Volume 6 – Number 4 – November 2010

Special Issue: Infrastructure

Infrastructure: New Findings for New Zealand A Culture of Lead Infrastructure Arthur Grimes 3 Colin Crampton 32 Planning New Infrastructure: Some Issues Investing in Infrastructure Arthur Grimes 9 Michael Deegan 36 Infrastructure Investment: Supporting Empty Talk? University Voices on the Better Decisions Global Financial Crisis John Boshier 14 Todd Bridgman 40 Strategic Decision-Making Frameworks Executive Power: 60 Years Stephen Selwood 19 On Has Anything Changed? Transport Infrastructure, Lock-Out and Harshan Kumarasingham 46 Urban Form: Highway Development in Health, Employment and Recession: Auckland and the United States The Impact of the Global Crisis on Andrew Coleman 23 Health Inequities in New Zealand Infrastructure Investment Clair Mills 53 Under Uncertainty Lewis Evans 28 dependence created by specific urban forms, and, with particular reference to Auckland, considers the chal- Editorial lenge of increasing public transport use in low-density cities; Lew Evans discusses problems of decision- making with regard to infrastructure investments in the context of various kinds of uncertainty, such as Note rare events (like major earthquakes), and volatility in Volume 6 – Number 4 – November 2010 economic conditions (including uncertain demand for Nations cannot flourish without well-designed physical infrastructure services); Colin Crampton describes the infrastructure. This includes transport infrastructure Policy Quarterly (PQ) is targeted at readers approach of the New Zealand Transport Agency to plan- (e.g. roads, railway networks, cycle paths, seaports, ning and providing land transport infrastructure, using in the public sector, including politicians and airports and navigation systems), water management the state highway network as an example; and Michael their staff, public servants and a wide variety of infrastructure (e.g. water supply, sewage collection Deegan outlines Infrastructure Australia’s approach to professions, together with others interested in and disposal of waste water, drainage systems, flood improving the coordination and quality of infrastructure public issues. Its length and style are intended control and irrigation), energy infrastructure (e.g. investment across the Tasman. to make the journal accessible to busy readers. generation plants, power grids and pipelines), and Collectively, these papers provide a rich source The journal welcomes contributions of communications infrastructure (e.g. phone services, of information, evidence and analyses. They contain about 4,000 words, written on any topic fibre-optic cable, undersea cables and satellites). much wisdom, insight and practical advice. They relating to public policy and management. Infrastructure is critical not only for the production and deserve careful attention by all those involved in the Articles submitted will be reviewed by distribution of goods and services – and therefore for funding, maintenance and governance of this country’s members of the journal’s Editorial Board and/or economic development and prosperity – but also for infrastructure. by selected reviewers, depending on the topic. social interaction and connectedness, environmental This issue of Policy Quarterly also includes Although issues will not usually have single protection and sustainability, and human well-being. three articles on three very different topics. First, Yet the provision of infrastructure poses many themes, special issues may be published from Todd Bridgman explores the (limited) contribution of complex and challenging policy issues. For instance, time to time on specific or general themes, university academics in New Zealand to public debate what is the appropriate level and mix of infrastruc- perhaps to mark a significant event. In such about the global financial crisis (GFC) during 2008-09. ture investment? How should such investment be cases, and on other occasions, contributions His analysis is sobering. Despite the gravity of the GFC funded and managed? How should access to, and may be invited from particular people. and the significant reservoir of relevant knowledge use of, infrastructure be rationed and priced? What Subscriptions: The journal is available in PDF within the academic community, the public voice of the discount rate should be used in evaluating the costs format on the IPS website: www.vuw.ac.nz/ips/ universities was decidedly muted. Few of those with and benefits of particular infrastructure projects? Is it pq. Readers who wish to receive it by email relevant expertise – whether in accounting, economics, possible to avoid inefficient forms of path dependence, should register as PQ subscribers finance, law, management and public policy – contrib- such as long-term ‘lock-in’ to antiquated technologies [email protected]. This service is free. uted to public discussion. Instead, public commentary or undesirable patterns of human settlement? To what was led from elsewhere, in particular by economists For all subscription and membership enquiries extent should infrastructure be designed to cope with employed by the major banks. Bridgman examines the please e-mail [email protected] or post to potential long-term developments, such as the impacts reasons for the relative silence of academics, why this Institute of Policy Studies, P.O. Box 600, of climate change (e.g. more severe storms, sea level is inconsistent with the ‘critic and conscience’ role of Wellington. rise, and heat waves)? And what lessons are there universities, and what should be done to rectify the Electronic Access: The IPS directs interested from both domestic and international experience about problem. individuals to its website: www.vuw.ac.nz/ the strengths and weaknesses of different decision- Harshan Kumarsingham poses a very different ips/index.aspx where details of the Institute’s making models with respect to infrastructure invest- question: has the move to proportional representation publications and upcoming events can be ment and management? In particular, is it possible to since 1996 really diminished the power of the execu- found. construct policy processes that reduce the tendency for tive, including that of the prime minister, or does New Permission: In the interest of promoting debate negative externalities to be underpriced and for users Zealand remain, in effect, an ‘elected dictatorship’? and wider dissemination, the IPS encourages of infrastructure to be inappropriately subsidized? Drawing on various recent examples, Kumarsingham use of all or part of the papers appearing in These and related questions were the subject of a argues that the power of the executive remains very well-attended workshop hosted by Motu and the Insti- PQ, where there is no element of commercial much alive, and goes on to consider some of the ways tute of Policy Studies on 13 July 2010 in Wellington. The gain. Appropriate acknowledgement of both in which this power might be better checked and fet- workshop brought together researchers, policy advisers author and source should be made in all tered. The prospects, however, do not look good – all and decision makers from around the country. Amongst cases. The IPS retains copyright. Please direct the more so given recent events, such as the enact- other things, the event provided an the opportunity requests for permission to reprint articles from ment in September 2010 of the Canterbury Earthquake to consider the findings and policy implications of a this publication to [email protected]. Response and Recovery Act which, amongst other major research programme on infrastructure issues led Editor: Jonathan Boston things, gives ministers the power to exempt, modify by Motu and funded by the Foundation for Research, Guest Editor: Arthur Grimes or extend virtually any statute by Order-in-Council in Science and Technology. Editorial Board: David Bromell, Paul Callister, pursuit of the general purpose of facilitating a response This special issue of Policy Quarterly includes Valentina Dinica, Michael Di Francesco, Mike to the earthquake. most of the papers presented at the infrastructure Finally, Clair Mills explores how economic reces- McGinnis and Jim Veitch workshop. It commences with two scene-setting sions affect health outcomes, and in particular the ISSN: 1176 - 8797 (Print) contributions, both by Arthur Grimes. These papers implications for inequalities in health. Overall, the ISSN: 1176 - 4325 (Online) summarize the aims of the research programme and evidence suggests that recessions impact negatively Volume 6, Number 4 – November 2010 its main empirical findings, and explore some of the on the key determinants of health, such as employment Design, Cover Photograhy & Layout: Aleck Yee major policy issues generated by the research – in and income, and that the effects fall differentially on Production: Alltex Design particular, the problems of uncertainty, discounting, population groups, with the least advantaged suffering Copy Editors: Rachel Barrowman and Vic Lipski strategizing and priority-setting. Following this are five most. Appropriately targeted policy measures can help contributions covering a range of policy issues: John to mitigate such outcomes, but fiscal pressures and Boshier assesses various methods for evaluating infra- limited political will are likely to constrain their applica- structure proposals; Stephen Selwood addresses the tion. Reducing health inequalities, therefore, can be problem of project prioritization and the lessons from expected to remain a perennial challenge. New Zealand’s experience (especially in the transport sector); Andrew Coleman explores the problem of path Jonathan Boston

Page 2 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Arthur Grimes

Infrastructure New Findings for New Zealand Research programme This article summarises the aims of the programme and its key empirical findings, Infrastructure is a crucial input into economic production, relating these findings to prior theoretical and provision of infrastructure is a key avenue through which and empirical work. A companion article in this issue (‘Planning new infrastructure: government may materially raise economic productivity. some issues’) examines some of the Recognising the importance of infrastructure investment, theoretical and funding issues raised by the programme. the Foundation for Research, Science and Technology granted At the time the programme was devised, it had become widely recognised Motu and its research partners a four-year research grant to that the quality of New Zealand’s examine the impacts that infrastructure investments have on infrastructure had fallen behind that of many other developed countries. The New Zealand’s economic development.1 The programme has 2004 OECD report on New Zealand raised significant questions about the resulted in a range of empirical research studies that examine quality of land transport, electricity the impacts of specific and general infrastructure investments and telecommunications infrastructure. The World Economic Forum Global in this country. It has also resulted in contributions Competitiveness Report ranked New addressing theoretical and funding aspects related to Zealand 20th of 29 developed countries for overall infrastructure quality. infrastructure investment. As a New World country, infrastruc- ture had to be built largely from scratch from the early 19th century onwards. Without modern economic tools, strate- Arthur Grimes is a senior researcher at Motu Economic and Public Policy gic judgements were made about which Research, Chair of the Board of the Reserve Bank, Chair of the Hugo Group and Adjunct Professor of Economics at the University of Waikato. investments to undertake. The infrastruc- He was previously Director of the Institute of Policy Studies, Victoria ture investments of Julius Vogel in the University of Wellington, and had prominent roles at the Reserve Bank 1870s stand out as transforming the New of New Zealand and National Bank of New Zealand. He has published papers on macroeconomics, banking, finance, housing and infrastructure in Zealand economy. Factories and mines international academic journals, and has authored/edited five books. mushroomed around the railways, and

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 3 Infrastructure: New Findings for New Zealand

whole provinces and industries opened have too much, just enough, or too little infrastructure (Grimes, Ren and Stevens, up for production (Grimes, 2009b). Since infrastructure investment? How large are 2009; Grimes, 2010b; Howell and Grimes, then, productive infrastructure (includ- the costs to productivity and to broader 2010); water infrastructure (Grimes ing roads, rail, bridges and telecommu- well-being of having the wrong amount, and Aitken, 2008); social infrastructure nications) and social infrastructure (in- or the wrong type, of infrastructure? (Roskruge et al., 2010); primary processing cluding schools, hospitals, community Is inadequate infrastructure placing a infrastructure (Grimes and Young, 2009); facilities) have further transformed our material constraint on New Zealand’s impacts of legal (planning) constraints economy and our society. economic and social development? What on infrastructure outcomes (Grimes and Prior to the current programme, there would be the pay-offs to relieving those Liang, 2009); infrastructure impacts on had been little evaluative work examining constraints? national and city productivity (Maré, 2008; Maré and Graham, 2009); and effects of local authority infrastructure investments Land values rose considerably (relative to comparable on economic outcomes (Cochrane et al., 2010). Analyses of funding mechanisms land elsewhere in Auckland) in areas closely adjacent (Coleman and Grimes, 2010a and 2010b) and theoretical issues involved in ex ante to the new motorway exits, with this effect tailing off to assessments of infrastructure (Grimes, zero at around 7 kilometres from an exit. 2009a, 2010a) have addressed additional conceptual issues.

Importance of infrastructure the benefits (relative to the costs) of The programme has included analyses New infrastructure is normally designed investing in many of these infrastructure of: transport infrastructure (Grimes, to increase the productivity of firms and/ projects. The research programme aimed 2007; Grimes and Liang, 2010; Grimes or increase amenity values for people who to conduct a range of evaluations in order and Young, 2010a; Fabling, Grimes and make use of the facility. The investment to help answer questions such as: Do we Sanderson, 2010); telecommunications may relieve an existing bottleneck (e.g. a Subscribe to the Institute of Policy Studies e-updates

Victoria University’s Institute of Policy as seminars by subscribing to IPS e-updates. Studies (IPS) is acclaimed as a trusted forum Simply fill in the form available at Vfor research and discussion, for providing www.ips.ac.nz/database to subscribe to the cutting-edge analysis of major enduring and IPS e-updates and advise us of your areas of emerging public policy questions and for interest. shaping the public debate on these issues. We look forward to keeping Stay in touch with the latest IPS research, in touch with you. new publications, including the IPS journal, Policy Quarterly, and upcoming events such

Page 4 – Policy Quarterly – Volume 6, Issue 4 – November 2010 new road may reduce traffic congestion) according to their degree of proximity 8% at the time of the announcement or may create new opportunities (e.g. a to the newly-opened motorway exits. Ex of Auckland’s rail upgrades; properties fibre broadband connection may open ante cost-benefit ratios for the motorway near the urban redevelopment at New up the possibility for international extension were favourable, with benefit- Lynn rose by up to 10%. The upgrades electronic marketing). As discussed in the cost ratios of around 5. The difficulty will substantially improve the frequency companion article, the latter may create that such ex ante analyses face is that they of Western Line services and improve increasing returns to scale opportunities may not adequately capture the full range amenity values associated with the New that lead to enhanced benefits. However, of benefits that a major new investment Lynn town centre. even the former type of investment may offers, especially where options for as The third transport project that we lead to increasing returns, especially if yet unknown activities are created (see have examined concerns freight: the co-ordinated with other investments servicing the same community. In either case, if the investment has ... firms with broadband had higher productivity a localised effect it will raise land values in the affected locality, since firms and/ than firms without broadband, after controlling for or households will be prepared to bid observable differences across firms. more to locate in that area. In such circumstances, the change in land value consequent on a new infrastructure investment can be taken as a measure ‘Planning new infrastructure: some opening of Port of Tauranga’s inland port of the net present discounted value issues’, infra). By providing motorway (Metroport) in Auckland at Southdown created by that investment (Roback, access from the heart of Auckland to (Fabling, Grimes and Sanderson, 2010). 1982; Haughwout, 2002). The insight the Whangaparoa Peninsula, new work, This new port facility opened up the that changes in land values reflect value leisure and residential opportunities were opportunity for Auckland (and Northland) creation has been used in a number of greatly expanded. firms to ship their goods to a port in the the studies in the programme. While there were major cost overruns southern part of Auckland rather than all Other forms of infrastructure have on the project, we find that there were the way to Tauranga, in addition to the more widespread impacts that are also extra benefits relative to what option of using Port of Auckland (which not confined to a defined local area. were expected ex ante. Population and subsequently also opened an inland port, Investment in telecommunications employment growth, especially around in Wiri). The analysis shows considerable technology that enhances broadband the Peninsula and around Warkworth, uptake of the new port by existing export access is one such form of investment. To were very strong. More generally, firms, particularly by larger firms and measure these benefits, one can examine areas within 3 kilometres of new exits those exporting lower value-to-weight impacts on individual firm productivity to experienced strong rises in population cargoes (e.g. commodities). Many existing assess the productive benefits arising for and employment. Land values rose exporters chose to add Metroport to Port firms. The benefits of social investments considerably (relative to comparable land of Auckland (rather than switching ports may be examined by recourse to survey elsewhere in Auckland) in areas closely entirely), so increasing their shipping data on individuals; we utilise these adjacent to the new motorway exits, with options (i.e. increasing the frequency approaches in some of our studies. this effect tailing off to zero at around 7 of ships that they can access for their kilometres from an exit. These responses exports). Empirical findings: specifics are as one would expect to observe if the Transport new infrastructure were highly valued. Telecommunications The programme examined three specific Our assessment of the benefits was New Zealand firms and households can transport investments and provided such that the benefit-cost ratio of the access the internet through a number background information about transport extensions was estimated to be at least of means: dial-up, copper wire-based issues in general (Grimes, 2007). The three 6, and possibly as high as 20, even after broadband (ADSL), mobile broadband specific investments related to Auckland: the considerable cost overruns were and multiple forms of cable/fibre. Current the Northern Motorway extension from accounted for. The high ratios imply policy is to substantially upgrade the fibre Albany to Silverdale (Orewa), the upgrade that initial analyses of benefits were offering across the country so that the of Auckland’s Western Line passenger conservative. bulk of consumers can gain access via a rail service, and the opening of Port of Similarly, we find benefits from fast fibre connection. Because this is a Tauranga’s inland port at Southdown. upgrading the Western Line passenger new technology, it is difficult to measure The Northern Motorway research rail service to Waitakere City (Grimes the benefits that may flow from such an (Grimes and Liang, 2010) utilised the and Young, 2010a). We find that the upgrade; by contrast, the (large) costs are change in land value methodology, price of houses near existing Waitakere apparent. comparing relative changes in land values City stations rose in the order of 6% to

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 5 Infrastructure: New Findings for New Zealand

