Thursday, August 28, 2014

The Costs of Consolidation - Watching a Slow Train Wreck

The perils of Thinking Big
Creating a single city to administer Auckland’s local affairs was always going to be an expensive exercise.  Efficiencies were possible, but by no means guaranteed, and unlikely to exceed the increase in costs.  As decision making becomes more centralised, it becomes less sensitive to the needs of those it is meant to serve.  Auckland is well down that track.  And announcements of cut-backs around the Mayor’s latest budget – and the coincidence of ever-expanding rates and debt – highlight the fallacy of chasing efficiency by creating large administrative and governance structures that become remote from the community.

Administrative efficiencies?  It doesn’t appear so
Let’s revisit that prognosis.  First, administrative efficiencies are not guaranteed by consolidating councils as the tiers of administration build up and channels of communication proliferate (along with opportunities for miscommunication) in a large council. The need for internal alignment begets managers and higher employment costs, impedes external alignment, and slows processes. Its interesting that according to Statistics Auckland local government employment in February 2013 was 38% higher than in 2010.  So much for the much heralded reduction in jobs.

Technical efficiencies – for whom?
Second, consolidating councils suggests that technical efficiencies can be pursued by way of economies of scale from consolidating the delivery of some local services like supplying water, maintaining roads and road corridors, and looking after parks.  But not if competition diminishes, labour markets are diluted, and monopolists (council owned or otherwise) come to dominate local services and utilities.  All too often possible technical gains from consolidation in the slow-moving, predictable, and unchallenging market for local government services get captured by the suppliers in higher wages, fancier buildings, glossier PR budgets, and bigger dividends, not the public. Increasing costs suggest that something like this is happening in Auckland.

Misdirected spending?  Too right
Third, there is a risk that the consequences of inefficient resource allocation will have further reaching effects in a large council than a small one. 

A local council investing, say, $30 or $40m in what may become an under-utilised sports stadium, for example, is less damaging than a larger council spending many more millions on super projects or major infrastructure of doubtful merit.  The risks of getting it wrong and the regrets from doing so are much higher.  A council with a larger revenue base may be subject to less fiscal discipline than a council with a small one.  It may favour larger “regional” projects with lower pay-back than the same sort of resources allocated to more,  smaller local projects.

And region-wide projects are likely to be subject to greater debate and scrutiny if they impact on multiple local councils areas than if they are conceived and delivered without the same level of debate by a large single council.  The delays and deferrals associated with contestability by constituent councils in a region may deliver better outcomes than the full-steam ahead approach of a single agency.

So is Auckland still on track?
Unfortunately, Auckland has been hit by a triple whammy. Council employment has been growing.  The costs of utilities and services have been increasing.  And the city is getting itself into some debatable capital commitments, lifting long-term liabilities. 

The central rail link is one of these.  And even as council costs continue to rise, it seems that this uber-project is sacrosanct.  Yet the case for it is constructed on highly debatable assumptions about where we might live and where we might work 10, 20, or 30 years hence. 

All aboard?
We are assured, though, that planned stations will double the number of people with access to the rail. Let’s think about that.  For a start, these stations are planned mainly in inner city areas already well served by bus and with relatively high public transport patronage. 
Further, even assuming that passenger numbers double as a result of better connections in 2013 that would have lifted rail commuters by 9,500 to 19,000.  According to Census figures this would be equivalent to just 4% of private transport users in 2013 (a gain of 2%) and less than 60% of the 33,000 bus users. 

There is a limit to the possible gains because of the rail focus on the CBD where already one third of commuters use public transport.  In 2013 another 13% walked or biked to work.  That’s a pretty good penetration rate of non-car modes.  Spending $2-3bn is not going to lift it significantly.
All at what cost???
And I’m not sure that the bill for the rail link will stop at $3bn.  Large, complex projects have a habit of running over time and budget.  The estimates for this one keep changing, highlighting the uncertainty and consequent fiscal risks around it. 

Given an uneconomic investment to start with, we are faced with raising funds elsewhere.  The taxpayer has already been lobbied, and now we are looking at alternative taxes (or tolls) simply because we know that charging users for the true cost of services is a fast track to running on empty. 

As well as additional charges on ratepayers and commuters (whether on public transport or in cars) we will further ramp up city debt.  Alongside the resulting interest commitments will be a raft of recurring costs – operations, maintenance, and depreciation – which we know will never be met by users.  This is a very real threat to a fiscally sustainable Auckland.

The CBD: going for bust
On top of all that, the rail connection is justified primarily as a service to the CBD, where much of the Council’s planned capital spending is already concentrated. But only 2% of the city’s population actually lives there, and 12% of its workforce works there.  The residents tend to be young, often immigrants, and transient.  The employees tend to be better paid and potentially more mobile than many of their counterparts in the suburbs. 

This vision of a city defined by its CBD raises major resource allocation questions for Auckland.  The CBD is the geographical choke point of the Isthmus, a regional bottleneck.  It is an area of ageing infrastructure, reclaimed land, and high building densities served by arterial roads that are increasingly congested, with critical roads subject to occasional inundation. 

I note that the driver of this singular vision, the Mayor, was elected into office by only 24% of eligible voters, or 17% of the population.  That, I would expect, should lead to a more measured approach than one that seeks a place on the world stage with a strategy that calls for sacrifices from the many to pander to the gratification of a few.  The CBD is already a great place to visit, but how much more must we mortgage as a community to pursue this particular vision. 

The risks grow 
To sustain the vision of a city defined by its CBD we are cutting back on the quantum and quality of works and services that have a more direct impact on the majority of Aucklanders. Deferral of drainage works for example, reduction of maintenance of our suburban corridors, a failure to expedite completion of critical roads not focused on the CBD, or a lower level of care of suburban parks and reserves are all more likely to impact on most Aucklanders on a daily basis. 

Can a strategy of spending, growing indebtedness, and increasing rates to finance the nice-to-have, me-too adornments (and liabilities) of much bigger cities really offset the reduction in the liveability that will come from cutting back on the basics while boosting the long-term cost of living in Auckland?