Although it will (justifiably so) be quite some time before we get past the initial human tragedy of last week’s Christchurch earthquake to think about the financial cost of the disaster, clearly it will be an extremely expensive disaster to recover from. This is outlined below, from a Scoop Article on the quake’s financial cost:
Last Tuesday’s quake, which killed at least 154 people, will cost as much as $15 billion, adding to the September disaster’s $5 billion bill, and equating to about 7% of the nation’s gross domestic product. Reinsurer Validus Holdings estimates the cost of the quake to the insurance industry will be as much as $10 billion.
A lot of the money will come through insurance companies, and their ‘reinsurance’ through the wider industry. That will be to the tune of around $10 billion. EQC also has money available to spend, but above and beyond that it seems the government will need to spend at least a few billion on works that are not covered by insurance schemes: generally in the form of welfare assistance packages in the short term, plus infrastructure rebuilding in the longer term.
Now that’s a lot of money for a government currently borrowing around $300 million a week just to stay afloat. Let’s remember that the Waterview Connection project and the widening of State Highway 16 to complete the Western Ring Route comes to around $2 billion. So if the government spends a few billion on infrastructure fixes in Christchurch, that will need to come from somewhere.
The Scoop Article linked to above has a few quotes from Finance Minister Bill English on the matter:
Finance Minister Bill English says the government will reshuffle its priorities to make sure Christchurch is rebuilt, and will look at all options, including curbing interest free-student loans and Working for Family tax credits which it previously said wouldn’t be changed.
Prime Minister John Key had already signalled the government will cut its new spending by as much as $300 million as it deal with a high level of foreign indebtedness that’s raised the ire of ratings company Standard & Poor’s.
The government will keep its spending focus on front-line services, and income support for people on low incomes, and continue to spend on “infrastructure and productive investment.”
“The earthquake means (tighter spending) is now absolutely necessary and we need to produce definitive results from that process,” English told a media briefing in Wellington. “We won’t change that recipe significantly, but we are going to have to test the limits of it.”
Whether the extra money should be found through more borrowing, spending cuts or an additional disaster levy (like what Australia’s doing) is a matter for debate that’s probably outside the scope of this blog. However, what is relevant are the potential effects on infrastructure projects – notably transport projects. This is discussed further:
English said spending on major infrastructure projects, such as Auckland’s central business district rail loop, may get pushed out, though the government won’t change its general approach.
“With the infrastructure projects, you’ve got some choice about the timing, such as the CBD loop in Auckland, and a year or two can make, over a longer period of time, a significant enough difference for us,” he said. “We’ve got some fairly big commitments we’d like to maintain, such as the ultra-fast broadband.”
To be honest, that’s about the most positive thing I’ve ever heard Bill English say about the CBD rail tunnel – that he actually foresees it happening in the future, it’s just a question of “when”.
In my opinion, the earthquake does change things quite significantly. There is no doubt that Christchurch will require a lot of expenditure when it comes to fixing up the infrastructure – and that’s fine. What it means is that we need to be really careful about the money spent on transport infrastructure – in short, we need to ensure we get good ‘bang for our buck’. Time for Operation Lifesaver instead of the holiday highway, time to take a good long pause to think about how badly we really do need another harbour crossing, time to think about more cost-effective solutions than Penlink. And so forth.
However, I think we need to be careful about scaling back on infrastructure investment in Auckland too much. Over the next few years it seems very likely that Christchurch’s economic activity will be reduced as a result of the quake (although there should be a fairly good construction sector there for a while to come). In order for the country to pull itself out of the current economic downturn, I think there will be an increased reliance on Auckland to “pick up the slack”. While we may be able to do that without some of the previously proposed infrastructure investment, I think it would be short-sighted to stop or delay too many of Auckland’s projects.
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I think the government will use it as an opportunity to quietly back out of things they now know to be unjustifiable like P2W as I get the impression they rushed into it and now they know the real picture are just trying to save face as they don’t want to admit they were wrong. I have seen a quote from John Key where he said they would investigate infrastructure but that Waterview was going to keep going ahead. I also think there is a possibility they save money by making further cuts to contributions to local roading projects, that way it becomes the councils problem and the government doesn’t look like the big bad guy as much.
One option I was thinking of for the CBD tunnel is Auckland could come to an agreement to fund it fully now on the provision the governments contribution is made up in a few years time by way of them fully funding something else like rail to the airport and additional trains. As that project is probably a least 5-10 years away before being really considered it could be a good compromise plus has the political advantage that at that time the current government will probably be in opposition and that would leave the government of the day having to work out how to fund it or face the public anger of cancelling it.
