Monday, October 1, 2018

Supersize my City: Super for Some


Is it the growth we want?

I have been thinking about the increasing cost of Auckland Council.  Is it simply a sign of growth, or is it something to do with the nature of the large councils (or large organisations in general)? And if it is all about growth, it raises other questions that remain unanswered, questions of physical and social capacity. Is it about coping with something that seems inevitable? Or is it something that the community wants and can embrace?  And if so, what will happen when that growth slows?
And how does the growth we are experiencing align with the much-touted ambition to be the world’s most liveable city?  (And what precisely does that mean?) There is a risk that we have leapt to the answers without quite understanding the questions. 

Another question

There’s another elephant on the Isthmus, one I turn to here. Can we sustain the costs of a super-sized council created to combat the supposed inadequacies of smaller councils? As the Council seeks out new sources of revenue, will they be enough to head off the fiscal headwinds that the Council may encounter, especially as the costs of living in Auckland increase?
If, as was hoped, a single city was to be more streamlined and efficient, this should be evident in its employment performance. I concentrate on council employment and its costs in this post. To do so I returned first to an analysis I have undertaken before (in 2014 and 2016).  Now that the super city has been with us for eight years the numbers should be more settled.

Employment growth: onward and upward

The amalgamation of six separate territorial authorities and a regional council (including the Auckland Regional Transport Authority and Watercare Services) was aimed at savings through integration and economies of scale.
Gains on the employment front from amalgamation were short-lived, however.  Stats NZ showed employment figures soon back above trend as indexed growth in Auckland moved ahead of the rest of the country (Figure 1). 
Figure 1: Local Government Employment Growth, Auckland and the Rest of New Zealand, 2000-2017
Source: Business Demographics, Statistics NZ

It gets worse when we look at the annual June reports for the Council since 2012.  They show significantly more employees when the subsidiaries – the CCOs – are accounted for:


Figures from:
2012
2013
2014
2015
2016
2017
Auckland council (June Reports)
6,789
7,008
7,051
7,123
7,184
7,220
Statistics NZ (as at February)
5,000
6,600
6,800
7,400
7,600
6,400
Difference (rounded)
1,790
410
250
-280
-420
820
 Source: Auckland Council Annual Reports; Stats NZ Business Demographics
Interestingly, the dip in 2016 in Statistics NZ figures does not show up in the Council’s data. This is preumably influenced by the fact that some of the Council's service delivery functions (water and waste, for example) turn up in other sectors. 
However, it turns out that employment growth has taken place primarily in Council's subsidiaries. Consider the staff figures for the period 2012 to 2017:

2012
2013
2014
2015
2016
2017
Gain
2012-17
Share of Gain
Core Council Staff
6,789
7,008
7,051
7,123
7,184
7,220
431
6%
CCOs' Staff
3,368
3,608
4,071
4,257
4,407
4,673
1,305
39%
Total Group
10,157
10,616
11,122
11,380
11,591
11,893
1,736
17%
CCOs' Share
33%
34%
37%
37%
38%
39%
75%

Source: Auckland Council Annual Reports
While growth within the “core Council” has trailed population growth (6.3% compared with the Stats NZ estimate of a 7.2% population gain), the CCOs have grown much faster.  They accounted for 75% of employment growth in the Group, reaching almost 40% of the total. The result: overall council employment increased at more than twice the rate of population growth.  It was also well ahead of 5% inflation since 2012.  
On employment grounds council growth is easily outstripping the growth of the city.

The cost of council employment

Even if wages and salaries stayed constant, the prospect of savings in employment costs from combining councils was astray. Annual reports show growth in the cost of council employment (“Employee Benefits” including contributions to superannuation, provisions for redundancy, and the like) increased 24% from 2012 to 2017 across the Group. The subsidiaries, the CCOs, grew employment costs by 45%; the core Council by a more modest 12%, although this was still twice the rate of growth in Auckland's employment.
Figure 2: Employment Costs, Auckland Council and CCOs, 2012-2017
  Source: Income and Expenditure tables, Auckland Council Annual Reports
Across the Group, employment costs were $853m in 2017, $163m up on 2012.  So much for $66m in staff savings ($74m in 2017 dollars) touted in 2010 as justifying the super city.  . 

