Preparing for a Post-Covid19 Economy: capacity building or building capacity?

We seem to have the pandemic under control - what next?

Now that community transmission has been eliminated in New Zealand and some rigour brought to border control, it is timely to think about economic recovery. That’s not straightforward. As the pandemic rages globally restricted travel, limited trading opportunities, and disrupted supply chains mean that we have to make the most of an inevitably shrunken economy.

Making decisions about where to put economic resources – including spending on recovery – is made harder because we have no idea what the future holds. We can no longer predict economic conditions and the outcome of policies with any confidence if we rely on past experience.  We can, however, make decisions about how to deal with today’s crisis in a way that prepares us for tomorrow’s unknowns. 

This post suggests focusing early recovery on employment-intensive sectors that better equip the community to rise to the unknown challenges of the new normal, rather than building the infrastructures associated with the old.

The Infrastructure Capacity Consensus

To date, New Zealand’s rebuilding strategy has been defined mainly in terms of building physical infrastructure to cater for economic activity as we knew it.  Among other things, the Government has just committed $3bn to start on its list of shovel-ready projects. While it's early days, the National opposition already says we need more infrastructure. While there may be debate about how much, what projects, and in what order, there is no obvious disagreement with the notion of building our way out of the darkness.

This risks justifying spending on uneconomic infrastructure that undermines productivity and prejudices long-term growth. Promoting infrastructure to create jobs simply promotes investment that cannot otherwise be justified in sectors already facing supply chain and skill bottlenecks. When these are publicly funded they not only increase fiscal risk; they potentially starve activities that promise greater employment and a more assured long term return.

Building Capacity as an Alternative

What about another approach? What about building the capacity of people, rather than structures, to deal with a future that will not be a rerun of the past? This will emphasise more jobs more immediately, maintain better short-term domestic demand , and build the adaptability and resilience needed in the long-term.

It does not mean dismissing infrastructure, but calls for spending on it to be moderated, focusing on what we know is needed and not the nice-to-have or me-too projects, favouring instead activities that deepen the skill base, develop talent, promote creativity, and encourage entrepreneurship.

Investing in people

Today we are confronted by a deficit of demand, not a deficit of infrastructure. Investing in people will lift demand directly, hold together a fractured domestic economy, and lay the groundwork for long-term recovery and resilience. Our nation’s capacity to respond will be best served if the population is in good health, well housed, well educated, and well employed.

So, what are the best sectors for promoting employment?
Employment multipliers are used here to address this question.  The multipliers relate job numbers to output in each of the 106 sectors used to define the economy.  The jobs may be direct (within the sector in question), indirect (associated with supplying materials, components, goods, and services to that sector),and induced (from the spending of employees in the first two categories). [1]

Table 1 lists the sectors with the highest employment multipliers. Among other things, this indicates that one million dollars of additional output (or funding) in pre-school education would give the most jobs for $1,000,000 spent: around 29 in total, comprising  around 21 in the sector itself, 3 in activities supplying it, and 5 from the resulting household spending. Specialised food retailing also scores well, with a strong indirect effect reflecting how it draws on domestic suppliers.[2]   

Table 1: Sectors with Highest Output:Employment Multipliers (2017)

Table 2 compares multipliers from the most employment-intensive industry groups drawn from Table1 with those for the industry targeted by infrastructure spending, construction.

From this we see that:

·   The employment boost from spending in construction sits close to the median for all sectors, but well below education, health, and social care services.

·  Residential building is a slightly better job-booster than civil engineering (roads, bridges, and the like) and non-residential building.

·  Residential and non residential building both generate significant indirect employment, reflecting reliance on local suppliers and subcontractors.

·   Non-tertiary education sectors have a substantial direct employment impact, with a relatively high induced impact suggesting that the sector’s typically “middle incomes” sustain above-average household spending.

Table 2: Employment Contribution, Selected Industries (2017)

·   Spending on tertiary education may generate less immediate employment because of higher overheads and salaries.

·   Medical and residential care and social assistance also have significantly greater employment impacts than construction.  Some of this will come from low paid “care” jobs, an issue highlighted by the critical nature of this sector to the Covd19 response.