Matt, I also think with the CBD Tunnel is that we don’t actually need to come to a final funding solution for a couple more years. What we need is the green light to proceed with the designation and the detailed design work. In the scheme of things that’s going to be a relatively low cost compared to actually building the project.
Sure, Len Brown will want to put a spade in the ground before the next local body election, but if we’re to have the rail tunnel built by 2021 then around 2014 is the date we need to start digging. That’s a few years off yet.
“time to take a good long pause to think about how badly we really do need another harbour crossing”
On the other hand, I think single points of failure will come under a lot of scrutiny over the next few years and the Bridge stands out as a massive exposure. As do the Picton ferry terminal, since there are two on the Wellington end, the Cook Strait DC link, electricity links around both Bunnythorpe and Otahuhu, and SH1 north of Wellington.
Like… What happens if the Harbour Bridge fails catastrophically? There is really no useful alternative for north shore to city commuter traffic. You can theoretically drive around the harbour, but that is a long route and will thoroughly overwhelm West Auckland’s roads. The same applies to a replacement bus service, with the added complication that the greatly increased travel time versus the busway means that we won’t have enough buses. That might be acceptable if service were only interrupted for a month or two, but the time to build a new bridge or tunnel is probably on the order of five years or so.
The Bridge redundancy doesn’t have to be a second road bridge or tunnel, by the way. Since most users are commuters then a rail tunnel would be just fine, as long as it is on a different alignment.
Road networks, like any assets, should be insured in the event of catastrophe, but the current funding framework doesn’t encourage it. Still there is always provision in the NLTP for emergency works, but this will overwhelm that, and CCC wont be able to fund its local share.
So:
1. There should be borrowing. This is reconstruction of much of an urban road network, the benefits from that capital are spread over a generation. The costs should be borrowed and repaid over a good 30 years or so.
2. CCC should get a 100% Financial Assistance Rate as long as it works in collaboration with NZTA on contracting. A key reason why less than 100% FAR is useful is accountability for poor contracting. This will be a rare and expensive contract to undertake a lot of repairs, it needs to be done with NZTA. NZTA may also renegotiate with contractors for new works that are delayed or on hold because of damage – Christchurch Southern Motorway extension being the big one.
3. Christchurch can equitably claim far more from the NLTF than it currently gets because it pays more than it gets, and always has. The Land Transport Pricing Study and Roading Advisory Group report in the 1990s modelled road companies based on revenue generated from fuel tax and RUC per region. Comparing revenue and expenditure, Canterbury (not Auckland) always paid far more into the NLTF than it got back. Prudential borrowing, paid back by RUC/FED/MVR will actually mean Canterbury reclaiming its contribution towards roads and public transport across the country.
4. The areas of expenditure cutbacks should obviously be those of lowest value, which means delaying the high capex low BCR road and rail projects. In Auckland it means P2W and Waterview, in Wellington Transmission Gully and Mt Vic Tunnel duplication, in Waikato, it means the Huntly and Hamilton portions of the Waikato Expressway. It means CBD rail tunnel in Auckland as well. In essence, it should mean raising the bar for funding for a couple of years.
5. Raising RUC and FED would be unfair, as Canterbury should not have to pay for that, and current levels are quite adequate to sustain efficient expenditure on the network. Any new taxes will suppress economic activity at a time when it will more than suppressed by the rechannelling of investment into reconstruction – which is not a net gain.
If Auckland or Wellington want more projects, then the case for them implementing congestion charging or increasing rates becomes quite overwhelming.
Obviously you’ve seen this http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10709598
Typical that the only projects getting the axe are PT projects…
“That could delay some projects on which work has started, and mean the axe for some projects such as Auckland’s downtown rail loop which the Government has not yet accepted.”
Considering so little money is going towards PT from National, I don’t see how this will free up much money.
In fact nothing has changed. But it gives everybody a new justification for their previous positions. For me it means ditch the low BCR and unnecessary Puford [but fix the dangerous existing highway, and bypass Warkworth], but the need to speed up the CBDRL to stimulate Auckland’s performance seems even more vital now. For Mr Liberty it proves road pricing is required. And, of course, for this government it will be used to avoid/delay the CBDRL, load more cost onto PT generally, sell performing SOEs, promote sprawl, and generally push their existing agenda.
