I can request that the authenticator provide confirmation of specific details about me to a third party, and that third-party being able to confirm those details with or without needing to know anything else about me, has value. 

When the government set the Covid check-in app, it baked privacy in right from the outset. Scanning in at a place would let you get a notification that someone else who had scanned in at that place around the time you were there wound up testing positive for Covid. Done poorly, it would be a privacy nightmare. But they had folks like Andrew Chen working on it. It was fine. And there was lots of open discussion about it when it was being developed, so everyone knew that people who cared about privacy were in on the ground floor in building the thing. 

When the first a lot of us would have heard about a government digital ID is in context of a trans-Tasman agreement for mutual recognition, in context of Australia wanting to age-gate social media, and nobody particularly trusting that the age-gate system isn't intended to result in the kind of censorship being seen in Australia - not so hot. 

Just a bizarre thing for the government to highlight without having put up explanations ahead of time. 

The PM's talk had this as all being about mutual recognition of driver licences. Which is obviously a weird justification. We already recognise each other's licences. And if Oz and NZ makes it tough for bars to recognise each other's licenses as ID, that's far more easily solved by just letting bars use the other country's driver's licence. The rest of it isn't needed for that problem. 

Instead - both countries are working toward digital IDs, both countries five years ago agreed that they'd recognise each other's digital IDs, and this seems just to be reaffirming that prior agreement. I'd love there to be more assurance around privacy being important in the design of any of these in NZ. Because there are very bad versions that should not be supported.