Bigger City, Bigger Bills

In brief ...
The last posting outlined rapid spending growth by Auckland Council since created by amalgamating seven units of local government and one regional council.  This post demonstrates that while rates increased only a little ahead of population growth, the boost in investment by the Council since it was created has been funded by growing charges for services and by borrowing. While the finances have been well-managed and debt remains reasonable, there is a question-mark over how long the rapid growth and cost of council activities can outpace the growth of the community and economy.  

This raises a number of questions. The key question: at what point will excessive council spending begin to limit the growth it aims to cater for? 

Keeping rates down

Auckland Council costs have gone up by around 26% over just six years by my estimate. Surely the ratepayers will be rebelling against that? 

Well, not necessarily. Over the same period, rates collected only went up 17% (in 2018 dollars), or 2.6% per year, roughly in line with population growth of 15%.  (That’s not to say they didn’t go up by more in some areas as the Council sought to equalise them across the newly formed city [1]).

But total council revenue went up a lot more, by 51% (in 2018 dollars, based on council annual reports). So, rates accounted for a falling share of revenue, dropping from almost half of the total in 2012 to 38% in 2018 (Figure 1).

Figure 1: Auckland Rates and Other Income, 2012-2018

Citizens are paying in other ways

Charges for local services went up by 44%, or $385m. Most of this is also paid by residents, who have little choice when it comes to water and waste or transport charges.  At the same time, development and financial contributions went up $108m or 150%. While this reflects city growth (and maybe some catch-up from development delayed while the Council was trying to sort out where growth might go), these are paid for mainly by home buyers (especially first home buyers): current and future city ratepayers. 

Figure 2: Main Components of Revenue, 20-12-2018

Building assets – and liabilities

Interestingly, vested assets accounted for 33% of revenue growth reported and 13% of total revenue in 2018 ($510m), up from just 2% in 2012.  Roads, sewer and water pipes (and pumps), reserves and parks, and so forth are transferred to Council at “fair value”as development proceeds .  They are reflected in the balance sheet as a component of non-current assets.

Vested assets are ultimately funded from new property purchase (in addition to development fees, also passed on in property prices).

One way or another, residents pay.

Vested assets are also an ongoing liability given the commitment to maintain them and fund their depreciation.  It is critical that they are well-placed and of a standard that will carry them well into the future if rates are not to escalate indefinitely.

Lifting investment

The Council’s accounts tell a story of recent growth. To better understand how growth is funded, and sidestep accounting conventions which see, for example, expenditure reflected in a reduction in the value of assets and vested assets recorded as revenue, it is useful to look at cash flow figures (Figure 3).

Figure 3: Auckland Council Cash Flow, 2012-2018

They indicate a 36% increase in revenue from rates, grants, fees, and charges between 2012 and 2018, supplemented by borrowings.  Annual borrowing declined significantly over the period, from 26% of cash in 2012 to only 6% in 2018. Presumably increased fees and charges have facilitated this, together with adoption of more diverse financial instruments, the latter reflected in the growth of the Other category (including dividends, interest, and $218m from the Crown in 2018). 

Keeping the lid on – so far

At the same time, the ongoing business of the Council is reflected in just 6% growth in the costs of suppliers and employees, compared with 21% growth in investment.  The fastest growing costs have been interest payments, more than doubling, although at this stage they account for only 10% of total spending (Figure 3). Annual borrowings (net of repayments) have trended down. 

Figure 4: Annual Borrowing and Interest Payments, 2012-2018

Long-term debt was up by $3.3bn (70%) in 2018, to $7.9bn, and total borrowings up $4.3bn to $10.8bn.  Increased indebtedness is reflected in the increased value of assets, up $13bn (35%) including revaluations,  to $50.2bn. Overall, ratepayer equity remained a relatively high 67% in 2018, although well down from an even healthier 74% six years earlier.

It’s not clear, though, whether this debt is doing much for the community. It needs to be.  Total borrowing per head of population (using StatsNZ June population estimates) grew by 76%, from $3,631 in 2012 to $6,384 in 2018. 

One way of charting the value of debt is to plot it against GDP, with the expectation that any improvements in public infrastructure and services might be reflected in output some time later.  The time span considered and a lag in the availbality of regional GDP data limits such an assessment.  However, short-term movements offer no evidence of a productivity benefit yet. Comparing June council debt with regional GDP 21 months later (possible only from June 2011 for debt to the four years to March 2016 for GDP) shows a 62% increase in debt compared with a 20% increase in GDP .  As measured by Stats NZ, Auckland's GDP growth was strong, but not as strong as the growth in the Council’s indebtedness.