Promoting job-intensive sectors may seem two-edged: they tend to pay the lowest wages (Figure 10).[3] However, low income households are likely to direct most of their additional spending to food and consumables, ensuring a large share of increased earnings flow through the retail and service sectors.

Figure 1: Average Wages by Sector, Q4 2019

In addition, these are the sectors that promote well-being across the community and should increase people’s skills and their abilities to deal with change.

Creating value

The benefits of recovery driven by employment-intensive industries also depend on how much value they add to the economy. According to the 2013 National Inter-Industry Tables, the share of output that is value added in the construction sector is modest, although low margins are offset in part by the substantial purchase of intermediate goods and services by the sector. 

While gross output is substantially lower in health and education than in construction, more value is created, largely in salaries and wages.  And because health and education each generate more household income than construction, funds channeled into these industries will lead to greater downstream demand in retail, services, and hospitality.

Table 3: Value Added, Imports, and Compensation of Employees, Selected Sectors (2013)

Towards a Multi-Layered Recovery – Scaling back the Infrastructure Sell

Infrastructure still has a role to play, especially in accommodating extra capacity in the priority sectors indicated by these figures. And, to be fair, the first $2.4bn of spending outlined by the Government included a strong commitment to social and affordable housing, well distributed sanitation and community enhancement projects, and environmental initiatives (Figure 2). Just under 30% was directed towards transport. However, this omits the big promises made to Auckland transit projects and major highway developments.

Figure 2: Distribution of the First Round of Shovel-Ready Spending

Investing in Human Resources

It is time to back off spending on mega-transport projects for which demand is uncertain and, instead, to focus on building the capacity of our people to deal with a changing economy.

Already there has been a commitment to step-up health funding in the May 2020 budget. The Simpson report on reorganising health and disability delivery (by consolidating and centralising administration and “professionalising” governance) may also help with a reset, although on the face of it looks a little like an expensive rearrangement of deckchairs.

Beyond that, a step up in new and innovative educational and vocational projects and initiatives across society may be the best means of ensuring that the recovery from Covid19 can be sustained, and that the country will be even better placed to deal with such crises in the future. 

Directing funding towards a more diverse, inclusive, and flexible education sector may mean increasing funding to both the educators and the educated. A simple start could include: increasing the funding of pre-school education; lowering staff student ratios in schools; developing applied tertiary courses in technology, production and distribution, agriculture and horticulture, and resource management; and encouraging and funding applied research.

Infrastructure should serve recovery, not shape it
Without doubt, initiatives in these areas will drive demand for further infrastructure.  But this investment will be focused on the needs of the sectors that underpin social well-being and economic productivity, and that foster the capacity of people to adapt to whatever demands the new normal might make. 

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[1]    The multiplier estimates are based on the national input-output tables (Statistics NZ, 2014) calculated and updated to 2017 by Insight Economics in Auckland. I gratefully acknowledge access to them, and am solely responsible for their interpretation here.

[2]    Employment in retailing largely reflects the induced effect of growth in other sectors. Spending by overseas visitors in retailing (and hospitality), though, represents additional external demand.  

[3]   Although wages in sectors like medical care span a wide range.

Its not the shovels that count: its what they're shovelling

Is boosting infrastructure the best road to economic recovery for New Zealand?

If we do not get investment for recovery right we will undermine productivity and economic progress for generations to come. Indiscriminate infrastructure development at this time risks limiting options by absorbing and concentrating resources in an area in which performance has been demonstrably deficient.

New Zealand's recovery from Covid19 requires short-term job gains and long-term income growth if we are to throw off the shackles of public debt. Committing substantial resources to “shovel-ready” projects without rigorous assessment risks excessive spending to meet uncertain demand. The result of over-investment will be lower foreign reserves, a diminished credit rating, and a prolonged productivity deficit.

Get the economics right first

Economic justification is essential to establish whether the benefits generated by infrastructure justify the resources consumed in its development. Projects that do not stack up have a negative fiscal impact, requiring ongoing tax- or rate-payer subsidy. While otherwise uneconomic projects may provide non-market benefits (to the environment, social equity, or public health for example), if we do not first consider their economic efficiency, we cannot know whether they are the best means of achieving those benefits. 

We do know, however, that the wrong projects can set our economy back: the Think Big projects contributed substantially to a run on foreign exchange reserves in the early 1980s.