The infrastructure research pro- because: (a) recent adoption of cable/fibre Water gramme attempted to provide new means that productivity benefits had not Plentiful water is one of New Zealand’s information to address the benefit side yet materially affected firm performance greatest resources, but in some parts of of the equation by examining differential for many firms; (b) fast broadband may the country it is already over-allocated; effects of internet access on individual have benefited only a small subset of firms Canterbury is the most seriously affected firm performance (Grimes, Ren and in 2006, so did not materially influence region in this regard. Irrigation and water Stevens, 2009). This research was enabled the overall results; (c) the data did not storage can considerably increase the through access to Statistics New Zealand’s allow for a clear delineation in speeds water available to productive enterprises, prototype Longitudinal Business Data- between differing measures of broadband but existing water allocation mechanisms base (LBD), and particularly to the 2006 type; or (d) there may in fact be little or (water rights) are based largely on a ‘first- Business Operations Survey (BOS), a no effect of switching from one type of applied, first-allocated’ basis. It is difficult, Statistics New Zealand survey of approxi- broadband to another, at least for most under current legal arrangements, to trade mately 6,000 firms. The research provid- firms. The study could not differentiate a water right with other parties who may ed descriptive statistics of how firms with between these explanations. have a greater use value for that water. different types of internet access utilised Discussion of the implications of In order to ascertain whether there the internet for their business operations, these results (see Grimes, 2010b; Howell are gains from trade to be had from and estimated the impact on firm perfor- and Grimes, 2010) notes that major better use of water in Canterbury, the mance arising from a switch to broad- investments in ‘new technology’ projects programme included a study on the band from dial-up access, or a switch to such as a fibre roll-out must consider value of water consents to farms in the Mackenzie district of South Canterbury (Grimes and Aitken, 2008). It found that water was more highly valued on ... investment in productive infrastructure and farms that were flatter and on more poorly draining soils than on other amenities that appeal to the young may be used as a farms (possibly because the water is retained for longer on those properties). mechanism to attract a younger population to a local Farms that are situated close to town area. derive especially strong benefits from irrigation, since these units are most likely to have potential water-intensive land uses such as dairying and cropping fast (cable/fibre) broadband from slow the factors that are likely to lead to large that require access to processing facilities broadband (ADSL/mobile). benefits accruing to firms. The ability to and/or urban labour pools. Accordingly, The descriptive statistics showed that access the internet at a reasonable speed farms with irrigation are, on average, firms with cable/fibre connections made through adoption of ADSL without located closer to town than farms with much greater use of the internet for tying up a firm’s phone line (as with no irrigation. business purposes than firms with other dial-up) may have a much greater effect The study found that reasonable forms of broadband. These latter firms in on productivity for many firms than the variations in the size of water right and in turn made greater use of the internet than marginal benefit of sending through the farm characteristics can give an estimated those with only dial-up (or no internet same information at a faster pace using a premium of at least 50% for irrigated access at all). Firms with cable/fibre were fibre connection. However, for some types properties relative to similar unirrigated especially over-represented amongst firms of firm that are reliant on very heavy data properties. Thus, there can be high net that had a web page, purchased goods and traffic and high customer expectations, returns to irrigation in a drought-prone services on the internet, sold goods and the move to fibre may open up major region such as the Mackenzie district. services on the internet, had high ratios opportunities (e.g. for international sales). Farms that have a water right are more of international sales as a proportion of Currently, only a minority of firms may valuable than similar farms without internet sales, had high tourism-related be in this latter group, but the portion water rights. However, the full value of sales, and entered new export markets. of firms comprising that group in future water is not being realised, since returns The research identified that firms may rise. The creation of an ‘option’ differ significantly according to farm with broadband had higher productivity (potentially for firms that have yet to be characteristics, and differing valuations than firms without broadband, after created) through judicious investment is of water cannot be fully capitalised upon controlling for observable differences therefore relevant. The unknown, at this where restrictions on water trading across firms. However, it could find no stage, is just how large the pay-off will be exist. This result is indicative of a more additional impact of cable/fibre relative to from investing in this option and whether general issue for infrastructure policy: other forms of broadband access on firm the benefit exceeds the cost. poor pricing of infrastructure can lead to productivity. This latter result may be

Page 6 – Policy Quarterly – Volume 6, Issue 4 – November 2010 severely sub-optimal allocations and to be complementary or contrary to the Thus, infrastructure (dis)investment may poor investment choices. impacts of the immediate effects. affect not only population size but also A study of the productive impacts population structure. A corollary is that Local social and economic infrastructure of local government infrastructure ex- investment in productive infrastructure Local authorities make considerable penditures (Cochrane et al., 2010) simi- and amenities that appeal to the young investments in both productive assets larly found effects extending from local may be used as a mechanism to attract a (e.g. roads, ports) and amenities (e.g. government investment choices. After younger population to a local area. social infrastructures such as community controlling for induced infrastructure The ‘agglomeration’ relationship facilities, parks, etc). Similarly, private expenditures arising from factors such as between infrastructure impacts and urban firms invest in facilities, some of which past population growth, the study found status (implied by the primary processing have similar properties to public that new infrastructure expenditure had study) is emphasised in two analyses infrastructure; primary processing plants positive growth effects on the local com- of firm productivity and employment that are locationally fixed and available munity. In particular, there was support density (Maré, 2008; Maré and Graham, for use by many local firms (farmers and/ for the ‘build it and they will come’ no- 2009). Large urban areas tend to have or foresters) are an example of the latter. tion: new infrastructure expenditure greater infrastructure requirements A number of studies in the programme (over and above what was required to and greater employment density than examined impacts of such investments. service past and expected growth) leads smaller areas. The former study finds Investments in amenities are to an influx of extra population to a com- an agglomeration elasticity of around undertaken by local authorities in order munity, and may also raise incomes and 0.05 (i.e. a 10% increase in employment to improve social outcomes for the land values as people and firms bid to density (employees/km2) results in a 0.5% local population. One council objective establish themselves in the growth area. increase in firms’ labour productivity);2 may be a desire to facilitate a high These findings are in keeping with the the intensity of this relationship is similar degree of participation in community insights of the Roback and Haughwout to that obtained in North American and activities by local community members. models cited earlier. European studies. The importance of By encouraging such participation Private investment in rural processing this result is that, if the effect is causal, – for example, through providing infrastructure is similarly found to have facilitation of higher density (e.g. through community facilities that complement considerable impacts on community improved transport networks) can result private endeavours – councils may raise outcomes (Grimes and Young, 2009). in higher productivity and hence higher the community’s ‘social capital’ and The study examined impacts of two incomes. assist community solutions to existing surprise meatworks closures: Pätea The second study (Maré and Graham, community challenges. (1982) and Whakatü (1986). Pätea 2009) provides further detail on the One study in the programme and Whakatü represent contrasts, one nature of this agglomeration elasticity. (Roskruge et al., 2010) examined rural and one peri-urban (Hastings). By industry, agglomeration benefits such issues, modelling the impact of Consistent with the findings on local are lowest for agriculture, forestry and local government community facility infrastructure investments, the closures fishing and highest for the finance and expenditure on individuals’ participation resulted in substantial immediate losses insurance industry, with wholesale trade, in community activities. The study found of employment in each community; retail trade and health and community a complex impact of such expenditures. however, the longer-term impacts services also having high elasticities. The Greater funding was found to increase differed considerably between the two latter four industries are most commonly the number of community activities cases. The loss of employment in Pätea found in major centres, emphasising the that active participants were involved was permanent given the lack of other importance of infrastructure investments in, consistent with building community opportunities in the surrounding area. that facilitate increased employment social capital. However, a free-rider effect By contrast, the losses in Whakatü density in larger cities. However, the was also found to operate: increased were temporary, as new employment study finds that there may be decreasing funding reduced the likelihood that an opportunities arose both in the broader returns to agglomeration, since the higher individual participated in community urban area and within Whakatü as new density cities (Auckland, Wellington, activities. Thus, the greater effort of firms replaced the former meatworks. Christchurch) have lower agglomeration some individuals appears to have enabled Perhaps the most important insight of elasticities than less dense areas, albeit others not to participate and instead the study was that such (dis)investments still in the vicinity of 0.05–0.06. enjoy the fruits of others’ exertions. These may also have an impact on the age results have a more general corollary: structure of the population. This was Empirical findings: commonalities the effect of a particular investment especially seen in the case of Pätea, which The analyses summarised above indicate may extend beyond the immediately saw a shift to a much older population the importance of infrastructure measured impacts to indirect, but structure following the closure, as young investments for raising productivity and nonetheless substantial, effects that may workers and families left, while older amenity values at local and national levels. people moved in to the vacated houses. In some cases, the nature of the benefits

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 7 Infrastructure: New Findings for New Zealand that flow from the projects are easy to partly in the nature of the purchase that must be taken into account when identify (e.g. improved local passenger of an option for future development, considering such matters. In keeping transport options). However, in other where the size and recipients of the with that article, the studies cited here cases benefits may be diffuse and/or potential options pay-off are unknown. provide prima facie evidence to support difficult to pinpoint ex ante. One factor Two of Vogel’s major investments – in a strategic, network-oriented approach to which causes difficulties in evaluating telegraph and rail – were of this nature; infrastructure investment that goes well benefits ex ante, especially of large-scale both had an immediate surge in usage beyond a project-by-project analysis of projects, is judging the nature of eventual with a further lift in usage 30 years later specific investment proposals. benefits and the recipients to whom they (see Grimes, 2009b). The nature and may accrue. size of Vogel’s investments effectively 1 FRST grant MOTU0601, ‘Physical, Technological and Social For some infrastructure projects – e.g. purchased an option that enabled these Infrastructure: Maximising Contributions of Infrastructure Investments to New Zealand’s Sustainable Economic a rural road straightening – the recipients subsequent developments to occur. Development’, awarded to Motu Economic and Public Policy of the project may be definable. But for Investments in fibre and/or investments Research with the University of Waikato and the Institute of Policy Studies. We thank FRST for its research funding and others – e.g. investment in fibre-optic in major transport networks may today thank co-funders acknowledged in cited papers. 2 This is the central estimate of three estimates provided in cable or a major new motorway linking have similar properties. The companion Maré (2008). two cities – the investment benefits are article examines some considerations

References Grimes, A. and Y. Liang (2010) ‘Bridge to somewhere: valuing Auckland’s Cochrane, W., A. Grimes, P. McCann and J. Poot (2010) ‘The spatial northern motorway extensions’, Journal of Transport Economics and impact of infrastructural investment in New Zealand’, paper presented Policy, 44 (3), forthcoming. to New Zealand Association of Economists Conference Grimes, A., C. Ren and P. Stevens (2009) The Need for Speed: impacts Coleman, A. (2010) ‘Transport infrastructure, “lock-out” and urban form’, of internet connectivity on firm productivity, Motu working paper 09- Policy Quarterly, 6 (4) 15, www.motu.org.nz Coleman, A. and A. Grimes (2010a) ‘Fiscal, distributional and efficiency Grimes, A. and C. Young (2009) Spatial Effects of ‘Mill’ Closure: does impacts of land and property taxes’, New Zealand Economic Papers, distance matter?, Motu working paper 09-12, www.motu.org.nz 44 (2), pp.179-99 Grimes, A. and C. Young (2010a) ‘Anticipatory effects of rail upgrades: Coleman, A. and A. Grimes (2010b) ‘Betterment taxes, capital gains and Auckland’s western line’, paper presented to the New Zealand benefit cost ratios’, Economics Letters, forthcoming Association of Economists Conference Fabling, R., A. Grimes and L. Sanderson (2010) ‘Transport infrastructure, Grimes, A. and C. Young (2010b) A Simple Repeat Sales House Price firm location and exporting’, paper presented to New Zealand Index: comparative properties under alternative data generation Association of Economists Conference processes, Motu working paper 10-10, www.motu.org.nz Grimes, A. (2007) ‘Transformative Transport: transport and economic Haughwout, A. (2002) ‘Public infrastructure investments, productivity transformation’, paper presented at the Transport – The Next 50 and welfare in fixed geographic areas’, Journal of Public Economics, Years conference, Christchurch (available on conference CD) 83 (3), 405-28 Grimes, A. (2009a) ‘Capital intensity and welfare: traded and non-traded Howell, B. and A. Grimes (2010) ‘Productivity questions for public sector sector determinants’, New Zealand Economic Papers, 43 (1), pp.21- fast fibre network financiers’, Communications and Strategies, 78 (2), 39 pp.127-45 Grimes, A. (2009b) The Role of Infrastructure in Developing New Maré, D. (2008) Labour Productivity in Auckland Firms, MED occasional Zealand’s Economy, Motu note #1, www.motu.org.nz paper 08-09 and Motu working paper 2008-12, www.motu.org.nz Grimes, A. (2010a) The Economics of Infrastructure Investment: Beyond Maré, D. and D. Graham (2009) Agglomeration Elasticities in New Simple Cost Benefit Analysis, Motu working paper 10-03, Zealand, New Zealand Transport Agency research report 376 and www.motu.org.nz Motu working paper 2009-06, www.motu.org.nz Grimes, A. (2010b) ‘Is fibre good for us?’, Competition and Regulation Roback, J. (1982) ‘Wages, rents and the quality of life’, Journal of Times, 31, March, Wellington: Institute for the Study of Competition Political Economy, 90, pp.1257-78 and Regulation Roskruge, M., A. Grimes, P. McCann and J. Poot (2010) Social Capital Grimes, A. and A. Aitken (2008) Water, Water Somewhere: the value of and Regional Social Infrastructure Investment: evidence from New water in a drought-prone farming region, Motu working paper 08-10, Zealand, Motu working paper 10-03, www.motu.org.nz Wellington: Motu, www.motu.org.nz Grimes, A. and Y. Liang (2007) An Auckland Land Value Annual Database, Motu working paper 07-04, Wellington: Motu, www.motu. org.nz Grimes, A. and Y. Liang (2009) ‘Spatial determinants of land prices: does Auckland’s metropolitan urban limit have an effect?’, Applied Spatial Analysis and Policy, 2, pp.23-45

Page 8 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Arthur Grimes Planning New Infrastructure Some Issues

Empirical themes importance of considering the options role performed by certain infrastructure Infrastructure investments are mostly long-lived, service investments. The importance of network multiple (current and future) users, and interact with other thinking and the consideration of options complicate the use of traditional public infrastructures and private investments. Empirical cost-benefit analysis (CBA) tools. Other examples cited in the companion article in this issue, complications also arise in relation to CBA, especially in determining the ‘Infrastucture: new findings for New Zealand’, include long- weightings given to current versus future benefits and to different types of lived road, rail and port investments, telecommunications benefit (especially consumption versus networks (fibre), water infrastructure and local social production benefits). This article indicates some of the issues that have surfaced amenities. Much of this infrastructure is provided by as a consequence of the findings of the central or local government, but some is also provided by empirical studies. A fuller examination of these conceptual issues is provided in public (state-owned enterprises) and private commercial Grimes (2010a).1 enterprises. Cost-benefit analysis CBA is the standard tool used in New Zealand and elsewhere as a basis for The presence of positive agglomeration assessments of the benefits flowing from decisions regarding infrastructure elasticities found in New Zealand and new infrastructure investments. Increasing investments. It makes explicit the nature, elsewhere (see Maré, 2008; Maré and returns mean that many infrastructure size and timing of a project’s costs Graham, 2009) indicates that increasing investments do not stand alone: analysis and benefits, covering both tangible returns to scale may be present in relation requires a network approach rather than a and intangible items, and includes to some infrastructure investments. The specific project analysis. consideration of wider economic benefits possibility of such increasing returns The empirical work outlined in the (e.g. agglomeration externalities). needs to be accounted for in ex ante companion article also points to the As with any such tool, the analyst Arthur Grimes is a senior researcher at Motu, Chair of the Board of the Reserve Bank, Chair of the using CBA must adopt a range of Hugo Group and Adjunct Professor of Economics at the University of Waikato. He was previously assumptions. CBA is most useful when Director of the Institute of Policy Studies, Victoria University of Wellington, and had prominent roles these assumptions apply equally to a at the Reserve Bank of New Zealand and National Bank of New Zealand. He has published papers on macroeconomics, banking, finance, housing and infrastructure in international academic journals, range of alternatives, so that the outcome and has authored/edited five books. of a decision is invariant to the particular