Super city, super salaries

If the workforce growth that took place had been at stable incomes, the cost of employment would have been $481m for the Council and $330m for the subsidiaries, $811m.  This leaves an additional $42m attributable to wage creep after inflation ($27m in the core Council and $15m in the CCOs).
How did this happen? Well, Bernard Orsman in an article in the New Zealand Herald last year put his finger on it:
“One in five staff at Auckland Council is earning more than $100,000 as the wages bill for the Super City blows out for the third year in a row.
“…  the number of executives earning more than $200,000 has increased by 25 per cent in the past year, from 155 to 194, according to figures in the council's 2016-2017 annual report”.
and
“The council and its six council-controlled organisations (CCOs) employ 11,893 staff, of whom 2,322 earn more than $100,000”.
Changes in these figures since 2012 reveal some interesting developments (Figure 3).
Figure 3: Shares of Salaries $100,00: Auckland Council 2012-2017
 Source: Auckland Council and CCO Annual Reports
First, growth in the core Council occurred entirely in the $100,000-plus bracket, rising from under 10% to 16% of employees while those earning less than $100,000 declined. This means that all growth in employees earning under $100,000 a year took place in the CCOs. Is this a sign that the core Council is already suffering organisational ossification (entrenching people, systems, and values as the outside world continues to change)?
Second, while 1,500 people in the core Council earned between $100,000 and $200,000 a year in 2017and 70 over $200,000, a disproportionate share of high salary growth took place in the CCOs.  By 2017 there were around 1,100 people earning $100,000-$200,000 in CCOs, up 48% since 2012, and 120 earning over $200,000, up 62%.
Not only has absolute employment growth focused on the CCOs, but they have provided fertile grounds for supersizing salaries, leading to significantly higher average wages compared with the core Council by 2017.  This is despite growth in the latter taking place entirely at the higher end of the salary scale.
It seems that both the council and its subsidiaries have been busy uploading salaries as well as people

Even more questions

While council reports are full of measures of progress and performance, there are still some outstanding questions.   

For example: 
  • Can we justify this growth in employment costs by increased productivity?  
  • Maybe we need to look at the bigger income and expenditure question?
  • Did we simply replace territorial fragmentation with functional fragmentation?
  • And where are the governance and efficiency gains for local democracy in that? 


Thursday, September 6, 2018

But Wait! there’s more. Why a bed tax on Airbnb in Auckland really is a bad tax


The opposition is growing
A couple of blogs back I said that imposing a bed tax on informal accommodation mostly offered through peer-to-peer web sites is a bad idea.  My reasons: it is a targeted tax, it ignores the fact that the accommodation capacity made available through platforms like Airbnb is already paid for by rates and user charges; and visitors who pay to use spare rooms or backyard cottages can be expected to have no more impact on public services than family members or friends who don’t pay. 

The informal sector provides low cost capacity at the margins to support the expansion of the visitor industry, thereby reducing uncertainty for commercial investors in tourism.  The Auckland Chamber of Commerce made the additional point that Airbnb, Book-a-Bach, and the like cater for visitors who might not otherwise visit Auckland.  So I struggle to understand why the Council should take this stand, especially when the idea of a bed tax on commercial accommodation is already under attack. 
The more I read about the policy the less I like it. Here are four reasons.

1             A Poorly Designed Tax
The tax is complicated, intrusive, and consequently inefficient. It is being added to the rates bill, confounding what is otherwise a generally straightforward levy based on the capital value of property.  This confusing revenue collection process by local government will impose new administrative costs for little gain.  
The Council evidently identified between 8,000 and 12,000 households renting out rooms or properties, and has managed to target 1,100 of them.  It sent out two letters to those it identified and set the rate depending on whether the owners replied or not[1].  Too bad if you were away at the time, or failed to clear your mail, or simply thought it was all a bit silly, and didn’t reply. The result: a higher rate set as punishment. 

Oh, if you only rent out one room or let rooms for fewer than 29 nights in a year you won’t have to pay. Good luck to the Council in enforcing that. I wonder if the cost in wages (and political capital) is worth the effort.

2              Compounding the tax impost
The new rate is actually a tax, a tax on providers rather than on consumers.  Bed-taxes  are an expensive form of revenue collection compared, with say, a visitor levy collected at port or airport. And the amount they might generate is trivial in the bigger picture: GST, rates on commercial tourism properties, and income tax derived from the hospitality sector already contribute substantially to government revenue. [2]
In the case of the informal accommodation sector, the revenue received by owners who use booking platforms to attract short-stay visitors to their spare room, empty cottage, or holdiay home is already captured in the income tax net. They also pay additional user charges for the services consumed through their property.

The bed tax is inequitable in a number of ways.  Owners are treated differently from those who let rooms or cottages to long-stay tenants or outside formal booking platforms, or anyone else running a small business from a residential area. The use of spare capacity in the housing sector, a sector in which many households are over-invested, is penalised when many would think it should be encouraged. 