Where to from here? 

The Council has kept the lid on its finances, despite the growth of debt, through moderately higher rates and sharply increased fees and charges.  This year it introduced even more ways to pay.  It is set to selectively tax income (on properties providing tourism accommodation) and mobility (levying road user charges over and above road costs which are already funded by the Government’s Road User Charges).

The Super City is delivering for the moment – at least in volume – but at what long-term cost? An appetite for increasing charges and growing debt to support rapid spending growth raises questions.  For example:

·        How much of the spending addresses the Council’s core business and how much is discretionary? And how is spending prioritised?

·       What is the quality of investment, both by the Council and by developers in new public infrastructure ? What are the long-term implications of the new wave of infrastructure for long-term spending on maintenance and funding depreciation?

·       What happens if population-based demand falls below expectations?  The high population projections justifying much of the current spending are by no means guaranteed.  If growth in resident numbers falls short, the surge in civic investment could stymie growth through the costs it imposes on households and businesses.

·      How well will current investments meet the expectations of future Aucklanders about how and where they will live, work, and play?.  Or, are we cementing current preferences into a future about which we have far-from-perfect knowledge?

·        At what point will residents and ratepayers resist rising monopolistic charges for public services? And how will such charges impact on the rest of the economy? 

·        In what ways is council spending impacting on regional productivity and output?

It is only eight years since the Council was formed but if a rapid increase in council costs is placing growth at risk, it may be timely to revisit the question of how Auckland is, or should be, governed. 

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[1]              In Auckland the property rate charged is based on capital value -- land plus improvements -- and the consolidated council has been seeking to eliminate variations in the rate per dollar across the region

All at Sea – Port Plan for Auckland

Critical Infrastructure at a critical location

Ports of Auckland Ltd (POAL) operates a substantial general cargo port and container terminal on the edge of Auckland’s CBD.   It occupies a critical site adjacent to  commercial, recreational, and residential zones.  Its future development will have a major impact on the city centre by way of land use options, traffic flows, harbour and harbour-side-based recreation and tourism, and the quality of central city life.

Rob Campbell’s concerns

It was disturbing, then, to read recently resigned Board member Rob Campbell’s view of the port’s future on Bob Dey’s Property Report website, especially in light of controversies about  port operations and plans.

As I read it, Campbell is saying that corporate plans for the port are really about more of the same – a harbour edge transport operation which does little to recognise the value of the site or consider how the company might increase efficiencies and returns by greater specialisation.  He calls for radical change: incremental gains in productivity are not enough.

He argues that POAL is not pursuing the gains that might come from exploring the use of surplus or lower cost capacity elsewhere.   This would take a quantum shift in thinking, though, including a willingness to cooperate with other northern ports (Tauranga and Northland).

The sector is due for a major shakeup in New Zealand if for no other reason than the uncertainty that  substantial long term increase in fuel prices create around future trade and shipping arrangements.  Our ports have to be able to respond.  Not only  that; our economy and the economies of our trading partners are undergoing transformations which are bound to impact on trade flows in ways that are difficult to predict.

The Productivity Commission’s focus: governance issues

Against this background of uncertainty the Productivity Commission in its International Freight Services Inquiry highlighted the difficulties in port management and development arising from current governance arrangements.  Local council control confuses purpose and direction, and prejudices governance in a commercial environment through the presence and expectations of elected representatives.  

This effect has been seen in Auckland where a prolonged industrial dispute has seen councillors taking partisan stands and where one of the most contentious issues in the Auckland Council’s Draft Spatial Plan was the proposed inclusion of a planned a 250m extension of reclamation by the port, since removed.

Revolutionary change – saving sectors

I have been involved in two sectors that underwent revolutionary changes to stay above water.  Both involved new players moving the ground from under conservative (and dominant) incumbents.

The New Zealand slaughtering and meat processing industry had to experience plant closures and company collapses to move from being a highly seasonal, over-capitalised, and non-viable industry to one that could compete internationally.  Long-standing work practises, fixed management thinking, and remote ownership prejudiced its ability to respond  to the trade upheavals that followed Britain’s move into the EEC in the 1970s.  It took new entrants with new ways of doing things to save it from crippling rigidities built on past success and current complacency.

In aviation, the beliefs of major western airlines that they were as streamlined and integrated as they could be and of  airlines in emerging nations that they could compete using the same management model but paying lower wages were turned over by a new breed of low cost carriers. Southwest pioneered the model in the US in the 1970s but it was not until the last 15 years that the LCC has really taken off. RyanAir and easyJet led the way in Europe in the 1990s. Air Asia has changed thinking about how airlines should operate in the developing world since then.  