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 9 Planning New Infrastructure: Some Issues assumptions made. For instance, it can ... investment in the initial information) of the fibre investment plus be used with confidence when making future private investments may even be comparisons between alternative projects project creates an option negative (i.e. a BCR of less than one). designed to produce similar benefits (e.g. However, as shown in Grimes (2010a), two roading choices designed to meet a to reap high returns it may still be worthwhile investing in similar need). fibre because, unless the initial fibre The scope of a cost-benefit analysis through prospective investment is undertaken, there may be must be appropriate for the issue at hand. future investments, with no possibility that the future firm-specific If a project has synergies with other investments can be undertaken. Those prospective investments, a project-specific no obligation to invest future investments will be undertaken if CBA will provide an inadequate estimate they are privately optimal for those firms, of benefits if the interactions with other in those projects where but these decisions will only be revealed synergistic projects (i.e. the full network) circumstances indicate in the future and will be conditional are not taken into account. In many on the fibre already being in place. The circumstances – for instance, upgrading that returns will instead be initial public investment therefore creates a roading network – a network CBA is the option for subsequent investment therefore required instead of a project- low. opportunities and hence for increased specific CBA. (The latter may nevertheless national income, and may be worthwhile still be useful where there are multiple even though no private sector participant ways of building a particular stretch of future conditions unfolds over time would embark on the initial investment road within the network, provided the (Dixit and Pindyck, 1994). The reason programme.2 full network CBA is also undertaken.) for this is that a project that today has The key to this result is that The article by John Boshier in this issue a benefit-cost ratio (BCR) exceeding investment in the initial project creates and discussion in Grimes (2010a) deal one (based on current information) an option to reap high returns through with this issue in more depth. may have a BCR next period (or later) prospective future investments, with no that is less than one (based on updated obligation to invest in those projects Options and uncertainty information). By waiting for further where circumstances indicate that returns Investment is frequently undertaken under information to unfold, the risk of will instead be low. The potential for such conditions of uncertainty with respect to investing in a poorly performing project options means that analysis for a project many factors, including future demand, can be lessened. A conventional CBA may, on occasions, need to incorporate construction costs, future input costs, rival that ignores uncertainty and learning a list of prospective (but uncertain) investments, complementary investments therefore provides an insufficient basis opportunities that may arise due to the and the potential for new technologies. for making investment decisions under completion of the project. Furthermore, In some cases the uncertainty may relate conditions of uncertainty. the analysis must be undertaken at a to the investor’s own future actions, but The logic of delaying investments (or national scale, rather than relating solely in most cases it will relate to the actions raising the hurdle rate) under conditions to the returns to the initial investor. of others. For long-lived investments, the of uncertainty may be reversed where A corollary of the options approach is uncertainties relate to actions of agents a project forms part of a sequence that disinvestment decisions must account who may not be alive or active at the time of potential projects in which future for future opportunities that may be lost the initial investment is considered. ones can only be undertaken if the if existing infrastructure were scrapped. Investments in general-purpose initial investment is itself undertaken. This insight is particularly relevant where technologies are especially beset with If information about returns to future large sunk costs are involved (rail freight such uncertainties. At the time telegraph projects is forthcoming only after the lines are one such example). cables were first erected in New Zealand initial project is completed, the initial Options analysis means that a BCR in the 19th century (under Julius Vogel’s investment creates a valuable option greater than one (within a conventional infrastructure investment programme), for potential investment in subsequent CBA) is neither a necessary nor a no one could foresee that movies would projects. For instance, consider an sufficient condition to make investment one day be downloaded to an individual’s investment in fibre for broadband. decisions under conditions of uncertainty home from any point on the globe The fibre itself constitutes the initial and learning. Some projects with a BCR through such cables. investment; subsequent projects relate to a greater than one optimally should be These uncertainties may have a range of private sector investment choices delayed, whereas other projects with a considerable impact on infrastructure by firms that may wish to utilise the new BCR of less than one optimally should investment. A classic result from technology. At the time of the initial proceed. Analyses that use certainty- the literature on ‘investment under (fibre) decision, the future returns to the equivalent methods in the presence of uncertainty’ is that investments may face private sector’s investments are uncertain; uncertainty and learning are therefore a high hurdle rate if information about the expected net returns (given current flawed.

Page 10 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Discount rate discount rate reflects the decision maker’s these funds to make the next generation One of the most important decisions that subjective trade-off between people six times as wealthy, the official choice in must be taken when conducting a CBA, or across time (i.e. between generations). New Zealand is to consume today. using any other method to determine the Consider, for instance, a government Furthermore, current roading projects net benefit of an infrastructure project, faced with the choice of investing in two are generally not undertaken unless is how to trade off future against current projects. The first is a one-off purchase their BCR is considerably greater than net benefits. In order to arrive at a BCR of 1,000 hip operations today for elderly one (using an 8% real discount rate). or a net present value (NPV) figure, the people in need of the operation (and who The effective trade-off between current trade-off between present and future net otherwise could not afford one). Assume consumption and wealth of the next benefits is normally made through choice that this incurs a one-off cost of $10 generation is therefore effectively much of an explicit discount rate. As implied million which is lost to the government greater than the ratio of 6 implied by the by the multiplicity of discount rates used once the operations have been completed. discount rate choice. Seen in the light of for infrastructure projects internationally, The second project invests $10 million in these official policies, New Zealand’s high there is no single ‘correct’ discount rate a toll-road that yields a 7.5% compound rate of consumption out of income and that covers all project types. real rate of return over 25 years (and where low growth rate is understandable. Nevertheless, some guidance can be the returns can be reinvested at 7.5% given. Where returns from a project are real). The New Zealand government’s The nature of investments monetary and can be reinvested in another current discount rate used for roading New Zealand is an open economy with project that in turn gives the same explicit projects is 8% real; thus, it would reject free migration internally and across the rate of return (with the same risk profile) the toll-road proposal as having a BCR of Tasman. In these circumstances, New as the project under consideration, and less than one. Zealand needs to be considered as one where the project could be undertaken What does this rejection mean? region within a broader economy. A equally by another agent, a cost of capital Investment of $10 million for 25 years at recent analysis for US states (Moretti, (incorporating a market-derived risk 7.5% real would result in a capital sum 2010) demonstrates that increased premium) constitutes an appropriate of $61 million at that time. Assuming hip demand for a region’s tradable goods discount rate for the project. operations cost the same in real terms raises employment in that industry and Even here, the choice of risk premium then as now, a government in 25 years also raises demand for employees in non- is far from trivial, and circumstances exist time could conduct six times as many hip tradable industries, thus inducing net where a negative risk premium may be operations as now if it invested in the toll- inward migration. If labour is not perfectly appropriate at a national level. Consider, road instead of purchasing hip operations mobile across regions, the result is a rise for instance, an irrigation scheme, which today. Use of an 8% real discount rate says in incomes across the regional economy. has its highest pay-offs during times of that we would prefer to conduct 1,000 A similar result holds for an increase in drought. Empirical work demonstrates a hip operations today rather than invest tradable sector productivity that arises causal link from drought to GDP decline that sum and have 6,000 hip operations from an improvement in infrastructure in New Zealand (Buckle et al., 2007). If in 25 years time. In other words, faced (Grimes, 2009a, 2010a). The productivity government is averse to negative shocks with consuming today or setting aside improvement to firms in the tradable to national income, there is a case for sector translates into income increases government to support an irrigation across the economy as returns to local scheme through provision of funds at Rather than seeing a resources are bid up in order to increase a discount rate that reflects a negative output in the more productive tradable price for risk. In other words, because productivity-enhancing sector. The effect is to relocate resources the scheme can mitigate adverse national infrastructure investment both within and between countries. income fluctuations, it has a negative These results are important for ‘consumption beta’ and this makes it in Auckland as potentially interpreting the agglomeration findings worthy of access to funds at a less than in the Motu infrastructure programme risk-free rate. If government is not taking resources away (Maré, 2008; Maré and Graham, 2009). concerned with fluctuations in national from the rest of New Rather than seeing a productivity- income, this result no longer holds and enhancing infrastructure investment in a market rate of return reflecting purely Zealand, it should instead Auckland as potentially taking resources private risk is appropriate. away from the rest of New Zealand, it The issue of appropriate discount rate be interpreted as boosting should instead be interpreted as boosting becomes even more difficult to determine the return to factors of production in New where the benefit stream of a project in the return to factors of Zealand. The resulting higher incomes part comprises intangible consumption production within New attract additional resources (including benefits, such as social benefits that labour) to this country and/or reduce the cannot be monetised. In this case, the Zealand.

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 11 Planning New Infrastructure: Some Issues

These considerations, which are (Coleman and Grimes, 2010a, 2010b). Where projects are national largely absent from conventional CBA Further consideration of this approach, in scale and have positive evaluation, may be combined with use of possibly in place of development a lower discount rate in order to prioritise contributions and financial contributions net pay-offs ... they can projects that boost the productive base (under the Local Government Act and of the New Zealand economy for future Resource Management Act respectively), be financed through debt, generations. is warranted in New Zealand. since the stream of benefits Where projects are national in scale and Whichever funding mechanisms are have positive net pay-offs (after inclusion used, there is a need in New Zealand is available to service that of network and other externalities and to extend current approaches to infra- option values), they can be financed structure planning so as to incorporate debt. through debt, since the stream of benefits some of the analytical extensions to cost- is available to service that debt. Where benefit analysis introduced by modern the effects are predominantly localised economic approaches. Incorporation of net outflow of labour and other resources (for instance, with a motorway extension network externalities and option values, to Australia. or new social amenities) another funding plus reconsideration of discount rates avenue is possible. Theory, and the (especially in respect of differing types Strategic and funding implications empirical work cited here, shows that of benefits), are specific extensions to The empirical work summarised in the beneficial infrastructure investments consider. The land value-based funding companion article and the conceptual with localised benefits result in an uplift mechanisms then provide a funding issues discussed in this one together in land values. This value uplift accrues option to finance further productive suggest that a more strategic approach to property owners who have not infrastructure investments, especially at to infrastructure investment could be necessarily risked their own capital to the local level. pursued in New Zealand than has been undertake the infrastructure investment. the case in recent decades. A national The value uplift affords a base on which 1 The analysis in Grimes (2010a) was funded by CAENZ (the infrastructure strategy may concentrate Centre for Advanced Engineering New Zealand) and by the to raise revenue through targeted local Foundation for Research, Science and Technology (FRST on prioritising projects that: (i) service the grant MOTU0601). We thank FRST and CAENZ for their authority rates (land taxes). Historically, assistance. internationally traded productive sector; similar mechanisms have been used to 2 Against this option must be weighed the option of delaying (ii) exhibit network complementarities; investment in a fibre network. This option may have value fund railway development in the United if cheaper fast broadband options (e.g. improved mobile and/or (iii) create opportunities for technology) were potentially to become available in a States and in New Zealand, and are used relatively short timeframe, so enabling savings on the large subsequent value-enhancing investments today in the United States through TIF costs of investing in a ubiquitous fibre network. that take advantage of the initial (tax increment financing) funded projects investment project.

References Grimes, A. (2007) ‘Transformative Transport: transport and economic Buckle, R.A., K. Kim, H. Kirkham, N. McLellan and J. Sharma (2007) transformation’, paper presented at the Transport – The Next 50 ‘A structural VAR business cycle model for a volatile small open Years Conference, Christchurch, (available on conference CD) economy’, Economic Modelling, 24, pp.990-1017 Grimes, A. (2009a) ‘Capital intensity and welfare: traded and non-traded Cochrane, W., A. Grimes, P. McCann and J. Poot (2010) ‘The spatial sector determinants’, New Zealand Economic Papers, 43 (1), pp.21- impact of infrastructural investment in New Zealand’, paper presented 39 to the New Zealand Association of Economists Conference Grimes, A. (2009b) The Role of Infrastructure in Developing New Coleman, A. (2010) ‘Transport infrastructure, “lock-out” and urban form’, Zealand’s Economy, Motu note #1, www.motu.org.nz Policy Quarterly, 6 (4) Grimes, A. (2010a) The Economics of Infrastructure Investment: Beyond Coleman, A. and A. Grimes (2010a) ‘Fiscal, distributional and efficiency Simple Cost Benefit Analysis, Motu working paper 10-03, www. impacts of land and property taxes’, New Zealand Economic Papers, motu.org.nz 44 (2), pp.179-99 Grimes, A. (2010b) ‘Is fibre good for us?’, Competition and Regulation Coleman, A. and A. Grimes (2010b) ‘Betterment taxes, capital gains and Times, 31, March, Wellington: Institute for the Study of Competition benefit cost ratios’, Economics Letters, forthcoming and Regulation Dixit, A. and R. Pindyck (1994) Investment Under Uncertainty, Princeton, Grimes, A. and A. Aitken (2008) Water, Water Somewhere: the value of NJ: Princeton University Press water in a drought-prone farming region, Motu working paper 08-10, Fabling, R., A. Grimes and L. Sanderson (2010) ‘Transport infrastructure, www.motu.org.nz firm location and exporting’, paper presented to the New Zealand Grimes, A. and Y. Liang (2007) An Auckland Land Value Annual Association of Economists Conference Database, Motu working paper 07-04, www.motu.org.nz

Page 12 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Grimes, A. and Y. Liang (2009) ‘Spatial determinants of land prices: does Howell, B. and A. Grimes (2010) ‘Productivity questions for public sector Auckland’s metropolitan urban limit have an effect?’, Applied Spatial fast fibre network financiers’, Communications and Strategies, 78 (2), Analysis and Policy, 2, pp.23-45 pp.127-45 Grimes, A. and Y. Liang (2010) ‘Bridge to somewhere: valuing Auckland’s Maré, D. (2008) Labour Productivity in Auckland Firms, MED occasional northern motorway extensions’, Journal of Transport Economics and paper 08-09 and Motu working paper 2008-12, www.motu.org.nz Policy, 44 (3), forthcoming. Maré, D. and D. Graham (2009) Agglomeration Elasticities in New Grimes, A., C. Ren and P. Stevens (2009) The Need for Speed: impacts Zealand, New Zealand Transport Agency research report 376 and of internet connectivity on firm productivity, Motu working paper 09- Motu working paper 2009-06, www.motu.org.nz 15, www.motu.org.nz Moretti, E. (2010) ‘Local multipiers’, American Economic Review, 100 Grimes, A. and C. Young (2009) Spatial Effects of ‘Mill’ Closure: does (2), pp.373-7 distance matter?, Motu working paper 09-12, www.motu.org.nz Roskruge, M., A. Grimes, P. McCann and J. Poot (2010) Social Capital Grimes, A. and C. Young (2010a) ‘Anticipatory effects of rail upgrades: and Regional Social Infrastructure Investment: evidence from New Auckland’s western line’, paper presented to the New Zealand Zealand, Motu working paper 10-03, www.motu.org.nz Association of Economists Conference Grimes, A. and C. Young (2010b) A Simple Repeat Sales House Price Index: comparative properties under alternative data generation processes, Motu working paper 10-10, www.motu.org.nz

The Costs of Crime Toward Fiscal Responsibility

A one day forum on Monday 21 February 2011 Government Buildings lecture theatre one, Pipitea Campus, Victoria University of Wellington

The Costs of Crime: Toward Speakers include: Presented by Institute of Policy Studies and the Fiscal Responsibility forum will • Audrey Sonerson and Paul Robson Hanan Trust provide information on the fiscal O’Connell, New Zealand and others costs of the impact Treasury of crime and policy measures • Kim Workman, Rethinking Crime to respond to it and generate and Punishment discussion on cost-effective • Professor Tony Ward, School of ways of responding to crime and Psychology, Victoria University repairing the harm caused by it. • Dr Gabrielle Maxwell, Institute The primary focus will be on of Policy Studies, Victoria Email your details to public expenditure but costs to University [email protected] for further information as it becomes non-governmental organizations • Heather Henare and Kiri available or to register to will also be considered where Hannifin, Women’s Refuge attend. There is no fee to relevant and possible. • Tony Paine, Victim Support attend.

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 13 John Boshier Infrastructure Investment

Supporting Investment in public infrastructure is a key driver of the economy. It delivers a wide range of services that underpin the material standard of living of all New Zealanders. Modern society relies on Better infrastructure for domestic markets to function efficiently, for export goods to be produced and for social interaction to occur. The OECD suggests that investment in infrastructure, particularly in network Decisions infrastructure such as transport and communications, boosts long-term This article is about making decisions on infrastructure. economic output more than other kinds of physical investment. It is about widening the menu of methods used to Investing in productive infrastructure evaluate infrastructure investment proposals. The article is one of six policy drivers in the government’s Jobs and Growth Plan summarises the findings and recommendations of the for New Zealand, intended to help the report Infrastructure Investment: supporting better decisions, country recover from the effects of the global financial crisis. Such infrastructure produced by the New Zealand Centre for Advanced investment is designed to help increase the growth in productivity, maintain Engineering (CAENZ) hosted at the University of Canterbury high levels of employment, improve our (Boshier et al., 2010).1 The objective of the infrastructure resilience to adverse events, and close the gap with Australia by 2025. study is to examine whether existing frameworks fully The Resource Management Act (RMA) has, for some time, been the bête capture the goals of increasing the productivity of the noire of the development community, economy and improving the social and environmental while decision-making practice has been somewhat under the radar. Refinement outcomes of infrastructure projects. of the approvals processes for projects of national significance and other John Boshier is is a Company Director of several not-for-profit organisations and Project Director enhancements were enacted with the for the Centre for Advanced Engineering in Christchurch. He is also a consultant on energy and 2009 amendment to the RMA. More organisational matters. Previously he was Executive Director of the National Generators Forum, the representative body for Australia’s electricity generators. For five years he was Chief Executive of changes are to come under phase two of Engineers Australia, the professional institution for all engineers. the reforms.