Current failures

The damage from uneconomic projects tends to increase if they are large scale. The literature on cost blowouts for major infrastructure projects – especially in transport – is extensive. Auckland's Central Rail Link , for which the case was flawed from the outset, and Transmission Gully are text book cases.  Consider the following:

• Under-specification at the outset, with inadequate technical assessment or design myopia leading to re-specification and add-on costs in the course of development;
• Under-costing from relying on precedent and current (or historical) costs for estimation, failure to consider the effect of competing demand for resources, and the optimism-bias of project protagonists leading to unwarranted approvals and subsequent cost blow-outs;
• Contract failures from accepting low tenders and engaging at-risk contractors to meet tight project budgets, leading to higher costs when contractors fail and re-tendering is necessary;
• Project delays from under-specification and under-costing compounded by resource shortages (including labour and skills), tying up capital and delaying benefits.

The failures threatening the CRL are such that economist Tim Hazeldine’s view is that it is time to stop pouring good money after bad. The contingencies facing such large scale projects should double down the call for rationality in today’s perilous economic environment. 

Unproven Demand

Because large-scale investments take time to finish, demand at completion may be quite different from what was projected at inception. Along with the impact of unexpected disruptions, extended pay-back periods add to uncertainty over what demand a project may eventually have to meet. 

As of today, the Infrastructure Commission’s pipeline of major public capital works , although incomplete, outlines around $16b or more of spending. Approximately 60% of this is for transport. (These figures are based on the cost ranges provided).  Yet major transport projects today face substantial shifts in demand, such as:

• Revised working conditions lowering building occupancy and increasing the appeal of large footplate, low-rise, suburban workspaces with natural light and airflow;
• Changed working arrangements (staggered hours, home-based working);
• Newly suppressed demand for and lower passenger densities on public transport;
• An increased preference for medium/low density suburban living environments;
• A shift from large scale venue-based recreation;
• Reduced international travel and tourism;
• Reduced demand for mall-based retailing in favour of local services and centres;
• More on-line retailing and in-home services.

We can add to this market uncertainty the impact of changing technologies, including prospects for:

• Enhanced face-to-face telecommunications;
• Gains in vehicle autonomy increasing capacity on existing highways;
• Falling electric vehicle costs boosting private transport and demand-responsive public transport;
• Aircraft operations favouring smaller aircraft on point-to-point rather than hub-and-spoke networks;
• Continuing logistics gains integrating production and distribution with direct delivery;
• Artificial Intelligence, product printing, design refinement, innovation, and changing consumption preferences jointly supporting local production of specialised goods;
• Distributed specialist services (law, health, medicine) supported by AI, gains in computing power, seamless tele-conferencing, and advanced instrumentation;
• Decentralised settlement with modern, localised infrastructure, decentralised employment, and efficient inter-regional and international information and transport connections.

A Shortage of Resources

Supply chains are over-stretched in the development sector.  This flows through to delays, costs, and failures all-too-often overlooked by local politicians and their consultants in the haste to justify economically suspect projects. 

Shovel-ready projects track straight into this quagmire of unrealistic supply chain and labour market expectations.  Yet, Infrastructure New Zealand has effectively lobbied the civil engineering/development complex to the top of the national economic agenda. It is supported by a network of professional players (engineering, consulting, planning, design, and legal) and the vested interests of operators. Because of its visibility, infrastructure building also plays to political monumentalism. 

What are the alternatives?

A shovel ready recovery locks us into projects based on the economy and labour market of the past. Uneconomic or marginally economic projects limit our ability to do other things. It would be better to focus on initiatives that lift adaptability (the ability to change what we are doing), and flexibility (the ability to vary how we are doing it). 