These and their emulators re-invented the operational, management, and capital structures of aviation, forcing change on those traditional carriers that survived.  They have changed the way the public travels and have managed to restore a semblance of profitability to a sector in which that has been all too rare.

The Ports of Auckland Plan: back to the future?

The port industry in New Zealand may need a similar revolution.   I  looked for signs of revolutionary thinking in the POAL 2009 Development Plan.  All I could see is a commitment to more of the same.

The  analysis of future demand is central to any understanding of what the port expects to be doing, and how it might be doing it in the future. But there is no such analysis.  Instead, there is an extrapolation of TEU (20 foot container equivalent units) throughput and a conversion of this projection into capacity requirement.  A compounding 8% growth rate in TEUs handled from 1989 to 2007 was adjusted down to 5% as “a slightly more conservative long term growth rate” and used to project demand from 2008 to 2040.

This is anything but conservative   

When I looked at tonnage growth using the Statistics NZ Infoshare cargo figures from 1989 to 2010 I actually got a 4% growth rate, which raises a question over which figures to use.  However, anomalies in the historical figures fade into the background when we consider the impact of 5% compounding growth over thirty years: a four to five fold gain in container throughput. 

This raw projection begs a lot of questions about New Zealand’s changing trade profile.  That’s not the immediate subject of this blog.  Suffice to say, few commentators or policy makers are likely to see a fulfilling future as one built on exponential growth in trade volumes.

Ports of Auckland Vision for its Future

So why such a conservative response?

POAL does acknowledge uncertainty around the projections which inform its assessment of expansion options.  But none of the options canvassed (see pages 11 -13 in the Plan) envisage relocation of component trades or operations, although inland ports will no doubt play a significant role in the streamlining envisaged.  Instead a combination of progressive reclamation and new stacking operations is proposed.  The need to deal with larger vessels is also acknowledged in new berth design parameters and a channel deepening programme.  

No doubt efficiencies can be imposed at the margins through investment in new equipment and changing working conditions.  But what will this achieve in the long-term?  And how relevant will it be to New Zealand’s – and Auckland’s – economy in 2030 or 2040?

POAL is proposing to cement in a development plan  which imposes a singular and historical view of its place in New Zealand trade, and in the central Auckland cityscape.  If we are to go with Rob Campbell’s analysis, productivity will be diminished because a relatively low cost activity will be expanded over high cost (reclaimed) land. 

Its  hard to understand  how such a conservative approach to development can be founded on such a bullish vision of the future. Unless we actually suspend our belief in the projection, which seems like a sensible idea.

Time for a rethink

I’m not sure that this path is one that the country or the city can afford, at least not on such an apparently thin analysis of future demand. 

So it’s a wise move by the Council to omit the planned reclamation from Auckland’s Spatial Plan.  This is something that we need to think long and hard about.  We need to expand our thinking about the physical options facing trade in the northern North Island, for a start, rethink the role of the port in downtown Auckland, and perhaps heed the Productivity Commission’s advice regarding ownership and governance of the port industry.  

Whither white collar services?

The Sydney-Mumbai connection
My son-in-law is visiting from Sydney, back in Auckland for Christmas and New Year celebrations.  He is a middle manager in one of Australia’s biggest IT testing teams (in financial services). The group’s growth over the past seven years has been phenomenal, from less than ten people to 700.  Of these, 400 are based in Sydney and 300 in India. 
That’s a substantial investment in Indian IT by an Australian business, an investment in high tech jobs that has strengthened the Australian operation even as it has boosted the economy in Mumbai.

From what I gather, growing expertise and experience mean that the bulk of investment in expanding capacity will take place in India, not Sydney.  As they acquire greater technical expertise and better management skills, expect offshore contractors there to play an increasing role in this sector, and others, and begin displace their home-based counterparts.

A farewell to footloose services?
This got me thinking – where is white collar employment headed?  What does it mean for the future of New Zealand (and Australian) IT?  And, of interest to me, what does this mean for our cities? 

Are we looking at a repeat of what happened to manufacturing – where producers have migrated to the lower cost, increasingly skilled labour forces of China and Thailand, for example?  Sure, locally oriented production (building materials and the like) has remained in New Zealand, but little high value manufacturing other than that associated with primary production and a few exceptional entrepreneurial producers survives.  From 2000 to 2011 New Zealand manufacturing lost 25,000 jobs (down 10%).  46% of these went gone from Auckland (down 14%).