Page 14 – Policy Quarterly – Volume 6, Issue 4 – November 2010 The CAENZ study has developed a advice provided to decision makers. analyses and decisions, and by ‘closing complementary agenda for reform. It is These tools will provide a richer the loop’ through benefits management designed to enhance decision making on evaluation of infrastructure proposals plans and benefits realisation testing. infrastructure investments to augment being considered by government and the An important element would be the the current tools, which are considered private sector. development of indicators to provide to be too narrow. It is fair to say that Some aspects of our recommenda- the (sometimes missing) link between New Zealand has been generally slow tions can be implemented simply vision and analysis, and which are then to adopt extensions to cost-benefit through information and training. used to assess outcomes. analysis. Leaders in decision making Others require some investigation and Accordingly the study makes have commented that evaluation does demonstration. All require the adoption recommendations to: not at times match their intuition. of a rigorous and more standardised • augment the government’s long- The emphasis now being placed on process by decision makers and analysts term vision and strategy for the role of infrastructure investment alike. infrastructure investment with comes at a time when there has been a quantified performance indicators growing realisation that New Zealand Strategy in operation and national criteria for project is suffering the consequences of under- The first main theme of the report is the selection, and include these in the investment in network infrastructure as need to ‘operationalise’ the government’s National Infrastructure Plan; a proportion of GDP in the 1980s and strategy for infrastructure. When the • operationalise the relationship 1990s (Figure 1). study team interviewed a number of between strategy, project planning It is now timely for this review. leaders of decision-making organisations, and evaluation through the use of The publication of the National many commented on the need for a logical framework analysis which Infrastructure Plan (The Treasury, 2010) strategy for infrastructure development. clearly defines the links between provides a platform that was previously The National Infrastructure Plan ends, means, measures, assumptions absent. There are now improved does provide a backdrop to enable and resourcing; and analytical tools which can support government agencies and the private • establish an ongoing programme decision makers seeking to understand sector to better co-ordinate the provision of publication of analyses of wider economic benefits, network of infrastructure. That said, an overall investment proposals to provide effects and opportunities, resulting in strategic framework for infrastructure increased transparency on infra- real options. There are also effective investment is missing. Sector-specific structure investment advice and methods for incorporating a range legislation and policy statements are decision making. of social, cultural and environmental relied on to provide guidance for project factors into the assessment. Together appraisal. The scope of projects with extended economic analysis, they Some of the concerns about the The second important theme is the can achieve the intent in the National lack of a strategy may be addressed by need to properly define the scope of Infrastructure Plan of improving the greater transparency in the reporting of infrastructure projects. The way a project is scoped and the bounds of the effects that Figure 1: Infrastructure investment as a proportion of GDP are evaluated are central to maximising the productivity of investments. Silo- 3.5% Auckland Southern thinking can inappropriately limit the Motorway largely scope of a project or curtail the assessment 3.0% complete of benefits that might occur. Investment Huntly logic mapping is increasingly being 2.5% Resource Management used to provide rigour to the process of Act 1991 Electricity deciding the scope of a project, whether 2.0% reforms government intervention is required, and Clyde 1.5% the outcomes that are expected. Think Hydro Manapouri Big Network effects are a core issue in Hydro 1.0% Transport project definition, in terms of making deregulation sure that the scope of the project that commenced Telecom is assessed captures the full range of 0.5% privatised TelstraSaturn Vodafone buy potential effects within a network. The NZ Rail sold enter market Bellsouth NZ 0.0% effects of an enhancement to one part of 1973 1977 1981 1985 1989 1993 1997 2001 2005 a network depend on the consequences Electricity, Gas and Water Supply Transport and Storage Communication or enhancements to other parts. This can mean that all enhancements appear Source: New Zealand Council for Infrastructure Development individually uneconomic even when

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 15 Infrastructure Investment: Supporting Better Decisions

The ‘bottom-up’ approach builds on the benefits of a the network comprised elements of rail, road, bus services, car and passenger more standardised approach to analysis recommended access and commercial building development. Analysing any one of by the study by enabling a portfolio of high-performing these would have served little purpose. projects to be built up which have been evaluated on a The whole integrated combination of interacting components needed to comparable basis. be analysed and compared with its alternatives. The interest in real options for the analysis of infrastructure investments the enhancements would all appear question. It is not always the collection arises because providing improved worthwhile when viewed collectively. of links in a single mode system like infrastructure can create opportunities What constitutes the ‘network’ that a motorway network. The New Lynn for further investments. One classification should be analysed is not a simple Transit Centre is a good example, where defines five types of real options:

Resilience in the Pacific Addressing the Critical Issues Tuesday 16 and Wednesday 17 February 2011 – Wellington

This symposium will examine the key eco- • Carol Flore-Smereczniak, United Nations nomic, social, environmental and political Development Programme, Pacific Centre,

challenges facing the Pacific. It will address Papua New Guinea Presented by the Institute the nature, relevance and implications of resil- • Professor Biman Chand Prasad, University of Policy Studies, Victoria ience. In particular, it will consider economic of the South Pacific University and the New Zea- land Institute of International development and environmental issues and • Sister Lorraine Garasu, Nazarene Rehabili- Affairs with support from the progress and prospects for achieving the Mil- tation Centre, Bougainville British High Commission lennium Development Goals. • Dr Adrian Macey, Institute of Policy Studies and UNFCCC The aim is to encourage debate about, and • Amanda Ellis, Ministry of Foreign Affairs critical analysis of, some of the key economic, and Trade social, environmental and political challenges • David Sheppard, Secretariat of the Pacific facing the Pacific. It will facilitate dialogue Regional Environment Programme amongst researchers, officials, the diplomatic • Associate Professor Winnie Laban, Assistant community and non-governmental organiza- Vice-Chancellor Pasifika, Victoria University tions. • Professor John Overton, School of Geog- Email your details to Speakers include raphy, Environment and Earth Sciences, [email protected] for • Hon Murray McCully, Minister of Foreign Victoria University full programme Affairs • Professor Graham Hassall, School of Gov- • John Allen, Ministry of Foreign Affairs and ernment, Victoria University details and to Trade • Dr Geoff Bertram, Institute of Policy Stud- register to attend. • Tuiloma Neroni Slade, Secretary-General ies, Victoria University There is no fee to Pacific Islands Forum Secretariat, Suva attend.

Page 16 – Policy Quarterly – Volume 6, Issue 4 – November 2010 • waiting-to-invest option: holding the across the public sector, including Improvement in transport links necessary resources available to make agencies and local government. improves efficiency in a number of an investment, but waiting until the ways, including the facilitation of closer time to do so is propitious; Wider economic effects production linkages. In sectors where • growth option: building an asset that Wider economic effects derive from there are economies of scale, this results can have its capacity expanded at a improving the efficiency with which in productivity improvements, raising later date; markets operate through agglomeration, efficiency as well as the volume of • flexibility option: the ability to alter through mitigating existing market production. Reduced barriers also enable the course of the investment after it is failures, and through an increased output businesses to relocate to more central built; in imperfectly competitive markets. locations to gain further economies of • exit option: the ability to get out of or run down an investment if it Figure 2: Productivity gains identified by extended cost-benefit analysis proves to be redundant, or to have its life extended if it has ongoing value Non-work related user benefits beyond its design life; and (commuting, leisure etc) • learning option: making an investment enables the holder to learn about an Other benefits (safety, emissions etc) Benefits uncertain quantity, technology or captured in a conventional opportunity. Reduced business costs CBA Cost-benefit analysis has not conventionally included the potential Net element Labour market benefits that might come from subsequent impacts Tax element Captured in commuter projects or developments, except in the Productivity users benefits petroleum industry. Where projects gains have clearly identifiable consequences Agglomeration Wider in enabling other projects to go ahead, economic benefits then it is valid to include this value in the Echanced competition project assessment. The importance of options created by Source: Dialogue Consultants certain infrastructure investments means that a standard needs analysis may need Figure 3: Overview of triple bottom line assessment to be supplemented by an ‘opportunities BENEFITS COSTS analysis’. Some caution is needed when the possibility is purely speculative. Wider community Melbourne Water Wider community Rather than attempt a doubtful valuation, it may be better to assess the extent to Non- Non- Market Market Market Market Non- Non- which the project falls short of breaking Market Market $ $ $ $ Market Market $ $ even without including any option value. The question for decision makers is then whether they are prepared to believe that Financial the option is worth at least that much. It is for these reasons that the report makes recommendations to:

• promote the use of investment logic BCA (market values only) mapping and the inclusion of the governance viewpoint at project inception to add rigour to problem BCA (with non-market values only) identification, to ensure wide coverage in options definition, and to capture BCA (with non-market values only) + Scoring opportunities; • undertake investigations to show how the value of ‘real options’ might Weight Weight Weight be incorporated into analyses of infrastructure investments; and MCA • extend the use of the State Services Commission’s Gateway review process Source: Melbourne Water

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 17 Infrastructure Investment: Supporting Better Decisions

scale while still accessing the resources a comparable basis. analytical methods and tools used for they need from the hinterland. Comparisons can be made between infrastructure investment; Such agglomeration benefits are sectors by identifying projects which may • prepare and foster the adoption of a typically the most important of the wider have high benefit-cost but which were standard portfolio of analytical tools economic effects. They are additional not funded due to budget constraints. and indicators to ensure comparability to the benefits captured in a narrowly- There may be a case for switching funds of investment proposals that would defined cost-benefit analysis appraisal. into the sectors with more high-value capture monetised user benefits, wider Wider economic effects can also include projects, especially those which offer high economic effects, network effects, life other improvements to the efficiency of productivity gains. cycle costing, and effects that cannot economic activity, through enhanced be monetised (principally social and competition, labour market effects, Standardised methods and presentation environmental); and taxation, trade gains, and technology and One of the more interesting frameworks • develop a process using the knowledge transfer. for systematic and sequential analysis standardised project assessments to A trial application of the method is that used by Melbourne Water with present the economic benefits and developed for the UK Department for its triple bottom line (TBL) assessment, productivity gains of projects and Transport commissioned by the New illustrated in Figure 3. What differentiates programmes in different sectors, Zealand Transport Agency (NZTA) a triple bottom line assessment from a to inform the discussion of budget examined the Waterview motorway purely financial assessment is the extent allocation between sectors and develop extension project. NZTA established the to which it takes into account the broader a portfolio of high-performing workability of the method in New Zealand. effects on the environment and the investments. The wider economic effects calculated in community. Within these TBL guidelines, that study added another $250 million, at least one and usually two of four Conclusions or 23%, to the conventionally captured different evaluation techniques are used This study by the Centre for Advanced benefits. While the method in this case to define the ‘optimal’ solution, in the Engineering is designed to support those is specific to road transport, the same following sequence: leaders in Cabinet, councils and company general principles apply in other sectors. • financial analysis; boards who are responsible for making To give confidence to the assessors • benefit-cost analysis (BCA) with wider decisions to invest in infrastructure. The of projects that wider economic effects costs and benefits that are monetised; authors intend it to be complementary have been properly examined, the report and to the government’s Jobs and Growth makes recommendations to: • multiple criteria analysis (MCA). Plan for New Zealand. We have explored • require a benefit management plan The financial analysis is used to what it means to invest in productive for every major infrastructure project; differentiate between options on the infrastructure, and how the wider and basis of the cash flow implications to economic benefit may be captured, and • investigate benefit realisation on a Melbourne Water, while benefit-cost made specific recommendations on range of past investments to determine analysis and multiple criteria analysis are techniques to give greater assurance on lessons that can be learned and used to account for wider effects on the the evaluation and delivery of projects. identify exemplars for the promotion environment and society. 1 The report’s authors wish to thank the funders of the project: of good practice to be used with the An important feature of the Melbourne the New Zealand Council for Infrastructure Development (the portfolio of methods. Water approach is that the weighting cornerstone funder), the Electricity Commission, Waitakere City Council, Transpower New Zealand, Westpac Institutional used in the multi-criteria analysis is Bank, Auckland City Council, Fletcher Construction and Productivity gains Christchurch City Holdings. They also thank other funders based on widespread consultation, based who have contributed resources in kind: Auckland Regional The CAENZ research has identified an on the understanding that ‘the weight Transport Authority, Ernst and Young, Watercare and Waitakere City Council; and acknowledge with appreciation approach to the vexed question of selecting given to factors and the identification the expert contributors who have worked on the project: the most productive infrastructure of relevant distinguishing factors is BERL Economics, Motu Research, Dialogue Consultants and Opus International Consultants. investments after exploring both ‘top- subjective and cannot be decided by down’ and ‘bottom-up’ approaches. The “experts” in isolation’. Sensitivity analysis, References preferred approach is ‘bottom-up’, by changing the discount rate and modelling Boshier, J., P. Phillips and M. Ellis (2010) considering the productivity gains offered probability distributions for uncertain Infrastructure Investment: supporting better by individual projects and network- effects are then used to incorporate risk decisions, Christchurch: New Zealand based programmes based on an extended and uncertainty in the decision making. Centre for Advanced Engineering cost benefit (Figure 2). The ‘bottom- The CAENZ report makes recom- The Treasury (2010) National Infrastructure up’ approach builds on the benefits of a mendations to: Plan, Wellington: National Infrastructure more standardised approach to analysis • undertake a pilot benchmarking proj- Unit, The Treasury recommended by the study by enabling a ect across a range of central and local portfolio of high-performing projects to government agencies on the quality of be built up which have been evaluated on

Page 18 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Stephen Selwood

Strategic Decision Making Frameworks The New Zealand Council for Infrastructure Development (NZCID) considers that there is a need for a much more strategic, more sophisticated and better balanced approach to prioritisation of infrastructure investment in New Zealand. This was one of the key reasons why NZCID was a cornerstone funder of the New Zealand Centre for Advanced Engineering (CAENZ) study into improving capital investment decision-making frameworks. In commenting on the need for reform of decision-making frameworks, this article traces the history of public sector project prioritisation methods, with a particular focus on transport. It critically assesses the approach used in conventional cost-benefit analysis (CBA), as applied during the 1990s and early 2000s. CBA is then compared with the much more politically driven approach adopted from 2003 onwards. The paper concludes by arguing that New Zealand must develop more strategic project prioritisation and decision-making methods which appropriately value economic, social/cultural and environmental benefits and costs.