Here are some ideas that might contribute: 

• Vet and prioritise infrastructure projects, ditching those like Auckland light rail plans with costs bound to blow out and which face uncertain demand; 
• Pursue best practice in the assessment, design, specification, and management of any projects that may be justified (most likely in public health, water quality, and the like); 
• Prioritise social infrastructure (education, health, and housing) for  short- and long-term benefits. 
• Promote innovation and entrepreneurship with vocational education to increase career mobility and deepen domestic skills and experience. 
• Pursue an open business environment to facilitate enterprise, mobilise capital, ensure productive resources and feedstocks can be widely accessed, and streamline regulation; 
• Address business support to future-oriented capacities, rather than propping up existing structures and practices; 
• Review approaches to trade facilitation, support for innovation and technology, and business taxation. 
• Maintain household incomes: increasing local consumer spending, especially among low income households, will have the highest immediate impacts on employment while providing breathing space as the country and the world adjust to the economic shock of Covid 19.

Quite simply, an infrastructure-dominated programme that imposes new and potentially open-ended fiscal demands on currently constrained incomes is more likely to undermine than boost economic activity.

Central City Dreaming

Getting past the words

The Draft Auckland Plan is a daunting document – both in ambition and in presentation.  It covers a range of fields.  In what started out as a spatial planning exercise, Auckland Council boldly sets thirty year priorities for central government in areas like transport, health, and education; spells out what industry might do and how it might perform;  and promulgates its own long-term agenda in the areas of land use, urban design, and infrastructure.

So when we get past the vision, the photos, the charts, the the strategies, the principles, and directives, what does it all boil down to?

A central city manifesto

Well, in areas in which the council has direct accountability, it emerges to all intents and purposes as a central city manifesto.  A cynic might call it a bold attempt to boost inner city land values, potentially at the cost of ordinary, suburban ratepayers who will be called on to help fund its many CBD projects.

To try to pin down what the Plan really stands for, I examined the spending priorities.  Now we know these are indicative in most places, perhaps fanciful in some, but this is the best sign we have of where the Council’s priorities for us, and our children, lie. 

And when we look at where the priority area spend is targeted, it is clearly anchored to the CBD:

Priority Locations for Capital Expenditure: Draft Auckland Plan

Source: Table 12.3 Draft Auckland Plan

Of course, the further into the future we go, the more tentative this spending becomes. 

So let’s just take the first decade, 2011-2022: during this period 48% of the Council’s priority spending is targeted at the central city and water front.

Is it justified?

The area attracting the lion's share of spending, the area the Plan defines as the central city, [1] accounted for under 2% of the region’s population in 2009, although it did pick up 6% of growth in large part as a result of the boost in rental apartments in the middle of the decade.  It also accounted for 14% of Auckland’s employment and 11% of employment growth.

Turn these figures on their head: the rest of Auckland attracted 89% of population growth and 86% of job growth in the decade, but is lined up for only 52% of priority spending – much of that already committed by existing plans.  And this share falls to just a third if we add in all the figures through to 2040. 

While funding for the Council’s Southern Initiative is not pinned down in the Draft Plan and might adjust the balance slightly, that initiative focuses on strengthening children and families.  It depends largely on working with the relevant community and government agencies to meet social goals.  The Auckland Council is likely to act mainly as a civic champion for a needy community in the vacuum left by the demise of Manukau City Council.  It’s not clear what, if any, commitment to direct investment it might make in this space.

And there’s more

On the other side of the ledger, the priority projects listed do not include the $2.7bn investment planned for rail and transport improvements (which are listed instead under city-wide infrastructure improvements in Table 12.2).  These are an intrinsic part of the grand plan to revive the central city. 

Certainly these two projects are not yet funded, and may never justify funding in terms of demand, economics, or urban design.  But the fact remains that when we add them in to the mix the Draft Plan identifies close to $6bn planned by the Council for spending on the CBD over the next thirty years.  And that’s before we take account of such fundamentals as stormwater management, water supply, and wastewater infrastructure. 

It is not clear how much retrofitting will be required for these and other underground services. The recently reported  requirement for a $4.5bn spend to fix ageing stormwater infrastructure over 50 years (which is not obvious in the Plan, and does not include new capacity) represents the sort of bill that redevelopment of existing built-up areas incurs, especially in older, central areas.

How will it work?

Regardless of how we qualify the Draft Auckland Plan's numbers the bias in the vision is overwhelming.  And it is difficult to see this emphasis making Auckland a better place to live for the majority of its residents. 