Inequity is compounded when the providers of bed and breakfast services are working to make ends meet with a little additional income.  There are many households in Auckland having to do this with long-term sub-lets.  Why should those that take the short-term rental path instead be treated differently?

3              A new ratepayer business subsidy
According to the Mayor, the revenue raised by bed taxes generally (including from AirBnB operators) is used to fund Auckland Tourism, Events, and Economic Development (ATEED), Auckland Council’s development agency.  

ATEED incurs spends on marketing and promotions to boost demand for selected commercial goods, services (including underwriting events), and sectors.  This may be justifiable for emerging sectors, to support innovation, and even for city branding. 
But these are items that might be more appropriately charged to general revenues of the Council in a clearly transparent, politically contestable process.  Beyond that, initiatives to promote established sectors like tourism may be best funded by direct charges on the beneficiaries.  The capacity to fund would then be based on capacity to deliver, rather than on coercion; on revenue earned rather than on tax- based subsidies. 

4              An Anti-Competitive Move
Finally, the new bed tax appears to be an anti-competitive move by the council. The Mayor saysit was introduced after representatives from the hotel and motel industry approached him about Airbnb’s advantages”.  Hmmm – are these the same interests benefiting from the subsidies ATEED passes on?  It begins to look like they want it both ways. 
Either way, I question the role of local government in manipulating rates to manipulate the market.
Informal accommodation has always been around.  It is better organised today, and demand has grown as a result of innovative, web-based booking systems – which, incidentally are increasingly relied on by hotel and motel operators.  The new platforms are also raising standards through user and provider feedback.

It is a pity to levy rates to counter any perceived competitive impact , consequently suppressing some of the innovation and enterprise that a mature sector needs to stay healthy. 

So why bother?
Tourism has boomed in New Zealand and around the world.  The question is how much we want to participate in that boom.  Here’s what Statistics NZ estimates tourism was worth to New Zealand in the year ending March 2017:[3]

·         Total expenditure $36.0 billion;
·         International tourism expenditure $14.5 billion;
·         Domestic tourism expenditure $21.4 billion;
·         Direct contribution to GDP: $14.7 billion (5.9% of NZ GDP);
·         Indirect value added of industries supporting tourism $11.3             billion (4.6% of NZ GDP);
·         230,793 people directly employed in tourism (8.4% of NZ                  employment);
·         $3.3 billion in goods and services taxes.

This is a business worth maintaining and hgrowing.  More detailed 2016 figure indicate that spending was close to $1,000 for every international visitor night recorded.  The guests in Airbnb and Book-a-Bach may spend a little less, and many of them will be New Zealanders, but surely we don’t want to exclude participation by home-based providers in a sector that returns so much to the country.

Tourism in Auckland
How about tourists in Auckland?

Here are some figures from the ATEED website.  There was an estimated 7.32m guest nights in commercial accommodation in the year ending June 2018, based on a total of 5.59m domestic overnight visits and 2.69m international arrivals.  Their estimated spend of $8.36bn in the region must have done a fair bit to sustain Auckland businesses and their rates payments, on top of a Goods & Services Tax contribution of over $1bn . 

Conclusion
The Council is wasting resources and political capital on chasing a minor sum that will discourage a valuable activity on the fringes of our visitor sector.

If it really wants to play in the tourist pool, why not lobby government to splash out a share of all the GST that visitors generate in Auckland.  

Or else simply be grateful for the support visitors give to the retail, entertainment, and hospitality sectors, and continue to collect rates from the properties and businesses they support. But think again about implementing a bad tax to fund a promotional agency, ATEED, with revenue of $84.6m in 2017 (up 37% on 2016), 83% of which is in any case funded by grants and subsidies (up 29% on 2016) primarily provided by the ratepayer. 


[1]              Interview with Mayor Phil Goff on the AM Show
[2]              The Council is not sure what the take will be from a commercial bed tax, although it appears that last years collection was just over $13m.
[3]              Satellite Tourism Accounts 2017, Statistics NZ, p7

Monday, September 3, 2018

What happens when carrying capacity is exceeded? The planning debate we have to have



In 250 words …
The failures of Auckland’s Unitary Plan could have been avoided if it had been based on the physical capacity of Auckland to absorb development, rather than on how to cram in as many households as we can imagine over the next forty years.  This would have focused on the population that the environment can sustain, not the population that comes from extrapolating sseveral years of high migration gains.
Using carrying capacity as a starting point helps rationalise infrastructure investment and enables aspirations for growth beyond “natural” limits to be assessed relative to the additional investment required. It would reveal the fiscal impact of the Plan based on understanding the City's environmental assets and residents’ needs.
Unfortunately, the approach adopted seeks to accommodate inflated population projections in a confined space, raising questions around environmental impacts, economic consequences, fiscal outcomes, and sustainable growth.
It may not be too late to adopt a carrying capacity approach.  It may mean redrawing the map of development and density,though, rethinking connections within Auckland and with other cities, and backing off over-specification of what is allowed, focusing instead  on desirable outcomes within the physical and social limits to growth. 
It also means debating some difficult questions: How many residents is too many? How do we enforce limits? And how does this impact on the national economy?  