Looking at investment in national infrastructure. Gross fixed investment the decentralised market approach. Most infrastructure as a percentage of GDP since as a percentage of GDP ranged between significantly, the nation faced significant the early 1970s, some interesting trends 4% and 6%. Major projects completed capital constraints because of a high emerge (see Figure 1 in John Boshier’s included the Manapouri hydro scheme level of national debt, a legacy of some paper in this Policy Quarterly). The first (1972), Auckland’s Southern Motorway, profligate spending during the 1970s. decade was characterised by a significant largely completed by the late 1970s, and Perhaps the most notable example level of investment in transport and energy the ‘think big’ projects, including the of this capital constraint is the transport Huntly coal generation plant, in the sector. Rail went through a decade of early 1980s. But the decade of the 1990s divestment during the late 1980s and early Stephen Selwood leads the New Zealand Council and early 2000s were characterised by 1990s under its new corporatised and for Infrastructure Development’s advocacy a comparative low level of investment. then privatised structures. In roads, only of and investigation into key infrastructure development issues in NZ and abroad. He is There were three main drivers of this. First, projects with a benefit-cost ratio (BCR) an expert on infrastructure policy issues and a having built some national infrastructure of 4:1 were even considered for funding. regular adviser, commentator on these subjects. capacity, we were able to live on this for Benefits assessed in the traditional BCR Until his CEO appointment with NZCID, Stephen some time. Secondly, the less successful analysis were heavily weighted to travel held various senior management positions with the Automobile Association in both operations ‘think big’ projects created a reactionary time savings and safety improvements. In management and policy areas. trend against central planning in favour of addition, a high discount rate of 10% was Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 19 Strategic Decision-Making Frameworks

Figure 1: Road expenditure substantial planning was done for the Manukau Harbour Crossing, Newmarket 3.0% Road spending % GDP 1960 – 2019 Viaduct upgrade and the Waterview project, among others. 2.5% Funding A major shift in decision-making Required 1.8% to 2% frameworks occurred during this period. GDP Funded 2.0% Forecast by borrowing In its desire to achieve a higher level of /user pays environmental and social outcomes, 1.5% the government, through Transit Manakau New Zealand, substantially increased Hoarbour X 1.0% Newmarket funding for social and environmental Hobsonville Auckland Southern Waterview mitigation. This was clearly evidenced Motorway Largely Complete 0.5% by projects like the Northern Gateway, Waikato Alpurt A Northern Expressway Dunedin Gateway which included expensive viaduct and Mt Roskill tunnel solutions, and by the decision to 0.0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 construct the Victoria Park tunnel rather Maintenance Improvement Roading Source NZCID than an additional viaduct. Neither project would have had any possibility applied. Consequently, most expenditure 1990s. However, it was far less successful of proceeding under the former 4:1 went on rural curve realignments, in achieving the highway agency’s BCR regime. The move to improved passing lanes, road widening and overarching objective to ‘deliver a safe environmental mitigation avoided the urban intersection improvements. and efficient state highway network’. need for lengthy legal battles through Notwithstanding significant worsening Instead of the economically strategic the courts to obtain the necessary congestion in Auckland, only a small connections between Auckland and approvals. However, the significant number of capital projects were Hamilton being completed or the additional expenditure on these major undertaken during this time, including provision of an alternative north–south projects inevitably meant that numerous modest extensions of the Northern route through Auckland being realised, other projects across the country had to Motorway, the upper harbour corridor, only small piecemeal sections of these be deferred. State Highway 20a airport extension, nationally significant transport links The ministerial report on roading the South Eastern arterial and Grafton were completed during this time. costs produced in 2006 (Ministerial Gully (Figure 1). On the wider network By 2003, under considerable pressure Advisory Group on Roading Costs, the only significant state highway from Auckland business and local 2006) clearly identified that the costs improvements were partial extensions of government representatives, and with a of a number of major roading projects the Waikato Expressway, the ALPURT-A desire to make some substantial progress undertaken during this period escalated motorway extension north of Auckland in Auckland, the Labour government significantly (sometimes more than and the Fairfield Motorway extension in decided to take a more strategic approach doubling). By and large this was the result Dunedin – all semi-rural extensions of to the allocation of transport funding. of attempts by Transit New Zealand to the existing state highway corridor. An improved financial situation allowed avoid litigious delays in order to resolve Ironically, although there was, and the government to have less reliance on political and community concerns in still is, wide acceptance of the need CBA in the allocation of funds. With the regard to environmental and community to complete the four-lane Waikato injection of additional Crown funding, impacts of the projects. Expressway between Auckland and a number of projects were started, The advisory group found that Hamilton, only a small number of including the Mt Roskill extension and scope change resulting from community discrete sections of this road were ALPURT-B2 north of Auckland, and and environmental impact mitigation completed during this decade and only where improvements achieved a benefit- Table 1 cost threshold of 4:1. Whereas other, Cost change in $millions as more costly sections of the expressway Project Time to approve identified in 2006 resulted in a lower BCR these sections Northern Gateway were left unfinished. Consequently, (Alpurt B2 Toll Road) 9 years, 1997 to 2006 82 to 340 the Waikato Expressway now includes Victoria Park Tunnel 5 years, 2001 to 2006 165 to 320 various stretches of four-lane, three-lane 14 years, 1996 to current and two-lane sections. (The project is to be called in Waterview Connection under the RMA in 2010.) 72 to 1,380 CBA proved to be highly effective as a capital rationing tool during the Manukau Extension 6 years, 2000 to 2006 125 to 225

Page 20 – Policy Quarterly – Volume 6, Issue 4 – November 2010 measures were a key driver of cost assessment of environmental effects. and environmental imperatives and increases for a number of the roading (p.15) which had only limited assessment projects they studied, as shown in table of economic returns, to a politically While not explicitly stated in the 1. expedient assessment of economic, report, it seems reasonable to conclude The group reported on two key social and environmental needs. In that the behaviour of Transit New projects in detail. In respect of the both cases the strategic implications Zealand in selecting project design Northern Gateway project it found that: and opportunity costs of these decisions options was and arguably still is (as were not substantially considered. On the It appears that the environmental evidenced by the design of the Waterview one hand the traditional CBA approach enhancements incorporated in tunnels) being significantly influenced sought to maximise value but failed ALPURT B2 at a cost of $65 million by risks and time costs associated with to address wider economic benefits or were in response to the risk that the protracted legal processes, involving network effects. On the other hand, the Manu Waiata Restoration Protection both the Resource Management Act and politically expedient decisions to improve Society (the Society) would challenge other legislative requirements. In other social and environmental mitigation on the project’s compliance with the words, while it might be possible to gain specific projects meant that there was requirements of the LTMA. In necessary approvals for projects by taking insufficient funding for the construction response to a February 2004 letter an adversarial approach through the of other strategically important network from the Society, the Board looked courts, the costs of delay and the political projects. for environmental enhancements to Forward projections of road spending, the project, which ultimately led to as illustrated in Figure 1, show a ramp- the inclusion of the Nukumea viaduct up of investment in 2010 which will see and Johnsons Hill tunnels. The Past experience underlines completion of the Western Ring Route in inclusion of these features appeared the need for a much Auckland by 2015 and the roads of national to the Advisory Group to be in order significance towards the end of the decade. to expedite the project, and ultimately more sophisticated, But investment declines and flatlines resulted in a significant cost increase. for the balance of the decade, despite (p.13) more balanced decision- significant need for new investment in In respect of the Victoria Park making framework that local roads and public transport services Tunnel (Option D) which is now under in the major centres. NZCID forecasts a construction the group found that: is driven by overarching substantial deficit over the next decade, national strategy and requiring an increase in funding from An objective assessment of environ- 1.5% of GDP to 2% in order for this mental effects prepared in September which appropriately values new capital investment to be delivered. 2002 for Transit NZ showed that ‘Op- Not only will more capital be required; tion D [northbound tunnel option] economic, social/cultural optimal application and prioritisation retains the status quo within Victoria and environmental benefits of that additional investment will be a Park, and therefore has no significant critical success factor. reduction in effects compared to Op- and costs. Past experience underlines the need tion A [viaduct option]’. On this ba- for a much more sophisticated, more sis, there appears to be no objective balanced decision-making framework that reason to provide additional funds to is driven by overarching national strategy risks associated with the contentiousness construct Option D instead of Option and which appropriately values economic, of the process make it easier and faster A. In fact, analysis indicates that sig- social/cultural and environmental (if not necessarily cheaper) to make the nificant environmental improvement benefits and costs. This is the primary necessary changes to the project scope. will only occur if all traffic is moved purpose of the CAENZ research project: The key question to be addressed is underground. However, there is cur- to find much more robust decision- whether this approach is achieving an rently no plan to replace the existing making tools that provide an optimum optimal balance between economic, social viaduct. balance between economic, sociocultural and environmental imperatives, and and environmental imperatives. And that: whether a more streamlined, integrated It is interesting to note that comparable approach to project approvals might Transit NZ appears to be making nations, including Denmark and Sweden, yield a better outcome. decisions to speed up projects and the Canadian province of British The history shows a substantial that have high cost implications. Columbia have adopted a more strategic change in policy direction, from very There does not seem to have been a approach to project prioritisation and narrow assessments of national benefit, systematic process to establish the investment. While CBA methods are which almost totally excluded social scope of this project based on the used to inform the decision-making

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 21 Strategic Decision-Making Frameworks

process, strategy is the primary driver Infrastructure Plan. NZCID strongly of alternatives. Where CBA is unable to of project prioritisation. CBA is used to supports this policy recommendation. monetise benefits and costs adequately, test and inform the financial viability of In our view, the establishment of a more robust multi-criteria attribute and a project business case and the delivery strategic vision for New Zealand’s non-market valuation methods will have alternatives that have been considered. infrastructure must be the overarching to be deployed. The discount rates used reflect the life guiding imperative for project selection Not only will this enable better, cycle of the investment being made, and prioritisation. Since we are seeking a more rational investment choices, deter- with lower discount rates for long-term balance between economic, sociocultural mination of a more balanced long-term investments of strategic importance. and environmental outcomes, the strategy provides the opportunity to Unlike New Zealand, which now applies decision-making frameworks and the engender broader multi-party political an 8% discount rate, with sensitivity tools and methods that we deploy to support for the investment programme testing at lower and higher thresholds the evaluate capital investment choices and enable a shift away from the politically- discount rates used in Europe are much must adequately address all three driven project-by-project piecemeal lower – typically in the 3%–6% range. criteria. Sector plans should identify implementation of infrastructure delivery A principal conclusion of the the set of investments in existing and that has characterised the investment over CAENZ report is the need to augment new infrastructure that are required to the last three decades. the government’s long-term vision and deliver the strategic goals of the nation. strategy for infrastructure investment In supporting policy processes, full social References with quantified performance indicators cost-benefit analysis should inform key Ministerial Advisory Group on Roading Costs and national criteria for project selection, decisions by identifying the most suitable (2006) Final Report, Wellington: Ministry and include these in the National project delivery methods from a range of Transport CLIMATE CHANGE 101 An Educational Resource by Andy Reisinger (co-author: Lenny Bernstein)

Climate change is widely recognised Climate Change 101 draws its as the most important issue now substance mostly from the findings facing humanity. Proposals to reduce contained in the Fourth Assessment emissions or to adapt proactively to Report of the Intergovernmental future climate changes often result Panel on Climate Change. But it also in intense public debate about the highlights more recent scientific urgency, feasibility, and cost, as well as developments and illuminates the the appropriate balance, of responses key issues that underpin the current to climate change. A better and much international negotiations for a new broader understanding of the causes global agreement on climate change. and effects of climate change, together This book is intended as an educational with the options for mitigation and resource for anyone seeking a robust change represents for the global adaptation at the global scale, is scientific overview of the complex and community. critical for such societal discussions to interdisciplinary challenge that climate be fruitful. Climate Change 101 – An An Institute of Policy Studies and New Zealand Climate Change Research Institute co-publication Educational Resource provides a clear, by Andy Reisinger (co-author: Lenny Bernstein) succinct, and measured summary of our Publication November 2009 Format A4 Paperback, pp 303 current knowledge of climate change, ISBN 978-1-877347-34-4 Price - $45 (including P&P within New Zealand) Place your order by email, phone, fax or mail to its potential impacts, and the scope for Institute of Policy Studies, Victoria University of Wellington reducing greenhouse gas emissions Email [email protected] Telephone +64 4 463 5307 Fax +64 4 463 7413 PO Box 600, Wellington, New Zealand and adapting to inevitable changes. An invoice will be issued with your order

Page 22 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Andrew Coleman

Transport Infrastructure, Lock-Out and Urban Form Highway Development in Auckland and than others. These questions are related. Careful research across a large number of cities in Europe, Asia, North America the United States and Australasia has shown that cities When travelling the world, it is impossible not to be struck where most trips are by private car tend to have much lower population densities by the different urban forms of the world’s great cities. than cities where public transport plays a more important role (Newman and Cities differ in size, age, shape and height. They have Kenworthy, 1989). This is not surprising, different housing styles and population densities. Some are for people living in cities where car ownership is high can more easily live far concentrated around a mess of crooked streets, some are laid from public transport facilities, enabling sprawl. But the evidence also suggests that out around a planned grid, and some sprawl over wide areas. investments in highway networks create Many have a central waterfront, while others have ports sprawling low-density cities that are then unsuited for public transport. several miles away. Cities also differ substantially in terms of This evidence is particularly pertinent their transport systems. There are walking cities, light rail- to New Zealand. By world standards, cities like Auckland and Christchurch are based cities and subway cities. And there are also cities where characterised by low population densities and low public transport usage (Bachels, public transport is little used, as most travelling occurs in Newman and Kenworthy, 1999). In private cars. recent years the adequacy of public and private transport infrastructure in these Andrew Coleman began at Motu in February Historians, urban planners and economists cities has been reviewed, in part because 2008 as a Senior Fellow, where he contributes are trying to understand why cities have of concern about traffic congestion. to research programmes on macroeconomics, housing and taxation. He earlier worked as evolved in such different ways. Two key In evaluating the appropriate mix of an assistant professor of economics at the questions have concerned the reasons transport infrastructure, cost-benefit University of Michigan, where he researched the why some cities use much more public analysis needs to evaluate how investment way that storage and transport networks affect transport than others, and why some cities the prices of natural resources. Andrew has a in one form of infrastructure – say, roads PhD in Economics from Princeton University. have much higher population densities – affects the demand for other forms.

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 23 Transport Infrastructure, Lock-Out and Urban Form: Highway Development in Auckland and the United States

When historic choices about public which residents of cities in Europe, Asia, that was constructed after 1950. This and private transport infrastructure North America and Australia differed in network, which was constructed partly networks have long-lasting effects on their use of public and private transport for defence reasons, connected cities transport demand because they change (including non-motorised transport) across the nation. The way in which it the urban structure of a city, there is and how these differences were related was designed meant that the number of path dependency of a type described to various aspects of cities such as new highways entering any particular city by Arthur (Arthur, 1987; Barter, 2004). population density, average income was largely exogenous to the city’s initial This path dependency needs to be taken and the concentration of employment characteristics, such as size. For example, into account, for it affects the way future in central business districts. In general, in most of the country highways were transport investments will operate, and they showed that low-density cities built so that they connected contiguous thus the likelihood of different transport have high private car use and low public cities; thus, cities that were close to investments occurring in the future. In transport use and high-density cities many other cities gained more new a network system the value of current have high public transport use and low highways than cities located far from transport investments depends on the private car use. More particularly, across anywhere. Given this design feature, way the network is extended by future cities they showed that (a) there was a Snow-Baum used the original network investments. Accordingly, a proper strong negative correlation between car design as an instrument to examine how evaluation of current transport projects ownership and population density; (b) the construction of a highway affected can only be done while cognisant of the there was a strong positive correlation the employment and residential location way these investments are likely to affect between the use of public transport and patterns in a city over the subsequent the structure of a city. population density; (c) in low-density 40-year period. cities, not only was car ownership The data indicate that cities greater and public transport use less, decentralised after highways were but more miles were travelled by car per constructed. Baum-Snow (2007) esti- ... a new road, built for car and a greater fraction of income was mated that an additional highway spent on transport; (d) there was little ending in the centre of a city reduced the reasons independent relationship between average income central city population by 9% between and public transport use; and (e) public 1950 and 1990. Overall, the population of a city’s economic transport use was much higher in cities of metropolitan areas increased from 93 performance, tended to that had intensive rail service. Some of million to 160 million during this time; these differences reflect major differences since the population of central cities increase the population in the style of cities found in different only increased from 45 to 51 million, regions of the world, for cities in Asia and cities on average gained 2.6 new of the city, because it and Europe tend to have much higher highways, a third of the relative decline population density and much greater use in central city populations was caused lowered transport costs of public transport than cities in North by the highway building programme. He in the city and for that America or Australasia. Nonetheless, further analysed the effect of highways even within broad continental regions on the location of jobs, noting that reason made it a more the relationship between population in 1950, 20 million out of 40 million density and transport structure appears urban centre jobs were in central cities, attractive place to live. to hold. whereas in 1990 only 27 million out The negative correlation between of 87 million jobs were located there. private transport use and population Cities with more highways had greater density raises two related questions. job decentralisation: an extra highway The first is whether there is a causal led to an 18% reduction in the number Transport modes, income and city form relationship between private transport of people living and working in central In recent decades there have been several use and density. The answer appears to cities, and a 25% increase in the number cross-city studies of the relationship be yes. If private transport infrastructure of people living and working outside between a city’s transport systems, its – a highway – is built, people move out central cities. In a strongly worded size and population density and its from high-density central city locations conclusion, he observed: urban structure. Much of this work to low-density suburban locations, and was pioneered by Kenworthy, Newman population density declines; or, to be The evidence is clear that the primary and various co-authors (Newman and more succinct, highways induce sprawl. way highways serving central cities Kenworthy, 1989; Kenworthy and Laube, The best evidence on this point caused declines in central city 1999; Bachels, Newman and Kenworthy, comes from a series of papers by Baum- populations was by inducing those 1999). Using a consistently assembled Snow (2007, 2010) analysing the effect who had lived and worked in central data set, they examined the extent to of the United States highway network cities to live and work in suburban