Are we now looking at something similar in the white collar sector, especially among producer services?[1]  

Take one of our biggest, Telecom New Zealand. The company retained some call centre capacity in New Zealand when it restructured in 2009, but the expansion plan favours new investment in Manila. Keeping a New Zealand presence looks like a strategic move, about the consumer interface and brand management, not about reversing the tendency to invest in services offshore. 

And it was acknowledged by Telecom that while knowledge of products and services was usefully served from New Zealand in areas “where specific, technical knowledge was particularly important, offshore staff have delivered strong results ... [and] ... the offshore operation recorded our highest ever level of customer satisfaction for broadband support in December”.

Falling behind in the IT employment stakes?
Incidentally, the bias this example in favour of greater technical knowledge offshore differs from the findings of a US study[2].  This suggested that off-shoring impacted mostly on medium and low level skill occupations, creating a higher skill bias among those remaining.

If we want to limit New Zealand’s loss overseas to lower skill jobs, extra investment will be needed in building the quantity and quality of investment in technical education and training.  But with the collapse of many financial institutions, and ownership of our major players offshore, it may be too late: perhaps we already lack the depth of IT smarts, for example, needed to hold our place in the world’s financial and producer service sectors.

Of course, off-shoring among the upper echelons of the white collar sector has been going on for a long time as New Zealand companies have been absorbed by overseas principals.  The result is generally that senior management, IT control, and high tech jobs end up elsewhere, even if some production or distribution remains here. 

In terms of economic theory, increasing trade based on specialisation and comparative advantage should increase net welfare in both exporting and importing nations as each plays to its specialisations and its strengths.  It should be no different for services. 

Unfortunately theory is not enough.  The necessary assumption that comparative advantage is static does not hold.  In fact the gains in skills and experience to the service exporting country as experience accumulates may be reinforced by selective migration depleting the skills and experience of the importing country. 

The impact on our cities – time for a rethink?

Either way, the loss of high or low skill capacity to overseas suppliers, through loss of control of our companies or outmigration, raises important questions.  The one I am interested in is how we can plan for the future of our cities if we cannot assume a strong, growing white collar sector?

Perhaps we should qualify our plans for Auckland by contemplating the impact of a ground-shift in white collar employment as a result of the migration of current and future professionals and managers to Sydney and beyond, and of mid-level skilled technical tasks to lower cost Asian suppliers.   

Ambitious plans for a burgeoning Auckland CBD, the land use transformation and infrastructure investment required to shape it do not reflect the possible impact of a white collar slow down.  Quite the opposite: business and technical services are picked as the big performers necessary to meet Draft Plan goals according to the background papers, with no discussion of where the threats to such optimistic growth forecasts are coming from. [3]

So what has been happening?

I looked at recent white collar employment growth.  According to Statistics New Zealand Auckland gained 88,000 jobs from February 2000 to February 2010 (20% growth) with 84% in white collar sectors.  The rest of New Zealand gained 211,000 jobs at the same rate (also 20% gain), but only 47% of these were in the white collar sector.

So white collar employment was the big driver in of New Zealand’s economy over the decade, and accounted almost entirely for Auckland’s job growth. 

A decade of two halves
Solid growth came to an end in 2008 (Figure 1).  Around 85% of the decade’s new jobs were in place by 2005: employment grew by 261,000 between 2000 and 2005 but by only 46,000 between 2005 and 2010.  The figures for Auckland were 81,000 and 15,000 respectively. 

There was a decline in non-white collar jobs between 2005 and 2010, reinforcing dependence on services for growth. Nationally 84,000 new white collar jobs were partly offset by a loss of 38,000 elsewhere.  Auckland gained 32,000 white collar jobs but lost 17,000 non-white collar jobs.

Figure 1: Employment Growth in Auckland and the Rest of New Zealand, 2000-2011

Clearly we cannot afford to take the future of white collar employment for granted.

Is this decade going to be different?
It got a more interesting last year, and a little more promising.  Auckland staged a recovery between February 2010 and 2011, driven by 8,600 new white collar jobs out of a 9,000 gain overall.  White collar employment stalled in the rest of New Zealand, which recorded a decline of 3,100 jobs.  

Does this represent a recovery, a turning point perhaps?  With Auckland starting to grow ahead of the rest of New Aealand, and white collar servcies resuming their pre-2008 growth trajectory? 

It’s probably too soon to say.  These are small numbers coming in the course of what could be a drawn-out downturn.  I like to think that we are looking at accelerating growth founded on a strong producer services sector.  But I fear we may not be.