The CBD is certainly improving as a place to visit as a result of investment that has gone into the waterfront, Aotea Square, and iconic events such as the Americas Cup regattas and the World Rugby Cup.  There is no doubt justification for more investment to make it even better. But there is a limit, especially if it comes at the cost of civic spending on more worthy projects that can be enjoyed by more people on a day-to-day basis, or if it unduly increases the community's exposure to high rates and charges. 

The CBD pre-eminence bestowed by the Plan shows limited appreciation of where most Aucklanders live, work, and play, and what might be required to make our suburbs more attractive. 

A high risk vision?

A key driver of the Plan's great CBD expectations is anticipation of an unprecedented population boost.  Chapter 8 of the Draft suggests that between 2006 and 2040 the population in the central city could increase by 340%, from 23,000 to 78,000.  This lies between 14% and 18% of projected region-wide growth, quite a turn-around.

It also raises some interesting issues. 

For a start, there are no strong grounds to expect Aucklanders to embrace the increase in housing densities that would result, from around 20 to over 70 households per hectare (more or less, depending on average household size), especially given the environmental and social issues such a strategy raises in an intensively developed area of mixed use. 

Second, there are real question marks over the capacity to deliver at a reasonable cost the 25,000 to 30,000 new dwellings implied in an environment where land assembly and remediation costs are high; infrastructure is constrained, ageing, and expensive; planning and consenting are traditionally tortuous; where dependence on medium density housing will push up construction costs; and where there is also an expectation for a revival in employment numbers. 

Third, it raises real questions over the resulting conflicts between the requirements of residents – for space, security, and residential ambience – and visitors.  The latter comprise a large student population, office, hospitality, and service workers, and visitors to recreational and cultural facilities, all of whom make quite different demands on the built environment.  And this is an area where there were already 86,000 employees in 2009 (although that was down 4% on 2007).

Fourth, it concentrates even more people and activity in a part of Auckland that is most vulnerable to the impacts of natural hazards, with a concentration of ageing commercial buildings at risk from earthquake activity, a significant area of reclaimed land prone to liquefaction, and low lying areas, including key arterial routes and lifelines, subject to storm surge flooding or even tsunami-based inundation.  While the probability of these events is low, the relative impact of any one of them will be high in the central city. 

How far, then, are the risks factored into the Draft Plan prescription: the risks of market resistance, commercial failure, economic inefficiency, land use conflict, and the impact of extreme events?

At least it’s a draft

In trying to create a CBD that might be all things to all people the Draft Plan may fall between stools.  Visionary planning certainly calls for imagination, but imagination tempered by clarity of means and ends, and a little more than a small dash of realism. 

The CBD can be a great place, but that need not be at the expense of heartland Auckland.  And if we do not maintain the attraction of our suburban spaces, and make it easy for people to meet their work and lifestyle aspirations we may not get the growth required to support plans for the city as a whole, let alone to support the resources this council plans to pour into the CBD.

The Draft Plan is a useful snapshot of what the politicians and advisors want – now it’s time to take seriously what the people are likely to prefer, and what they might be able to afford, and shape our civic spending plans accordingly. 

[1] Auckland Central, East and West, Freeman’s Bay and Newton Census Area Units.  The latter two are traditionally excluded from definition of the CBD, but are included to bring the 2006 population estimate up to the Plan figure of 23,000 people.

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Spatial Planning 3rd (and final!): a real alternative for Auckland

I have reviewed spatial planning for Auckland in earlier posts, and what it might or might not do for the region.  The spatial plan has to go through a deliberative process, the outcome needs to be balanced, and it needs to reflect some form of social consensus.

That doesn’t stop people from saying what they want in it or what it should look like. 

So here is my personal plan.  It needs work.  It needs analysis.  Any comparisons with alternatives, especially the mainstream option of pushing up first and out later, needs to be rigorous and systematic.  It could concentrate on differences at the margin (and not get trapped into comparing averages) to ensure a degree of economic rationality. Evaluation should also explore the capacity to encompass cultural diversity, and to provide the freedoms that a truly attractive city might offer to provide hope for growth, all without undermining the physical qualities that make Auckland – the new, greater Auckland – unique.

My alternative would promote the following:

1.       A simple map of bottom lines, the no go areas for development where we are prepared to make a real commitment (i.e., spend!) to protection and preservation.  It would focus on features and assets rather than zones.  It would be sparse and inclusive (identifying what we really want) rather than extensive and exclusive (focused on what we don’t want).