Page 24 – Policy Quarterly – Volume 6, Issue 4 – November 2010 areas instead. … Estimates indicate Nonetheless, combining the analysis of States shows that cities with less dispersed that had the urban highway systems Baum-Snow and Newman, Kenworthy populations have lower car ownership not been built, the total number and others, it appears that (a) constructing rates, and that the combination of of within-city commutes would be a highway reduces the population density population density, public transport about double its 2000 number, and of a city and (b) cities with lower densities supply and road density explains a large the total number of within-suburb have less efficient public transport. The fraction of the difference in commuting commutes would be cut by about one inefficiency can occur for two reasons. patterns across cities (Bento et al., 2005). half. (Baum-Snow, 2010, p.382) First, the population close to each bus or rail route is smaller in less dense cities, Related evidence from Duranton and meaning that a given route is likely to have Turner (2008) shows that road building lower utilisation because it is conveniently Once people and firms take increases the population of cities as located to fewer residences. Secondly, advantage of highways and well as reduces their density. They since people, their jobs and the amenities demonstrated that a new road, built for they wish to use are widely dispersed other roading investments reasons independent of a city’s economic across space, any route is less likely to performance, tended to increase the go directly to a desired destination than to locate in dispersed population of the city, because it lowered when a city is densely populated. While regions far from the city transport costs in the city and for that it may be possible to go between any two reason made it a more attractive place to points in a city indirectly, by transferring centre, public transport live. They estimated a 10% increase in a between public transport lines, this city’s stock of major roads led to a 20% can be excessively time consuming becomes increasing increase in population over a 20-year and unattractive compared to private period. But they questioned the cost- transport. irrelevant to city operation. effectiveness of road building as a strategy While there is clear evidence from for reducing transport costs, noting that Newman and Kenworthy and others that the provision of bus services increased cities with low population density have the population at far lower cost. little public transport, the argument that While Baum-Snow’s evidence is clear low density reduces the utilisation and If, as theory suggests and evidence that highways induce sprawl, it should efficiency of public transport is difficult corroborates, low-density cities are less not be concluded that the highways were to prove. First, the cross-city evidence suited for public transport than high- bad. Many people and firms are obviously analysed by Kenworthy and Newman can density cities, transport infrastructure happy to move to low-density housing far be criticised because, rather than analyse choices can have long-term and potentially from the city centre if transport systems the history of a city or cities through time, irreversible effects on city form. A city are sufficiently efficient that it is not too they analyse a cross-section of cities at a that chooses to invest in roads rather inconvenient to locate there. Indeed, from single point in time. This type of analysis than public transport infrastructure to the data assembled by Kenworthy and can be misleading if city transport patterns improve its transport system is likely to Laube (1999), it is clear that people are evolve through time and cities differ in reduce the efficiency of any subsequent prepared to pay high private transport terms of their development stage, or if the public transport investments, by causing costs in order to live in these low-rent, transport arrangements in each city are population and employment in the city to low-density areas. From the evidence dominated by idiosyncratic factors that disperse widely over space. When making compiled by Duranton and Turner (2008), are correlated with density, but that are decisions to build roads, therefore, the it appears many people are prepared to not caused by density (Hensher, 2000). city planners need to take into account migrate to these cities from elsewhere Secondly, within-city evidence that public the way roads affect the operation of because of the transport network. This transport is more efficient in densely subsequent transport infrastructure is not to say that people would not use populated areas than in low-density areas investment choices. Once people and inexpensive public transport if it were suffers from selection issues: often people firms take advantage of highways and convenient. But revealed preference who frequently use public transport have other roading investments to locate in indicates that, when faced with the characteristics that attract them to high- dispersed regions far from the city centre, relative costs and benefits of high-density density areas. Nonetheless, the weight of public transport becomes increasing city or low-density suburban living, in evidence strongly suggests that density irrelevant to city operation. many cities a large majority of people has and city form have a large effect on the It is important to emphasise that the chosen the latter. use of public transport, and there is no overall operation, income and welfare The second question is whether evidence that reductions in population of a city is not necessarily affected by its the construction of private transport density increase public transport use. For population density or public transport use. infrastructure makes public transport less instance, a study of commuting patterns Both low-density and high-density cities efficient. Here the evidence is indirect. across 114 urban areas in the United can have and do have high productivity

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 25 Transport Infrastructure, Lock-Out and Urban Form: Highway Development in Auckland and the United States

and high incomes. Moreover, it appears transport, or 290 trips per resident per Since the middle of the 1990s, that city highways enable many firms to year. This is similar to the number of Auckland has made several new leave the central city area to obtain cheap trips in contemporary European cities investments in public and private land without losing the agglomeration (Kenworthy and Laube, 1999.) In the transport infrastructure, in part because benefits usually associated with central mid-1950s, however, it was decided that of growing traffic congestion. For cities (Moses and Williamson, 1967; Auckland’s transport future would be example, a dedicated bus-way has been Glaeser and Gottlieb, 2009). Traditionally, based on private transport, and several constructed to the north of the city, and firms have clustered together to reduce highways were constructed, using the US the train system to the south and the west the cost of doing business with each interstate highway model as inspiration of the city has been upgraded and partially other, or to share a common input or (Mees and Dobson, 2001; Harris, 2005; double tracked. It is also upgrading its customer; this cost can be minimised by Mees and Dobson, 2007.) Auckland had road network, and considering several lowering transport costs, or, for a given a highway system one or two decades large-scale developments such as a new level of transport costs, by lowering the before comparable Australian cities, and harbour bridge. While public transport distance between businesses – that is, by switched away from public transport to use has nearly doubled in response, it increasing density. The fact that many private transport much faster than these remains at very low levels (Wang, 2009). firms leave central business areas when cities, despite having similar levels of car It appears that Auckland citizens, spread road transport costs decline suggests that ownership. By 2000, only 2% of motorised over a wide urban area, still find it more firms can obtain agglomeration benefits convenient to travel by car than to use over a large area if transport costs are public transport. It seems likely that sufficiently low, as well as obtain benefits the reluctance to use public transport from not being in the central city. If Aucklanders wish to is because many of their trips could not reduce the amount of be easily made by public transport. If Transport infrastructure in New Zealand: an this is the case, it suggests that, for the historical perspective private transport use, time being at least, Auckland’s public By world standards, New Zealand’s cities, transport has been locked out by historic particularly Auckland and Christchurch, not only will they need to decisions to build a highway system, and are characterised by low density and increase the provision of the subsequent geographical dispersal of extremely low public transport use the city. (Bachels, Newman and Kenworthy, 1999). public transport ... but they US evidence suggests it is very Like many other Australian and American difficult to increase public transport cities, these cities have always had low will need an urban plan use, and that to increase its use requires population densities, for reasons that can that reverses population careful planning. It also requires a clearly be traced back to a coincidence in their stated objective. If Aucklanders wish to initial histories: not only did they develop and employment dispersal. reduce the amount of private transport at a time when streetcars made it possible use, not only will they need to increase for people to live in suburbs and commute the provision of public transport (which, to the central city, but their incomes as Duranton and Turner (2008) suggest, during this phase were sufficiently high can be considerably more cost effective that a large fraction of their populations trips, or 33 trips per resident per year, were than constructing new roads), but they could afford to make this commute (LeRoy by public transport, the largest decline in will need an urban plan that reverses and Sonstelie, 1983; Frost, 1991; Frost and any major city during this period around population and employment dispersal. Dingle, 1995). It helped that New Zealand, the world. The decline of public transport This is not easy to do, given the lifespan like Australia, was largely populated by was much faster in Auckland than in of residential and commercial building. English settlers who had a preference Wellington, where a significant public But it is not impossible either, as several for living in leafy suburbs rather than transport infrastructure system had been overseas examples demonstrate, and such compressed cities (Frost, 1991). Note, constructed between 1937 and 1955 (Harris, plans are being considered and adopted however, that this history means that 2005). Consistent with the history of US by major Australian cities (Mees and while New Zealand’s cities have always cities, the population of Auckland grew Dobson, 2007). However, this is not the had low density, they have not always rapidly, far faster than Christchurch or only possible goal. If Aucklanders merely been dependent on the car for transport. Wellington, with the growth concentrated want to improve transportation speeds, Rather, until the 1950s, urban dwellers in in new suburban regions south and and don’t mind private transportation New Zealand cities intensively used public north of the central city. In short, after remaining the dominant transport transport for commuting purposes. the construction of the highway system, form, new road and bridge construction The transport history of Auckland is Auckland grew, decentralised and gave up is a means to achieve this goal. But particularly interesting. In the early 1950s, public transport. Aucklanders should not expect this to be 58% of motorised trips were by public inexpensive, or to revitalise the central

Page 26 – Policy Quarterly – Volume 6, Issue 4 – November 2010 city. The US evidence, and Auckland’s flee the central city in search of desirable own history, suggest that new roads cause locations with easy city access located population dispersal and employment slightly further out of town. decentralisation, as firms and citizens

References Cities: issues, strategies, and policies for urban Australia in the Arthur, W.B. (1987) ‘Urban systems and historical path dependence’, in 1990s, Melbourne: Cambridge University Press R. Herman and J. Ausubel (eds), Urban Systems and Infrastructure, Glaeser, E.L. and J.D. Gottlieb (2009) ‘The wealth of cities: Washington, D.C.: National Academy of Sciences/National Academy agglomeration economies and spatial equilibrium in the United of Engineering States’, Journal of Economic Literature, 47 (4), pp.983-1028 Bachels, M., P. Newman and J. Kenworthy (1999) Indicators of Urban Harris, C. (2005) ‘Slow train coming: the New Zealand state changes Transport Efficiency in New Zealand’s Major Cities: an international its mind about Auckland transit, 1949-1956’, Urban Policy and city comparison of transport, land use, and economic indicators, Research, 23 (1), p.37-55 Perth: Institute for Science and Technology Policy, Murdoch Hensher, D. (2000) ‘Urban public transport challenges’, The Drawing University Board: An Australian Review of Public Affairs, 1 (2), pp.47-62 Barter, P. (2004) ‘Transport, urban structure and “lock-in” in the Kuala Kenworthy, J. and F. Laube (1999) ‘Patterns of automobile dependence Lumpur metropolitan area’, International Development Planning in cities: an international overview of key physical and economic Review, 26 (1), pp.1-23 dimensions with some implications for urban policy’, Transportation Baum-Snow, N. (2007) ‘Did highways cause suburbanization?’, Quarterly Review Part A, 33, pp.691-723 Journal of Economics, 122, pp.775-805 LeRoy, S. and J. Sonstelie (1983) ‘Paradise lost and regained: Baum-Snow, N. (2010) ‘Changes in transportation infrastructure and transportation, innovation, income, and residential location’, Journal commuting patterns in U.S. metropolitan areas 1960-2000’, of Urban Economics, 13, pp.67-89 American Economic Review Papers and Proceedings, 100, pp.378- Mees, P. and J. Dodson (2001) ‘ The American heresy: half a century of 82 transport planning in Auckland’, paper presented to the New Zealand Bento, A.M., M.L. Cropper, A. Mushfiq Mobarak and K. Vinha (2005) Geographical Society, University of Otago ‘The effects of urban spatial structure on travel demand in the United Mees, P. and J. Dodson (2007) ‘Backtracking Auckland? Technical States’, Review of Economics and Statistics, 87 (3), pp.466-78 and communicative reason in metropolitan transport planning’, Duranton, G. and M. Turner (2008) ‘Urban growth and transportation’, International Planning Studies, 12 (1), pp.35-53 CEPR discussion paper 6633 Moses, L. and H. Williamson (1967) ‘The location of economic activity Frost, L. (1991) The New Urban Frontier: urbanisation and city building in cities’, American Economic Review, 57 (2), pp.211-22 in Australasia and the American West, Sydney: New South Wales Newman, P. and J. Kenworthy (1989) Cities and Automobile University Press Dependence, Aldershot: Gower Publishing Company Frost, L. and T. Dingle (1995) ‘Sustaining suburbia: an historical Wang, J. (2009) ‘Appraisal of factors influencing public transport perspective on Australia’s urban growth’, in P. Troy (ed.), Australian patronage’, research report, New Zealand Transport Agency

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 27 Lewis Evans Infrastructure Investment Under Uncertainty1 Introduction Many volatile factors influence the performance of infrastructure and these yield a range of uncertainties when forward-looking investment decisions are being considered. This article is restricted to consideration of physical infrastructure, which has a wide spectrum of such factors. It includes physical events such as earthquakes that are beyond the influence of humankind, other events for each of which there is a very small probability of occurrence, and events that will almost certainly occur at some point within any reasonable period of time. It also includes economic events relating to uncommon financial episodes and common, but uncertain, volatility in demand and cost. Rare physical events have implications for investment in infrastructure that provides some mitigation of the effects of these events. In so doing, there is a trade-off between providing in advance for remotely likely but substantial events in specific, and usually costly, redundancy infrastructure, and having an economy with the resources to deal ex post with natural disasters. Obviously, some intermediate position will be socially desirable.

This article considers investment in and that, where economically feasible, and gas transmission, broadband and infrastructure taking into account more pricing2 will facilitate management of telecommunications networks – provides immediate risks. It argues that demand these risks and so enable a desirable level platforms on which consumers interact should be responsive to infrastructure’s of investment in infrastructure. Much in various ways that affect the utilisation direct and indirect costs and risks; infrastructure – e.g. roads, electricity of the platform. Without consumers revealing their willingness to pay for these Lewis Evans is Professor and Chair of Economics at Victoria University of Wellington. His current platforms, investment is unlikely to meet research includes the performance of contracts, firms and markets under different competition and the test of being socially desirable. This regulatory structures. He is a Lay member of the New Zealand High Court for matters of commerce, issue is placed in perspective below by was a member of the Market Surveillance Committee from 1996-2004, and a member of the editorial board of the Journal of Economic Literature. Lewis is a past Director of the Institute for the consideration of the effect of incentive Study of Competition and Regulation. regulation on investment.

Page 28 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Infrastructure investment once that cost variation can be attributed to: Economies of scale in investment made is sunk – i.e. not recoverable in the price of inputs such as labour and arise where the larger the capacity nearly its entirety – and typically entails materials; the level of competition; the provided by the investment, the lower economies of scale in investment, even in level of supply and demand; project the per-unit cost of the extra capacity. infrastructure maintenance expenditure.3 size and location; legal and regulatory This is illustrated in Figure 1, where These features and uncertainty in demand requirements; constraints imposed by economies of scale are 10%: i.e. 0.9 units mean that provision of infrastructure local authorities; choices between new of investment are required to produce is investment in capacity that services construction and use of established 1 unit of capacity. Constant economies demand rather than in demand per se. locations; design and construction of scale in investment would be where When combined with volatility, these standards; and the efficiency of the investment was 1 for 1 with capacity. features complicate the evaluation of project and contract management. In Figure 1, investment in two steps infrastructure investment. While cost uncertainty is reduced as a obviously has a much higher investment project becomes more specific – e.g. in cost than investment in a single step. Volatility and economies of scale location and design – much uncertainty The conjunction of volatility There is volatility in both demand and cost, may remain. An analysis of tenders and investment economies of scale with the extent of volatility depending on for 30 roading projects in Auckland, complicates infrastructure investment the nature of the industry. Technological Christchurch and Wellington as reported decisions. On the one hand, a large change affects cost and demand, and where by Transit New Zealand (2006) suggests increment in capacity will yield lower it is rapid – as in telecommunications – that on average the range of tenders construction costs per unit of capacity its effects on investment decisions can be for the same project was 26% of the than will a multi-stage investment. On significant. maximum tender. the other hand, with uncertain demand Demand volatility, and hence risk, PricewaterhouseCoopers (2005) re- growth there may be inadequate demand arises where there is competition in modes ported on project quotes for four catego- for the larger capacity. Typically, capacity of delivery – for example, as between ries of investments across six electricity is expanded iteratively, trading off these road and rail, and for gas pipelines as lines companies. The results reported in two factors: where demand is more between alternative fuels and locations Table 1 indicate a very substantial varia- uncertain, the higher is the likelihood of of customers. Even the utilisation of gas tion in potential construction costs.4 By the smaller increment in capacity being pipelines can exhibit very high volatility way of illustration, if the quotes were socially desirable, despite its higher cost. in demand at different locations in the normally distributed, a lines company Figure 2 indicates the decision rule network of pipes. To illustrate: between contemplating an urban 11kV project in the case of volatile demand, and 10% 1995 and 2003 the flow through one of would be of the order of 95% certain that economies of scale in infrastructure the Natural Gas Corporation’s piplines the spread of quotes would be 55%–155% investment. Demand and capacity are fell from the capacity of 500 terajoules of the average quote received. Variation, on the vertical axis and time on the (TJ) per period to 50 and rose back to and thus prospective risk, is reduced by horizontal. Demand (x) is volatile and 400 TJ; during this period other pipes negotiation as the project is finalised, but must be served, and capacity (s) is were stranded as their gas flows fell to risk remains.5 irreversible (sunk) but declines without zero. This substantial variation evidences investment at a fixed rate of depreciation. very considerable demand risk that must Table 1: Variability of infrastructure The socially optimal decision rule is to be assessed in advance when evaluating construction costs invest whenever demand equals capacity investment in capacity that will be Under- 11kV and at that time increase capacity irreversibly sunk once in place. ground Transformer urban beyond the amount required to meet Cost uncertainty also arises due to Coefficient immediate demand. This decision rule variation in technological change, and a of is a consequence of the presence of variation 17.8% 40.1% 27.8% range of other factors. PBA (2004) report investment economies of scale (see Evans