So what jobs are growing and what are their prospects?
When we look closer at the composition of white collar job growth (Figure 2) we see:

• It depended heavily on community services (education, health, and government) especially outside Auckland.  These jobs will not migrate offshore, so that’s good.  Unfortunately, economic conditions mean they will have minimal medium-term growth.
• Personal services (arts, recreation and others) have been slow growers.  So much for economic salvation by the creative sector.  Unfortunately, these activities depend on discretionary spending; they follow rather than lead growth.   So don’t expect too much from them as incomes stall and discretionary spending falls.
• Commercial services (finance, real estate, information and media, professional and scientific services, and administrative support to business) held up longer outside Auckland than inside, but the rate of growth fell sharply.  Herein lies the biggest long-term threat: these services are most vulnerable to offshore supply and lack of investment, especially in human resources.  On the plus side, the bulk of Auckland’s 2011 gain was in this category.

Figure 2: Employment Growth by Service Sector and Period, Auckland and the Rest of New Zealand

Thinking about the future
I wish I could feel as confident about Auckland’s growth as the authors of the city's Draft Spatial Plan.  But in light of the vulnerability of our white collar sector, I can’t, despite a better employment performance in the commercial service sector last year.  And I certainly would not be relying on strong long-term growth in that sector to underpin heroic land use assumptions and big spending commitments.

I am not sure how we might respond to the threat to white collar employment in Auckland.  I guess I would start by addressing our education and training capacities, and maybe continue to explore ways of boosting innovation and development appropriate to our capacity and our setting (and not built simply around comparisons with other post-industrial, western cities!) 

And I would certainly address the relative cost of investing in IT and other producer services here, considering issues around infrastructure and public spending, local and central government regulation, and appropriate land use strategies for modern producer services. 

As I see it, though, it will be a long time before Paul might bring his family home permanently, if at all, and enjoy the sort of challenging, high tech (and well-rewarded) job he has at the moment. 

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[1]           By producer services I mean those that primarily service the needs of other businesses and perhaps government rather than households.  Of course, there is some cross-over between markets and categories.

[2]          Crin R (2009) “Service Offshoring and White Collar Employment” Institut d.Analisi Economica, CSIC, Barcelona

[3]                 Despite positioning Auckland as an innovation hub in Asia Pacific, all the international indicators considered are about relativity with cities in Europe, North America, or Australia.  See Auckland Council (2011) Background Paper: Auckland Economic Development Strategy, especially p.103

Are we being a bit dense about productivity?

Taking the long view

There has been a lot written about the virtues of a high density city and a thriving CBD.  I have no issues with either of these notions, but let’s at least understand the dynamics before we concoct policy to try to bring them about. 

High density does not necessarily mean a city is more productive, or wealthier, or more sustainable.  It just means more people live or work in a smaller spaces.  This may be because of a land shortage - think Japan and its cities.  (I hope this is not what planners have in mind for Auckland).  Traditionally, high density living is associated with less wealth, lesser lifestyles, and public health challenges. 

The long view of the west since the Middle Ages has been one of increasing real wealth and falling densities.  Especially since the 18^th century greater personal mobility and enhanced material standards have been implicated in healthier, longer lives and greater social equity. 

Much as I rail against conservative planners, reversing this trend is something we should be wary about, especially when crowded cities are associated with social disparity and ageing urban infrastructure with greater risk of disruption.

The transport tail wagging the density dog

Yet today’s planners and policy-makers not only try to restrict development to increase densities, but also promote transport investments in the belief that they will make it happen. 

Instead of designing a public transport system that might serve our particular form of settlement in Auckland, we are designing one which is intended to change the shape of the city.  The New Zealand Herald (3 December 2010) quotes transport expert from the University of Sydney, David Hensher, as “absolutely amazed” that we would even consider rail given Auckland’s relatively low density.  It would be far more cost effective, he thinks, working on extending our busways.  At least that way we could get public transport to where people want to live and work and we could keep it flexible to meet changing needs.

Of course, one of the interesting things about rail-based public transport is that if it works it encourages long-distance commuting, and lower densities.  This, in turn, increases the distances travelled for non-work purposes. 

And then the transfer of travellers from private to public transport increases capacity on key roads, encouraging additional travel and promoting further suburban and exurban growth.  That’s why sweeping statements that “transport investments serve to facilitate higher densities” [1] have to be taken with a grain of salt. 