A Plan for What?
Auckland’s Unitary Plan appears to be unravelling. Congestion continues to grow.  The infrastructure spending required to keep the city functioning and its waters clean keeps growing. The Central Rail Link budget is blowing out (as far as we know!)  The public costs of running the city are running away.   Between 2012 and 2017 operating expenses jumped 21% in (in 2017 dollars) while population increased by around 12%: that’s an 8% increase per head.  Borrowing went from around $3,600 per resident to $5,010, a 40% jump.

And now the taxpayer is being called on to top up investment as central government steps in to fund a transport package for Auckland, even as additional charges are placed on residents and households by way of fuel levies and, possibly, a bed tax on private short-term rentals.  

And now the government is overriding the Unitary Plan, a plan with  rules that even the people who wrote them – the City’s planners –  apparently struggle to interpret.

The Unitary Plan is all about the metrics of fitting more and more people into a confined space and pouring resources into the central city in the hope that it may retain its commercially dominant role.  This may serve some interests.  But how well does it serve Auckland’s population at large, now and in the future and what are the long-term consequences for the physical and social environments?

Even as our understanding of the risks of over development improves, the Unitary Plan and ad hoc responses to its short-comings threaten to reduce resilience and sustainability by over-running Auckland’s carrying capacity, particularly by emphasis on intensification on the Isthmus.




Fiscal, Economic, and Social Consequences
The fact that we are investing hand over fist in infrastructure may provide some reassurance about the capacity to accommodate growth, but carries its own risks. Infrastructure that is not justified economically, retrofitting under-capacity, aged, or obsolete infrastructure, and unbudgeted overruns all undermine productivity. Getting infrastructure investment right, based on sound land use planning among other things, is critical to sustaining the investment necessary for well-founded city growth.  Otherwise, inadequate or inappropriate infrastructure will undermine investment and productivity.  

Increased housing and commuting costs that arise from a deficient urban plan will also do so.  High living costs translate into high costs of employment.[1]  These, like high land costs and infrastructure deficiencies, also reduce the attraction of the City for productive investment. 

A large and growing rental population is one result of high living costs.  This is inherently destabilising.  It places downward pressure on birth rates as young households delay or abrogate child raising.  It makes recruitment of specialist skills more difficult.  And it creates a large fotloose component within the community, something that also increases the cost of employment.  All this, in turn, raises the risk that what has been a modest net population loss from Auckland to other parts of the country over the past thirty years will accelerate..

The current building boom arising from catch-up infrastructure and housing projects is creating a whole set of issues of its own. Cost overruns are inevitable when major private and public projects, and the drive to boost housing intensify competition for scarce skills and labour, for land, and materials.

Thinking about carrying capacity
If this gloomy prognosis has any crediblity, then its time to confront the question, how much growth can Auckland physically accommodate?

Identifying physical carrying capacity means addressing questions with a mix of science and subjectivity: when will the things we value about the Auckland environment be lost if we over-develop? Where are the environmental thresholds? At what point do we call a halt to untrammelled growth and consider alternative development strategies? 

 While politically difficult, here are some of the matters we must consider.  First, at what population level will we have transformed the city to the point that it hits the threshold for sustainability, and how do we identify that?  When might our valued natural and productive marine and terrestrial ecosystems collapse, or be threatened with collapse from the weight of overuse?  And what are the issues raised by recognising that we cannot continue to pursue hgrowth at any costs?

The answers will change as our knowledge of natural systems increases, along with out capacity to manage the effects of development.  But if we look at the state of our coastal waters, the fishing resources of the Gulf, the risks to our forests, and the dwindling of indigenous wildlife, it seems these things have not weighed in sufficiently in our planning.

Another question: how do we factor resilience into our plans for Auckland, especially in the face of climate change?  This may call for a retreat from the foreshore, or the funding of major structures in the marine environment, and the development of new transport corridors if the central city is not to be subject to regular and inceasingly severe disruption (the more we pack into the CBD, the mre far-reaching extreme weather events will become).. 