Figure 1: Economies of scale in investment Figure 2: Demand, capacity and scale economies

Cost Cost if 2 instalments st Cost if 1 instalment

xt

Capacity t

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 29 Infrastructure Investment Under Uncertainty

The Case I firm would pansion in capacity, and thereby gain the enough to start up by building the cost advantages of economies of scale in (existing) network from scratch: this never start up, for its investment. requires setting revenue to cover the The interactions among risk, expected cost of additional investment value lies below its irreversible investment and economies but it disallows accumulated past replacement cost: this of scale have been the Achilles heel of investment. incentive regulation of infrastructure • Case II: just sufficient revenue for the situation arises where assets. It is useful to consider why firm to start up and keep operating. this is so because it foretells the sorts • Case III: just sufficient revenue for existing assets are not of institutional arrangements that the firm to start up, keep operating allowed to, or cannot, facilitate socially desirable investment in and not lose value when it expands infrastructure. In New Zealand and in capacity. earn a competitive rate of some other countries it was proposed The Case I firm is just willing to that such infrastructures as transmission, operate using its existing assets: that return. pipelines and telecommunications be is, those put in place in the past and subject to incentive regulation in which depreciated. Because it is earning no the regulated price be set at a level that return on its existing assets the revenue it and Guthrie, 2006), and it is affected by financially just supported the most receives just covers its expected capacity the variability in demand.6 Building an efficient firm in its delivery of services, expansion cost. At low demand it makes extra unit of excess capacity allows the independently of the actions of the firm little profit and hence has a low valuation firm to connect new customers in the being regulated.8 The efficient price to be at that level of demand. But its profit future without investing (at higher cost), calculated was set as a price that would increases as demand increases – and its but it destroys the option to wait and just enable a hypothetical, efficient firm network is more fully utilised – until the assess if such customers will arrive. to exist and provide existing services. The point where the firm’s anticipation of the effect of this on firms’ decision making is cost of investing in expanded capacity Project evaluation and regulation illustrated by examining its effect on the outweighs the revenues per unit of The concurrence of risk and irreversible valuation of the infrastructure firm. demand. As demand approaches capacity, investment materially affect investment A firm looking forward from some the probability of having to invest in decision making (see Dixit and Pindyck, date t has a valuation given by: expanded capacity increases to the point 1994; Guthrie, 2009). The key effect is to value(t) = expected present value of that the expected cost outweighs the render it socially desirable that the varia- revenue less expected present revenue allowed per unit of demand. tion in demand and cost be a critical ele- value of costs Thus the value of the firm declines: by ment in the investment decision.7 In par- The expected present value of costs enabling the firm to just cover expected ticular, investments that seek to maximise contains the sunk cost of the capacity investment cost, the value of the firm the expected present value of the sum of in existence at date t, as well as expected where demand equals capacity is zero. producers’ and consumers’ surpluses into future investment in the network. The Case I firm would never start up, for the foreseeable future should consider the Consider the effect of this incentive its value lies below its replacement cost: timing of the investment, not just wheth- regulation price setting where demand this situation arises where existing assets er, if carried out, it will be socially ben- has to be served, there is 10% investment are not allowed to, or cannot, earn a eficial at the date of evaluation. In situa- economies of scale and uncertainty about competitive rate of return. The decline in tions of risk and irreversible investment future costs and demand: both sources of value at higher levels of demand means it is generally desirable that there is some uncertainty are reflected in the valuation that the firm is contemplating investment delay beyond this date. The delay enables of the firm that owns the infrastructure. in capacity that will have a negative pay- some resolution of uncertainty. If the in- The valuation makes some allowance for off to it. vestment climate improves, much less is economic uncertainty (systemic risk) in In Case II, the firm is allowed just lost by delay than would be lost by im- the level of its discount rate but it does enough revenue for it to start up and mediately (irreversibly) investing and the not include uncertainty about the very continue operating. Its situation is as investment turning out to be bad because many other risks to the project’s social for Case I, but with a minimal revenue demand (cost) turns out to be low (high). and private viability. In this setting, Evans stream covering both existing assets and The larger the risk – or variation of de- and Guthrie (2006) depict a firm that additional, but prospective, investment. mand and cost – the larger the private holds an existing capacity of 100 units This firm will have a valuation greater and social benefit of the option to delay. and an associated rate base of K(t), and a than its replacement cost at moderate Economies of scale may induce a longer regulator setting allowed revenue for the levels of demand, but it will try to avoid waiting period to invest because increased infrastructure provider as follows: investment in additional capacity, because surety of demand increases comprehen- • Case I: just sufficient revenue for as demand approaches capacity the firm’s sion of the effect of building a larger ex- the firm to keep operating but not valuation falls, even below its optimised

Page 30 – Policy Quarterly – Volume 6, Issue 4 – November 2010 replacement cost (ORC). The revenue be achieved if the firm is allowed an enables the firm to not lose value at the assigned this firm is insufficient for it inordinately large return on its assets: a time it invests. Whether this means that to invest and maintain its value when it return that would not be contemplated by the firm invests at the socially desirable faces network expansion. The reason for a regulator. It is for this reason that pure time will be affected by whether it has this result is that revenue will be reset incentive regulation fails where there are competition or is subjected to regulation as the revenue required to just support economies of scale in investment. These that precludes it making excessive rents a hypothetically efficient firm that economies exist for most infrastructure from congestion. produces the same level of services as and hence pure incentive regulation is Excess demand requires prioritisation the firm in Case II. This revenue will be unsuitable for it. In many cases, pure of use of the capacity, and this may based upon the cost of building a single incentive regulation has been replaced be achieved by pricing where it is network and hence must be lower than by historical cost regulation, where economic, or by congestion broadly that required to just support a firm that there is intense regulatory oversight conceived.11 Congestion pricing for makes incremental decisions over time and approved infrastructure investment infrastructure importantly allocates the because of the presence of economies projects are included as capital in the capacity to those who most value its use, of scale. Put another way, while the firm rate base. and it provides information about the makes incremental capacity decisions willingness to pay for an expansion in anticipating uncertain demand, the Demand and investment infrastructure. Both features are highly regulator sets the price after the firm’s Cases II and III illustrate that where desirable if not essential if investment decisions, applying the economies of demand must be satisfied at prices that in infrastructure is to be at a socially scale to the whole firm and with no approach the cost of infrastructure desirable level. uncertainty about demand. The ex post services, it will be a challenge to achieve 1 This paper draws heavily on work with Graeme Guthrie. actions of the regulator take place with the socially desirable level of investment 2 Indirect costs include costs imposed by individuals that more information than the firm had where there are investment economies affect others. These suggest prices such as congestion prices that enable consumers of infrastructure to express when it made decisions, and they utilise of scale. If price is set at a level that their demand for it while paying the cost of externalities induced by their use of the infrastructure. economies of scale more extensively. just covers the cost of a replacement 3 Economies of scale in investment mean that the larger If there were no economies of scale, firm, society will have to subsidise the the quantum of investment, the lower the cost per unit of service or output of the additional capacity. but rather constant returns to scale, the infrastructure provider to achieve the 4 The coefficient of variation is the standard deviation of the firm does not lose value by expanding desirable level of investment.9 If a price quotes for the same project divided by the average quote for that project. network capacity and thus has the is set that just covers the incremental 5 The risk may well be shared between the investor and the construction company. incentive to invest in new capacity as costs the firm incurs with its sequence of 6 And variability in cost, where this exists. required under incentive regulation. investments so that the firm is agreeable 7 Although some firms’ decisions may differ from those preferred by society. Comparison of constant returns to scale to investing, it will no longer be incentive 8 In a number of countries this approach has been applied to calculating access prices for telecommunications services: and Case II illustrates why incentive regulation: it will be approved investment see, for example, the widely used forward-looking cost regulation fails in the case of economies management. In this situation, demand concept of total service long-run incremental cost (TSLRIC). In New Zealand, this regulation was proposed for lines of scale in investment. Scale economies management becomes as important as companies by the Commerce Commission but was never must produce a conflict between the investment management. In Case II, the actually implemented. 9 This is the dynamic analogue to the classic static depiction regulator and the firm in which the firm firm’s conflict with the regulator might of natural monopoly. The need for a subsidy changes the concept of the desirable level of investment. seeks to reduce its investment relative to be resolved by allowing excess demand 10 The argument was advanced as long ago as 1970 by that desired by the regulator. to reach some level before investment Baumol and Bradford in a setting without risk but with growing demand. A second approach not considered here In Case III, the firm has sufficient takes place, even in the presence of is to charge bundled, or two-part, tariffs: these may reduce consumer surplus at any point in time but bring forward revenue that its valuation does not investment scale economies. Indeed, this investment in capacity to the benefit of future consumer decline as demand approaches capacity. has been an approach long advocated and producer welfare. 10 11 Congestion can take various forms that represent reduced Evans and Guthrie explain that, in by some. The income generated by the service quality – e.g. delays and poorer service – and be the presence of investment economies jump in number of customers using the managed by prices, administrative rules or laissez faire which is unlikely to be socially desirable for infrastructure. of scale, this desirable state can only infrastructure at the time of investment

References Guthrie, G. (2009) Real Options in Theory and Practice, Oxford: Oxford Baumol, W.A. and D.F. Bradford (1970) ‘Optimal departures from University Press marginal cost pricing’, American Economic Review, 60 (3), pp.265- PricewaterhouseCoopers (2005) ‘Cross submission intention to declare 83 control on unison networks limited’, draft report, 15 December Dixit, A.K. and R.S. Pindyck (1994) Investment Under Uncertainty, Parsons Brinkerhoff Associates (PBA) (2004) Review of Optimised Princeton: Princeton University Press Deprival Valuation Handbook, Replacement Costs of System Fixed Evans, L. and G. Guthrie (2006) ‘Incentive regulation of prices when Assets, prepared for the Commerce Commission, 31 August costs are sunk’, Journal of Regulatory Economics, 29 (3), pp.239-64 Transit New Zealand (2006) www.transit.govt.nz, accessed September 2006

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 31 Colin Crampton

Our wealth did not create our transport infrastructure; it is our transport infrastructure which created our wealth. John F Kennedy A Culture of Lead Infrastructure

Introduction In a time of global economic downturn, such as the one Ensuring we get quality infrastructure through investing in land transport is we are living through, it is important to ensure that we do the responsibility of the New Zealand Transport Agency (NZTA). The NZTA everything we can to make ourselves as competitive as we takes a lead in planning the land transport can in the global market. The government’s priority for network; investing in land transport; managing the state highway network; and transport is to invest in land transport to increase economic providing access to, and use of, the land productivity and growth in New Zealand. Quality land transport system through the licensing of vehicles and people. The aim of this article transport infrastructure and services are recognised as is to outline: • how the NZTA contributes to being an essential part of a successful and resilient economy. economic growth and productivity Good quality land transport enables people to access gains; • how the NZTA invests in infrastructure; employment and businesses to get their goods to markets and • what cultural changes the NZTA has across the country, and is the first link in the ‘logistics chain’ needed to initiate to address these to international markets, through our ports and airports. issues. It is not the purpose of the article Therefore, investing in quality infrastructure, as John F. to make the economic case to invest in Kennedy so eloquently put it, contributes to our economic public infrastructure and establish that long-term benefits accrue. There were growth and productivity. sufficient papers presented to the Motu– IPS conference that already demonstrate this relationship. However, this article Colin Crampton is the Group Manager Highways and Network Operations with the New Zealand Transport Agency (NZTA). He is responsible for New Zealand’s state highway network of 11,000 km, shows how in practice the NZTA with an annual expenditure of $1.6 billion and replacement costs of $29 billion. approaches the task of ensuring that

Page 32 – Policy Quarterly – Volume 6, Issue 4 – November 2010 New Zealand has a land transport system will be raised. The government directs 1 What is the function of the highway that is fit for the purpose and supports a investment through the activity classes network? resilient economy that competes in global (such as the activity class for new and 2 What level of service do we aspire to? markets. improved state highways) into high- 3 How best to allocate resources? The NZTA enables productivity quality infrastructure projects and improvements and economic growth by transport services that encourage the 1. The function of the state highway network being involved in integrated planning efficient movement of freight and people. In November 2010 the NZTA proposes to ensure that land use and transport Of particular importance are: to engage with stakeholders on a state links are planned together. In doing so • investing in the state highway network highway classification system. The the synergies that exist between having as a key to the efficient movement of proposed classification system is built a quality planning framework and a freight and people; and up around the function of the road. The well-managed land transport system • generating better value for money classification system would balance the can be captured. The NZTA also enables from government’s investment across functional requirements of different state productivity improvements and economic all land transport activity classes and highways and would recognise: growth by being responsible for improving enhancing economic efficiency of • routes connecting major centres the efficient and safe movement of people individual projects. and thus having significant traffic and goods around the state highway In the short-to-medium term the volumes; network and ensuring improvements in effectiveness of the transport system using the concept of ‘levels of service’ in terms of a performance measure. State Highway 1 (SH1) is the spine of our state highway The NZTA places particular focus on the Auckland network; critical network. It connects Cape Reinga to Bluff, so its routes between population centres; and function changes. routes carrying significant volumes of freight and large numbers of tourists. It recognises the importance of these routes to the overall economic well-being impacts the government wants to see • port and airport connections; of the country. The NZTA sees itself as a are improvements in the provision of • routes carrying a high proportion of service provider of quality links for our infrastructure and services that enhance freight; export market. All the high-performing transport efficiency and lower the cost of • routes with high tourism volumes; industries, such as forestry, dairying and transport. To achieve this, the government and tourism, need a quality transport system wants improvements in journey-time • essential lifelines. to achieve, and maintain, their potential. reliability; easing of severe congestion; To put this into context, set out below In fulfilling its role in planning and more efficient freight supply chains; and is a range of examples. investing in the land transport sector the better use of existing transport capacity. NZTA gives effect to a number of key This will provide better access to markets, SH1: Auckland to Hamilton documents: employment and areas that contribute State Highway 1 (SH1) is the spine of our • long-term transport sector outcomes, to economic growth, thus ensuring a state highway network. It connects Cape both national and regional; secure, resilient transport network. Other Reinga to Bluff, so its function changes. • the National Infrastructure Plan; impacts sought are reductions in the The section south of the isthmus of • Safer Journeys: New Zealand’s road number of deaths and serious injuries Auckland down to Hamilton is a strategic safety strategy 2010–2020; and on our road network; provision of section of SH1. It links New Zealand’s • Government Policy Statement on Land more transport choices, particularly for largest city with the rest of the North Transport Funding (GPS). those with limited access to a car; and Island and on to the South Island. It The government policy statement reductions in the adverse impact on the also forms one side of what has become on land transport funding sets the environment and contribution to positive known as the ‘Golden Triangle’, between government’s priority for land transport health outcomes. Auckland, Hamilton and Tauranga. It is a investment to support national economic As an example of how this works, the section of SH1 that contributes very much growth and productivity. The GPS rest of this article uses the state highway to New Zealand’s economy. This section covers the impacts the government network as a case study to show how of SH1 carries around 20,000 vehicles a wishes to achieve from its investment these government priorities and impacts day, of which 3,000 vehicles are trucks. in land transport, how it will achieve are given effect to when managing and Its function is very much one of moving these impacts through funding certain investing in the state highway network. people and freight, so it is a key link for activity classes, how much funding The NZTA tackles this in three parts: business. will be provided, and how this funding

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 33 A Culture of Lead Infrastructure