2.       A polycentric, connected city which reflects our fragmented geography and our cultural diversity and in which the rationale for centres – both those contained in the plan and those that might come into being in the future -- is clearly articulated.

3.    The evolution of the CBD first and foremost as the entertainment, creative, and educational centre, the place where Auckland’s cultures come together.  This is different from forcing it to be the commercial and employment centre of the region with a mix of high rise housing tacked on around the edges.  In the light of what is happening to CBDs worldwide and the need to consider issues of resilience and sustainability, the latter approach is a hiding to nowhere.  But we are hearing lots of good ideas about making the CBD more people friendly, more fun, and more accessible.  If we do that, the other stuff – inner city living and commerce – should follow.  We could promote the role of CBD (and harbourside) in developing a regional community of cultures rather than taking the high risk road of promoting it simply as an international centre of commerce.

4.   Promote the gateway employment zones (Mangere, Hibiscus Coast/Silverdale; Massey-Westgate, Drury) to take pressure off the land market and land prices as growth picks up, cut down on commuting and congestion, and provide good cross-regional, inter-regional, and international connectivity.

5.    Allow the evolution of distinctive villages and village centres within the urban fabric. This implies a more creative approach to city nodes than associated with the 1999 Regional Growth Strategy.  It can’t simply be done with lines on the map, rules about development, and a propensity to build out green spaces.  Urban villages need good local urban design and initiatives to encourage greater self-sufficiency.   We need to find ways to use existing building stock and not overload the capacity of local infrastructure and amenities.  It’s also important not to choke these centres off with unsustainable high density corridors between and through them.  The interstices should be transitional, perhaps with more parks, leafy suburbs, and opportunities for people to fill in the spaces with street scale activity.  The aim is to make centres attractive places to congregate and live, places of choice for residents and small businesses rather than places where people with limited choices are housed.

6.   Provision could be made for satellite centres to cater for a substantial share of growth. The possibilities include Warkworth, Wellsford; Dairy Flat, Coatesville, Beachlands-Maraetai, Whitford, Clevedon, and Pokeno. Some of these are underway already.  Let’s make sure that they are not unnecessarily constrained by poor decisions about transport links, unrealistic land use rules, or inadequate urban design.  Some of these places could end up with populations of 10,000, perhaps 20,000 or more.  Pukekohe is an example.  Warkworth is developing nicely.  These areas provide an opportunity to apply the more useful concepts of new urbanism – pedestrianisation, local work, and local services in village, town or even small city environments.  They may turn out to be more cost effective and sustainable on infrastructure grounds than trying to expand the current urban envelope.  They may even be associated with reduced car dependence.

7.   Focus on the core transport network – the main arterials between urban and ex-urban villages developed with generous corridors which contribute to land use flexibility, encourage localised intensification where appropriate, and leave a variety of transit options open.  Future transit might include implementation of “T lanes” (allowing for cars with two/three or more passengers only), heavy vehicle and bus lanes, even light rail.  Some understanding of the different demands made on corridors – commuting, freight movement, recreational travel, tourism, social mobility, and public transport; local, regional and inter-regional movement  – would lead to a more flexible and open ended approach to arterial roads, whether state or city highways.   

On the same theme, any rail development could be based on addressing and confirming positive land use opportunities such as (1) redevelopment around centres in the inner city and (2) smart growth centres on the edge.  

But I would not want any high cost transport commitment in my plan until its demand, economics, and business case had been proven, and a clear land use rationale established.

8.   Let’s extend our network of urban parks and green spaces.  Compared with many major cities, Auckland is not particularly green. It has several iconic green spaces within the urban area (the Domain, Cornwall Park, perhaps Albert Park, ...?) but that’s not the same as a green city.  Let’s cement nature into the urban area, not with rules for lot owners or obligations on developers but with a commitment to a public network of parks, perhaps even a town belt, where we can advance restoration, enhancement, and accessibility.  And let’s build it in to our bottom lines.

That’s it.  The implementation of my plan would be through the associated budget and programme commitments in the Long Term Council Community Plan and through rules – as few as possible – and some very broad and flexible zones contained in the unitary plan.