There is also a question of equity and social justice: how far are particular sections of the community going to be required to carry the cost of excessive growth, or be excluded from the benefits?

Finally, we need to address the role of infrastructure.  The wrong infrastructure, or infrastructure in the wrong place, will effectively reduce the region’s carrying capacity, just as too little will.  Our refusal to think of the treatment of transport corridors and future demands on them is already emerging as a significant limiting factor.

Start with “How much?” and then move on to “How?”
Identifying and managing carrying capacity is more fundamental than simply debating trains versus cars, public versus private transport, high density versus low density housing, mixed use versus single use zones, heritage versus high rise, greenfields versus brownfields, malls versus local centres, or city centre versus suburbs.

If we had been planning for Auckland based on how much growth the City can support without undermining its natural, economic, and social resources, we would likely have produced a plan quite different from the hotchpotch we are saddled with today. 

And the argument that Auckland must grow if the nation is to grow is simplistic. We already seem to have reached the point at which the diseconomies of agglomeration in the city exceed any benefits it might offer business.  Auckland’s GDP growth from 2000 to 2017, for example, lagged the rest of New Zealand, placing 14th out of the 15 regions listed by Statistics New Zealand. [2]

It is time to rethink the strategy for our largest urban centre.

Getting ahead
A plan that builds from the ground up would explore technical thresholds and how they might change in the future. It would highlight the unknown and provide for flexibility and adaptability, rather than rigidity and over-written rules. There would be greater clarity on what is not allowed, and why, and ideally a scientifically informed consensus on the limits to growth.

At a practical level the plan would provide the canvas, not the paint.  It would accept that a growing city comprises a collection of connected communities and that, given their varying character and capacity, one set of rules for all does not work.  The attempt at homogeneity has led to a complex current plan which points the way to overdevelopment and uninspiring sprawl. Better that we recognise, among other things, the significance of diverse suburbs and  suburban life and work, and ensure that within them the public realm supports healthy communities.

It should recognise that containing development within an urban boundary is flawed in a growing city, boosting the externalities that occur when carrying capacity is exceeded, and diminishing the quality of life. These include bottlenecks and congestion, infrastructure and service failures, high employment and service costs, water and air pollution, and vulnerability to disruption.  

That contiguity does not lead to efficient urban development, is a reality finally being realised. We should be looking at the evolution of satellite towns and cities in the regional hinterland, and at the quality of connections with them and with provincial cities and regions (although they too will have to address carrying capacity issues as they gear up for a migration-driven boost to growth).  

The promotion of satellite towns and cities, adapting smart growth principles to the sites selected, incorporating modern and sustainable infrastructure solutions, and providing for diverse and dynamic investment and employment, increases the capacity to adapt urbanisation to changing circumstances.  It potentially provides for greater degree of resilience locally, through a high level of community self-sufficiency, and regionally, through multiple sites of production and consumption, and plentiful, accessible  green space. 

A ground-up plan will set broad land-use parameters within which infrastructure services should be provided, and guidelines for their assessment set out, rather than seeking to prescribe and control what will happen, where, and when . The timing and capacity of infrastructure cannot be pre-determined too far ahead of the growth it might cater for without excessive costs and risk. Any major public infrastructure provided for in a plan should be subject to rigorous economic, fiscal, and environmental evaluation. Uneconomic infrastructure is costly and a drag on productivity. 

Local or commercial infrastructure might simply be assessed on environmental and safety standards and the disciplines of finance and market left to determine development within those parameters.

Beyond Auckland
The fact that central government is becoming more and more involved in sorting out Auckland’s problems may signal time for a fundamental change in how we do urban development.[3]  The development of Wellington, for example, has benefited from modest growth.  However, today growth pressure is mounting, pressure which could well undermine its claim to be the world’s coolest little capital.

Wellington, like urban centres Tauranga and Queenstown, faces growth challenges that arise in large part from the costs and constraints physical character imposes on growth.  The challenge many New Zealand centres face is how to retain the character that makes them both appealing and viable in the face of new growth pressures.  

In Auckland and beyond, it is time to address how much centres might grow based not on na├»ve cohort projections but on just how much we can accommodate.  It is a shift in urban planning and policy that raises some uncomfortable issues.  But it may be better to address them sooner rather than later, before we destroy the very qualities that make our settlements and cities prosperous.



[1]              This negative impact may be masked by methods used to estimate regional productivity that assume high wages reflect greater output per worker rather than compensation for excessive housing and commuting costs. 

[3]              The fact that the Government asked the Productivity Commission to visit ground aero with respect to urban planning says as much.