And it brilliantly gives them all an opportunity to look all presidential [even Brownlee!] and wipes them from all responsibility for the state of the economy.
I hope Matt is right and this allows Joyce to slip away from Puford, but what a huge waste of money that has already been. What they’ve already spent instead could mean that Northland has rail to the port now, which would make the whole line viable. And NZTA should be fixing the current road which will save lives. Delay should be enough to kill this big pork barrel project as the global oil situation continues to clarify even for the the most willfully blind to it over this year and next.
Brown and AK will be painted as being selfish for fighting for national money for PT. Stupid, of course, but it will play in some quarters, especially for those already with the absurd anti AK prejudice but also for those who still can’t get their heads around how cities function and see rail as an expensive luxury.
Clearly there is some justification in scaling back projects but given the time scale of the expenditure we must continue with an over all plan. I think this is a great time to get all the projects with a realistic chance of proceeding on the table and compare value for money against the pool of money available to apply to them. Surely it’s a good time to start looking at cheaper options for expensive projects (a la Operation Lifesaver).
And given the earthquake seems to have given rise to discussion over previously political hot potatoes (interest free student loans, working for families, asset sales) maybe it’s time to put congestion charging on the table. Part fund the rail loop out of that and suddenly Auckland is helping pay its way in this time of need.
MOJAE SJ is a smart cookie. For my money he’ll go for the face-saver (a P2W back-down) – there’ll be nothing much more said about CBDRL because that’ll be held in reserve for the election campaign (note that the Herald article quoted a ‘government source’ – just like the mining thing last year). And if he really does have any forward-planning sense, he’ll have realised that in about 3-4 years time we’ll need really BIG work for the heavy-lifters who will by then have just about completed the Canterbury rebuild.
Progress on the CBD rail tunnel is already glacial at the moment. We need to continue to at least plan for it and do the designations etc. This is likely to take at least a year and won’t cost a significant amount to do.
In the meantime of course petrol prices are going to keep increasing, putting further strain on the PT network.
Is anyone else wondering if this news is going to affect previous shoe-ins – Waterview and Transmission Gully? The way the Waterview Board of Inquiry is currently going, I certainly am.
The government has already said it won’t affect Waterview, Transmission Gulley is a different story as is P2W and parts of the Waikato Expressway. If the BOI requires a lot of extra mitigation that significantly increases costs it might have an impact but the most likely thing is the extra costs would be less than $50m so a pretty small scratch on the surface when you consider the total cost.
Hi Matt, can you link me to where the government said the EQ won’t affect Waterview happening? I’m interested. I’ve had it on good advice that it (along with all infrastructure projects – incl non-roading) will be subject to review, although obviously Waterview will be the first to go ahead before P2W & WE if they decide that they’re not scrapping the lot.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10709223
Major infrastructure projects are being reprioritised – though Auckland’s Waterview roading project was not in jeopardy, he said.
Great. Thanks
#Jones
Well, putting a quiet end to Transmission Gully (the Wellington equivalent of the Holiday Highway, in many ways), wouldn’t be a bad thing.
The most important thing here is the “cost” is being used as economists use it not as accountants and ordinary people use it.
Look at it this way:
First – Every year we have been sending money overseas to reinsurers – that’s been a genuine cost to the NZ economy because money is being sent out to the global economy. Over the next few years that flow will reverse, and on a scale equivalent to having an entire wine or wool industry added to our export earnings.
Second – In round numbers, over the next few years $5bn of anticipated economic activity will no longer occur (mainly out of Christchurch City), $5bn will occur differently than anticipated (mainly into Christchurch City) and $10bn of economic activity will occur that wasn’t anticipated. That’s a nett $5bn increase in spending. Since all these amounts are GST inclusive the government Treasury will receive an additional $700m in GST not included in it’s forecast revenues so that govrnment can spend $700m assisting Christchurch before the earthquake actually becoms a financial cost to the consolidated account.
Third – most of the “government” spending included in the $20bn economic cost is actually from the accounts of NZTA and EQC and a few other CEs and SOEs. So far the government has only announced spending commitments on the Consolidated Account of approx. $250m.
Treasury’s half yearly economic and fiscal update has a box on pages 22 & 23 explaining how the update has incorporated the Sept 4 quake to show 0.2% reduction in GDP growth in the Sept-March half year and 0.4% GDP growth increase in the March 2012 f.y.
http://www.treasury.govt.nz/budget/forecasts/hyefu2010/hyefu10.pdf