The density myths

I want to challenge what I see as some of the myths about city density.  I want to deal in this blog with the proposition that actively increasing density improves aggregate (or individual) productivity.  There are a couple of myths that I will tackle subsequently.  One is that increasing density will increase the health of the urban economy.  The other is that to save the city we must preserve the CBD. 

The productivity story

I have already queried the role of city size and density in urban growth in earlier blogs, mainly because it hasn’t apparently helped Auckland over the past decade.  Being concentrated in the region is more likely to be a disadvantage than an advantage to business. 

Despite this, the policy argument goes along these lines:

·         Large cities grow faster than small cities;

·         The higher densities associated with larger cities foster higher productivity (value added per worker);

·         Therefore if we force higher employment densities by regulating land use we will boost productivity and cause the economy to grow;

·         We can also increase employment densities in certain parts of the city by delivering public transport commuters to them;

·         These transport nodes will become fast growth areas and this growth can be attributed to  both public transport investment and consequent higher employment densities.

This reasoning supports policies to: (1) limit land availability for business and the view that business would be better off redeveloping “brownfield” sites or intensifying on existing sites because that will improve productivity;  (2) subsidise otherwise uneconomic public transport.

The evidence – marginal at best

Those are big – and potentially very costly – policy calls.  Just how much confidence can we have in them?  What does the supporting analysis say?

In New Zealand we relied for some time on overseas analyses, but since the mid 2000s we have developed a local evidence base using econometric research.  David Maré’s 2008 study is the most widely cited, and suggested a substantial productivity “premium” accruing to Auckland and, within the region, the CBD.  [2] This work has been called on, for example, to support the recent business case for an underground rail loop in Auckland.[3]  But just how robust is it for policy purposes?   

At best the evidence is weak with respect to the possibility that higher densities bring about higher productivity.  At worst, while the analyses may be technically correct, the policy assumptions that follow may be plain wrong.

The complication of composition

The growth of a national, regional, or urban economy over time naturally leads to a “sorting” of businesses.  This “composition” effect means that some places have businesses within them – for all sorts of historical reasons – that produce higher value goods or services than other places.  The composition effect based simply on classifying firms to sectors explains half of the apparent productivity premium identified by Maré. 

Even this may be conservative, though.  The two digit classification of firms he used still hides considerable diversity among firms in the same sector.  These differences are likely to explain a lot more than areferring simply to the generalised sector each belongs to. 

Maré also estimated the relationship between density and productivity in Auckland. His analysis siggested that 10% higher density is associated with 0.86% higher productivity.  This is not a huge gain when we consider what might be entailed by way of public spending and regulation to bring about a 10% increase in density.  There have got to be easier ways to increase productivity.

In any case, is this really a cause and effect relationship?  Maré's estimate came from a static analysis.  Establishing a dynamic relationship, such that when one item changes another follows, is more difficult.  Maré could not estimate a “robust” positive relationship over time, and called for more work to be done. Even if he could have demonstrated a dynamic relationship, we are still stuck with chicken or egg ambiguity – does higher productivity in fact lead to higher densities?

It gets shakier

Maré and Daniel Grahams' subsequent work for NZTA is even more circumspect.  Based on comparisons across New Zealand regions, it suggested that firms at locations with 10% higher density are 1.7% more productive.  But firms in different regions tend to do different things.  Observable differences based on 15 categories to allow for industry mix actually accounted for 70% of the density “premium”, dropping the productivity gain aacross a 10% density increment rom 1.7% to 0.5%.  (Incidentally, the figure for Auckland is down from 0.86% to 0.76% in this analysis).

Making sure we are doing the right things in the region is far better, I would have thought, than increasing densities and hoping this makes companies stronger.  The harder it becomes it invest in new activity, the more likely we are to be locked into yesterday's industries.

Oops - maybe Auckland is the wrong place

Maré and Graham explored different ways of estimating productivity effects, allowing for differences among enterprises and for sector mix within regions.  I drew the following conclusions from their analysis – although I concede some of the subtleties eluded me:

(1)    The predominant impact on the productivity-densities relationship is sector mix in a region;

(2)    Within Auckland, the stronger relationships and therefore the purported potential for gains from increasing employment densities are associated with the predominantly rural, low density areas of Rodney and Franklin, followed by Manukau, not the old Auckland city;

(3)    There are diminishing returns to agglomeration: productivity gains associated with density are higher in low density areas and lower in high density areas;

The results suggest that we might better concentrate on connecting and intensifying development in areas of relatively low density rather than trying to shoehorn more into areas that are already relatively dense.  When we take into account the relative costs – public and private – of trying to lift already high density localities this makes even more sense. 

Perhaps we need to revisit the notion I advanced to the Metropolitan Auckland in 2006 - let's lift our sights and consider the economic potential of the northern North Island, and begin to think about connectivity and opportunity on a wider canvas.

And shakier

The evidence regarding “productivity premia” in some places rather than others appears just too weak to support land use policies designed to enforce higher densities or to justify lifting urban densities as a rationale for transport investment.   

Daniel Graham is quite explicit on this matter in subsequent studies:

A key conclusion is that we are unable to distinguish agglomeration effects from other potential explanations for productivity increases, most notably functional heterogeneity.  Consequently, the agglomeration effects of transport investments cannot be interpreted causally.  [4]

Digging into heterogeneity – the occupational dimension

Heterogeneity- - a fancy word for diversity – almost inevitably overwhelms any econometric attempt to measure a relationship as weak as that between density and productivity.  The analysts try to control for the sector a firm is in, but that still hides a whole heap of heterogeneity.

Sectors are not the only things that vary between places.  Occupational mix is critical, for example.  The 2006 New Zealand Census showed that 19% of employment in Auckland region fell into the category “Legislators, Administrators, and Managers” compared with only 14% in the rest of New Zealand and 21% in the CBD.  Another high value category, Professionals, made up 18% of Auckland’s employees, 25% in the CBD, but only 15% in the rest of New Zealand.  Similarly, Technicians and Associate Professionals made up 19% of employees in the CBD, 15% in the region, but only 12% in the rest of New Zealand.

Jointly these high value added occupations make up 66% of Auckland’s CBD workforce, 50% across the rest of the region, and 42% across the remainder of New Zealand.  Such pronounced labour market stratification will account for differences in value added per worker even within firms and sectors.

Conclusion –make it easier to do business to make Auckland grow

Quite simply, the higher order, management, control, and negotiation jobs tend to end up in big centres.  This facilitates a range of local, national, and international transactions that they are associated with.  The challenge for planners is to make it easier, though, and not harder for them to locate in the region.  Imposing congestion and over-the-top infrastructure costs associated with promoting a high density city might just have the opposite effect, discouraging local investment and employment.

The benefits that firms might be looking for by heading to the principal commercial centre in a region or nation can be delivered by the quality of transport and communication links for the conduct of business, and the quality and cost of living to sustain a healthy labour market.  But if we make it too hard for them to locate at a suitable site in Auckland – whether or not that is in the CBD – the continuous improvements in transport, mobility and communications that we are witnessing today might just make it easier for them to leave or bypass the region.

[1]  Maré D and Graham D (2010) Agglomeration elasticities in New Zealand, NZ Transport Agency Report 376

[2]               Maré D (2008) Labour productivity in Auckland firms Motu Research Paper 8-12

[3]               APB&B (November 2010) Business Case Auckland CBD Rail Link for KiwiRail and ARTA

[4]               Graham DJ and Ven Dender K (2009) Estimating the agglomeration benefits of transport investment: Some tests for stability Discussion Paper 2009-32, Joint Transport Research Centre, OECD

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A region stalled - is consumption the problem?

So what makes Auckland tick?

For some time Auckland has been seen as a problem economy.

To find out why I looked at some 20 studies of Auckland’s economy prepared between 2004 and 2010.  They were pretty repetitive, some just building on what others had already said.  The following themes pretty well cover the analyses and prognoses they offered:

(1)    Too much has been invested in consumption-focused activity and not enough in export industries;

(2)    Insufficient innovation to drive productivity, create competitive advantage, and grow exports;

(3)    There is a need to keep costs low to attract investment and maintain competitiveness;

(4)    Good connectivity (transport and communications) is needed to enable firms to work together    well and to do international business effectively;

(5)    As a high density urban area Auckland should be able to make productivity gains, lower costs, and lift connectivity;

(6)    An attractive living environment will attract and keep the people needed to make things happen.

A high density city is not the answer

In previous postings I pointed out that in employment terms Auckland has lagged over the past decade, with the rest of New Zealand growing slightly faster.  Actually Auckland led the way after 2007 – but in the wrong direction.  Auckland's  employment fell by 2.8% and the rest of New Zealand by 1.6%. 

Not only that, but when we review individual sectors it appears that concentration in Auckland was more likely to be a disadvantage than an advantage.  

That finding seems to knock out theme number (5) in the list above, that there are automatically advantages in the concentration of firms and in a larger, higher density environment. Maybe there are some gains to firms in a sector clustered in the region. Perhaps the density of activity in Auckland offers “urbanisation advantages” – more opportunities to conduct exchange at lower costs.  But if so, these things do not show up in aggregate performance. 

So, theoretical agglomeration economies must be offset by actual diseconomies -- the reality of the high cost of investing and operating in Auckland.  With the government pinning its hopes for economic recovery on the performance on the region, this has got to be a worry.

We need to look again at how to explain Auckland’s performance, and how we might promote it. In this posting I make a start by considering changes in economic structure, item number (1).

The wrong structure?

If over-dependence on consumption has been the problem, this will show up in the changing mix of activities in the region.

To explore this I grouped employment into major sectors in the table below and looked at each sector's growth over the decade, in two parts.  The first seven years saw almost unparalleled growth internationally.  The last three years were sent reeling by the Global Financial Crisis (GFC). 

The numbers come from the Statistics New Zealand February employment counts. They tell an interesting story.

Production of goods on the downward slope

First, manufacturing was definitely on the soft side for the first seven years. This set it up for an outright tumble with the onset of the GFC. When we look at the detail, only the food and beverage sectors made any significant progress at all over the whole period. Machinery and equipment manufacturing just held its ground.  But the whole lot contracted – even these favoured subsectors  – from 2007 to 2009.

The other "industrial" activities – transport and storage, construction, and utilities – fared better early on, but joined the tumble in later.

Business services hit the wall

Second, the big player in the first part of the decade – business and support services, which grew by 37% in seven years – also hit the wall in the second part, giving back 15% of the job gain .  Not surprisingly, financial, administrative and real estate services took the biggest hit. Overall, this sector accounted for a third of the region’s gain between 2000 and 2007 and then a third of its loss between 2007 and 2010. 

Consumer services stall

Third, consumer-oriented services – retailing, accommodation, cafes, bars and restaurants – were certainly significant, but they still accounted for only 19% of Auckland’s total employment in 2010. And given that the region’s population grew by around 22% over the decade, a final gain of 16% in these activities (following a decline late in the piece) does not seem out of line. Cultural, recreation and personal services did grow faster than population, but are much less significant overall. They accounted for just 6% of regional employment in 2010.

Of course, a large share of employment in the industrial and business service sectors also depends on household demand but then those sectors – especially the industrial sector – grew only modestly in any case.  On the face of it, over-consumption has not been the problem - but under-production may have been. (I have not looked at the housing sector here, though.  That needs separate analysis).

Public services rumble onward and upward

Fourth, and most significantly, the public services sector – hospitals and health, education, law and order, social assistance, and government administration – had by far the most growth.  It was the only major sector to grow after 2007.  By 2010 public services accounted for over 23% of Auckland’s employment. 

It can be expected that this is related to an expanding population .  Interestingly, though, 45% growth in public services employment is over double population growth of 22%. 

Actually, on this score Auckland’s ratios do not stack up quite as badly as elsewhere. Over the rest of New Zealand public services grew by 27%, three times the rate of population at 9%.

Not surprisingly, Wellington led the way.  With 10% population growth between 2000 and 2010 it experienced 35% growth in employment in public services, including a spectacular 53% gain in public administration.

This raises some hard questions.  Has demand for public services grown by that much?  Have any productivity gains been made in public services?  And given that it was the only sector to actually grow during the GFC, where might recovery come from, other than from services funded primarily by current and, increasingly, future taxpayers?

So what is the prognosis?

Final demand – consumption – indeed dominated Auckland’s growth over the past decade, but only when we lump public servcies in with the traditional markers – retailing, catering, and entertainment.  The real issues this analysis raises are:

1.       The production of goods and services – industry – has completely underperformed.  We really do need to focus on how we can turn this around.
2.      The main growth sector, business services, is now looking shaky. Let's hope that some sound performers survive and emerge from the current shakedown of a sector that maybe just got too big for its boots.
3.      The GFC has revealed an unhealthy overdependence on public services.  THere is a need to address productivityn issues here, including the quality of decision-making and resource allocation throughout the public sector.

So crowding out of productive investment and employment by a focus on consumption my not have been the issue. Rather, a failure to grow our income earning sectors and consequent reliace on an explding public services sector is a concern, one that simply chopping the number of civil servants in local government may not resolve. 

It’s not that the expansion of public services is a bad thing if it contributes to the well-being of the community and lifts economic productivity.  But the fact that it has been the only source of significant employment growth over the last three years suggests a weakness in the private sector and signals a region still over-dependent on taking in its own washing to sustain itself – or, if we want to mix metaphors, bootstrapping without the boots.