High tourism volumes: Queenstown to stakeholders to hear what their views are effects of land transport. Milford on these three areas. By combining function and levels of In contrast, the route between Queenstown service we can compare what we have and Milford may carry only a few thousand Reliability today with what our aspirations are for vehicles a day, yet it provides access to one A reliable network is one where drivers the network as a whole in the future. This of New Zealand’s most iconic locations for can travel at their desired travel speed generates the gap for improvements we over 100,000 tourists each year. As such, it within the posted speed limit. This would need to close over the longer term. makes a major contribution to tourism be translated into a reliable Auckland in New Zealand. Thus, this function of network through not only completing the 3. Allocating resources access for tourists to New Zealand’s iconic Western Ring Route, but also ensuring Investing in land transport is a closed locations needs to be recognised when that there is the right balance between system in the sense that all revenue managing the route. transport modes given the demand to collected from fuel, road user charges and travel. However, the future focus will be on licences is directed back into transport. Other funding sources for transport are the local government rates contributions The challenge is how to allocate priority to all projects for local government transport operations and improvements (including public between today and our aspirational priorities for transport). The ring-fencing of transport- tomorrow. related taxation is a policy a lot of countries would love to see implemented in their own jurisdiction. It means that in New Zealand all the tax revenue collected Essential lifeline getting the best out of the existing network from road user charges, vehicle licensing At the other end of the functional scale, through informing travellers before they fees and tolls is returned to the national State Highway 73 provides a key link travel, ensuring timely information is land transport fund to support future between Christchurch and the West available during the journey, and ensuring investment in transport. Coast. The alternative is very long, and that intelligent transport systems (such It is the role of the government policy as such SH73 forms a lifeline between the as ramp metering and variable message statement on land transport funding to set west and east coasts of the South Island. signing) are introduced effectively to the level of revenue against the outcomes The link provides connectivity between ensure that the optimum use is made for transport. Our job is to contribute to the two communities and allows the of the network and that travel times are this debate with information: for example, economic interaction that is so essential reliable no matter what time of day you on the roads of national significance. to the smaller communities on the West travel. There is an economic argument for Coast. completing them sooner, so do we want In operating, maintaining and Safety to put more revenue into these routes? improving the state highway network it Secondly, safe travel will be promoted This has meant there has been a need for is necessary to have suitable systems that through targeting maintenance and a culture change around how transport can respond to the differences between improvements to the network that improvements are considered within the state highways. One way of managing contribute to a ‘4-star KiwiRap rating’ on wider picture of economic growth and this is to use a classification system as a the heavily trafficked parts of the network. productivity. way to predetermine the effectiveness of Star rating a road is a proactive approach The challenge is how to allocate the transport network through specifying to road safety. It enables sections of road priority to all projects between today and levels of service targets. with a relatively high level of risk to be our aspirational priorities for tomorrow. identified before a crash occurs. The star One tool the NZTA uses to assist with 2. Levels of service ratings will make drivers aware of the this is to profile projects for the purposes To measure and monitor the effectiveness relative safety of the roads they use, as of assessment using the three factors of of the state highway the NZTA uses three well as help identify roads that will benefit strategic fit, effectiveness and efficiency. factors to determine the outcomes. These from safety improvements. Each of these three factors is given a are reliability, safety and environmental rating of H: high, M: medium or L: responsibility. These factors relate back to Environmental responsibility low. Therefore, an assessment profile of the government’s ‘impacts’ of improving Thirdly, adopting environmental and HMM means the activity was rated high journey-time reliability, reducing deaths social norms through appropriate for strategic fit, medium for effectiveness and serious injury and reducing adverse standards in air, noise, water, community and medium for economic efficiency. impacts on the environment. To assist us separation and good urban design will This provides for a multidimensional with setting the appropriate level of service ensure that we meet the government’s aim assessment and ensures that the strategy we are engaging with our customers and of a reduction in adverse environmental for a route improvement or for an urban

Page 34 – Policy Quarterly – Volume 6, Issue 4 – November 2010 area is given weight when investing in advantage generated by improved access to bottom of the list. transport infrastructure. markets, as well as employment advantages The programming of the delivery The assessment factors are defined as of improved access resulting in more and of the investment is not a simple task. follows: higher-value jobs. In an ideal world, investment would be Strategic fit For example, the completed Waikato undertaken in priority order from the • links to key government aims; Expressway will provide a four-lane top of the prioritised list down. In reality • key freight and tourist routes; divided carriageway between the Bombay a more pragmatic approach has to be • key functions such as access to jobs Hills south of Auckland and Cambridge. taken, to balance the competing demands and business; It is expected to deliver several significant of cashflow management, resource • congestion relief. benefits which include reducing the levelling, stimulus aspirations, and the For example, the Wellington Northern journey time between Waikato and ever-present project development and Corridor (Levin to Wellington Airport) is Auckland at the same time as providing delivery risks that impact on both cost classified as high strategic fit because it better journey-time reliability and a and timelines of delivering the overall aims to improve access to the Wellington safer route. The Expressway will bring, portfolio of projects. This is particularly CBD, key industrial and employment through the enhanced connectivity true when the portfolio of projects centres, the port and airport. It provides between Waikato and Auckland, the contains a mix of small, medium, large relief from severe congestion both within encouragement of economic development and extremely large projects at different the Wellington CBD and at Otaki, as well opportunities. It will improve supply- stages in their project life cycle. Therefore, as improving the journey-time reliability chain routes and industrial growth, the programming over a ten-year period and safety between Levin and Wellington as well as improve access to Hamilton has to be determined by best value for Airport. International Airport and the major ports money, and the optimal use of resources. • Effectiveness in Tauranga and Auckland. State highway improvements, • supports national network; Another example is the package of maintenance and operations are • multi-modal; improvements to complete the Auckland considered in the context of the whole • integrated with land use. Western Ring Route, which generates national land transport programme For example, Tauranga Eastern Link journey-time savings for travellers. It and so they are seen in the context of will reduce the cost of travel to Tauranga provides improved access to employment the whole land transport network. In Port on a very busy route at the same time for a wider area: this converts to roughly conclusion, this has meant a culture as providing improved environmental $80–$100 million per annum of wider change for the NZTA. This change can be outcomes for Te Puke. It also supports economic benefits from the package of summarised by five points: the growth along the Papamoa peninsula improvements. 1) Contributing to the government policy in line with the SmartGrowth strategy for The standard BCR as currently statement discussions by outlining the Eastern Corridor by providing a good calculated is based on an 8% discount the outcomes that are possible quality road network and opportunities rate. Some would argue that this discount from current and projected revenue for public transport and active modes, rate leads to investment that is too focused streams, and demonstrating to New thus supporting the ‘live work play’ on short-term projects at the expense Zealand the best use of the land strategy adopted within the SmartGrowth of large, long-term infrastructure. The transport dollar for state highways area. This strategy encourages diverse NZTA’s process allows for sensitivity and other transport improvements. land use patterns for an area, such as analysis of the BCR using discount rates 2) Using more than the standard benefit- business parks being located within easy of 6% and 4%. The effect of lowering the cost-ratio to prioritise projects. That reach of residential areas and community discount rate is to increase the numeric means looking at the corridor as a facilities. value of the BCR, reflecting the long- whole and looking at wider economic term nature of the investment. benefits. Efficiency 3) Understanding the need to provide Efficiency is measured by the ratio between Prioritised and then programmed an appropriate level of service on the cost of a project and the benefits Prioritisation is placing projects in the different types of state highway, generated (benefit-cost ratio or BCR). order in terms of their merits, based on and the need to provide economic We place a particular focus on analysing the three-factor assessment profile. So, stimulus. the benefits on the basis of a route not the project, package or combination of 4) Protecting the network to maintain just a project. By doing this we ensure projects that is assessed as having a profile the levels of service. that the whole strategy and package of of high strategic fit, high effectiveness and 5) Operating the network to take greater improvements for a route are evaluated high economic efficiency (BCR above 4) account of the function of each state and optimised. The NZTA also recognises would be placed at the top of the priority highway. that there are wider benefits generated by list and those projects with a low strategic a project. These wider benefits include fit, low effectiveness and low economic agglomeration benefits, such as competitive efficiency (BCR below 2) would be at the

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 35 Michael Deegan Investing in Infrastructure Investing in infrastructure is not a question. It is, for any policy for cities, for ports and for freight in line with our defined strategy. nation, not only inevitable and vital, but also essential. Through this strategic approach we can Without infrastructure, nations, economies, individuals and create a multiplier effect of action, with positive impacts not only for business communities have no future. It is as simple as that. Energy, but for everyone in the community. The approach creates confidence across the water, transport, telecommunications: without any or all a board and underpins a positive business nation cannot operate, much less prosper and grow. People’s environment. We are looking not just at one area of policy or infrastructure, but lives could not be lived. Business could not operate. City right across the nation and the economy. planning, growth and just getting around would become Involving and engaging the private sector, via public–private partnerships, in chaotic. the delivery of infrastructure is vital. The feedback we have had so far is promising as the two sides learn more about each Since humanity began its path to infrastructure delivered meets the needs other. In my years in the bureaucracy civilisation, infrastructure has been as well as the aims and aspirations of I have been fortunate to have been able inextricably linked with the development both the government and communities, to spend time in the private sector and I and futures of societies and cultures – there has to be a plan, a strategy. have been able to gain an understanding and individuals. Throughout history The strategy adopted by Infrastructure of that sector. The same is not always the civilisations developed and grew as Australia is built on seven themes, case with my fellow bureaucrats, and this their infrastructure developed and grew. namely: is equally evident in the private sector. Human endeavour was often portrayed • a national broadband network; In engaging with the private sector, and manifested in infrastructure. • creation of a true national energy one of the most immediate and lasting The clear message we have in Australia market; outcomes has been an increased level of is that, without meeting current and • competitive international gateways; understanding about one another. future infrastructure needs, we won’t • a national freight network; Putting aside what might be thought survive, we won’t prosper and we won’t • adaptable and secure water supplies; of as an almost ethereal outcome (which grow. But to achieve the required delivery • transformation of the cities; and would be incorrect in the long term), of infrastructure, and to ensure that the • provision of essential indigenous what has been made clear is the need services. for: Michael Deegan is the Infrastructure Coordinator While delivering on infrastructure • observable government procurement of Infrastructure Australia, a national body is integral to our role, Infrastructure processes; established to develop a blueprint for unlocking Australia works with the Australian • national consistency; infrastructure bottlenecks and modernizing Australia’s transport, waters, energy and government and the Council of Australian • understanding of bid costs; communications assets. Governments (COAG) in developing • understanding of bid times;

Page 36 – Policy Quarterly – Volume 6, Issue 4 – November 2010 • real risk transfer; with the people it represents will neither When it comes to major infrastructure • governance structures and expertise; deliver for the people nor maintain the within those cities – and beyond • creating a true partnership rather will of the people. This is the approach those cities – local, state and territory than a cosmetic one; and Infrastructure Australia takes in governments increasingly look to the • the necessity of public evaluation providing advice to all governments and Australian government for the capital to audits. in developing major policy initiatives. build the infrastructure. In meeting those The last is of integral importance, as We seek to identify regulatory demands, the Australian government the private sector needs to understand reforms necessary to enable efficient must ensure that taxpayers’ funds – and that any injection of public funds – and co-ordinated delivery of national that is what builds infrastructure –are taxpayers’ funds – must be associated infrastructure investment. Streamlining allocated to deliver improved living with full transparency. governance means addressing issues like standards and a better quality of life for all The private sector also realises that the policies the government is following are approached on a national basis rather than state by state or intra-state across The new Auckland, the amalgamation of regions. For example, linking a national smaller local-government entities, has a freight policy with a national ports policy or a cities policy with a national water larger infrastructure palate with which policy can drive down costs and lead to better and more cost-effective services for to work, along with increased demands, the community. tight revenue streams and the myriad of Concomitant with the development of these national policies are initiatives problems replicated in Australia. on governance, although for the most effective delivery of the policies the issue of governance must be addressed. It is almost a chicken-and-egg situation of planning, especially in the cities. Australians, rather than merely satisfying which one comes first. Nowhere is there more need to address particular local demands. The three tiers Unlike the United Kingdom and governance than in the planning and of Australian government, national, state New Zealand, Australia has three tiers of delivery of infrastructure in Australian and territory and local, have to engage government: national, state and territory, cities. Australia is a highly urbanised and work together for the nation. This and local. From before Australia became society; indeed, one of the most is the beginning of a new regime in a nation through the federation of the urbanised nations in the world. But while governance in Australia. If projects are to states, conflict between the colonial this may be the situation it also must be be delivered then the national good and governments and what was seen by them recognised that if there is an economic improved outcomes for all people must as the lesser tier – local government – was core in Australia, then it is found in the be the drivers. endemic. Post-federation, another layer nation’s major cities, cities with more The cities are growing, inexorably and was added to the mix. than 100,000 people. These Australian inevitably, something that is not unique Infrastructure Australia approaches cities contribute nearly 80% of national to Australia. You can take, for example, the need for initiative in governance via gross domestic product and employ the city of Auckland, the new bigger the contention that the three tiers of around 75% of the nation’s workforce. Auckland that now exceeds Australia’s Australian government have to engage They are dominant in economic terms largest local government area, Brisbane. and work together for the nation. and equally dominant in employment. The new Auckland, the amalgamation National interests, a focus on outcomes Governance of these major cities sees the of smaller local-government entities, has for the Australian people, must supersede hands of one national government, eight a larger infrastructure palate with which parochial issues, rivalries and one- state or territory governments and 155 to work, along with increased demands, upmanship. There is also the need, and local governments. tight revenue streams and the myriad the recognition, that government at On top of that, add the complexity of problems replicated in Australia. This every level must ensure that the views of the bureaucracy, the departments, shows that infrastructure deficiencies, of the people they seek to represent are authorities, instrumentalities and the competition between communities or taken into account in all decisions and like. Within that myriad of governance, states, delivery timetables and national strategies. Without listening to the people state and territory administrations lay direction over localised and individual and incorporating their views in the down strategic planning frameworks and demands and perceived needs are decision-making processes, infrastructure local government implements planning features not unique to Australia. They are will not meet the aims and aspirations policies – although at times states take symptomatic of the industrialised world. of the people. A government out of step over planning decisions.

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 37 Investing in Infrastructure

But while the national outcomes are We don’t have it in aviation, where the They deserved to be listened to and that obviously the focus of the Australian approach is national, but it is the case in is what Infrastructure Australia did. government, the reach of the national rail. The need for a national rail safety It did not come as any surprise to be government is being expanded by it regulatory regime is obvious and in the told that problems with urban public engaging directly with local government development of policy that is something transport and road infrastructure were in the delivery of projects, bypassing the we are working to put into place. the most common areas of dissatisfaction states and territories. Such steps are vital Planning is another area where the among people who live in Australia’s for the development of Australia, but national approach is needed. Those major cities. Public transport was seen as they are not being taken without some who create and deliver major projects overcrowded, unreliable, too infrequent, too slow and unsafe at night. Roads were seen as choked and congested and residential streets were seen as clogged [When considering the delivery of with parked cars. There were also comments about limited or incomplete infrastructure in Australia] No one could cycle paths. Walkers suffered from seriously consider, ... that the New South distances, dangerous intersections, too many vehicles, too much noise and the Wales economy stops at the New South sense of being crowded out. People, again not surprisingly, were Wales border. Nor does the economy of also perceptive. They knew where the Victoria stop at the border with New South problems lay and, while they may not have the solutions, they look to government to Wales or South Australia. find the solutions. But government itself is not omnipresent; it needs information, analysis, debate and review in finding the path to the right solution. Our resistance. Again, in the industrialised and and those who service those projects are engagement with the private sector in political world that is to be expected. national in outlook, but state by state public–private partnerships gives us one Steps are being taken, and will in application. In different jurisdictions stream of outside advice. Other sources continue to be taken, as we examine and there are different rules, regulations include industry organisations, along make recommendations on reforming and requirements. This is another of with the wide breadth of knowledge and and streamlining governance. Reform can the inconsistencies that Infrastructure experience held by the members of the be across many different and divergent Australia is examining for the Council of board of Infrastructure Australia. activities of government. In our work, Australian Governments. Across the nation we are told of the for example, on developing a national The outcomes Infrastructure problems and shortfalls in one particular transport policy and a national ports Australia and COAG seek reflect the area or city or region. But what can be policy you can see how things can be views of the most important group of found in each of those areas, cities or governed better. In the transport policy, stakeholders, the Australian people. In regions can be replicated in almost any the necessary networks, of rail, road and developing our cities policy we listened part of Australia. A new road, a new rail ports, have to be financed. They also have to the people who live in the cities. Those connection, upgraded and expanded to be priced right. They have to have we listened to came from every city in ports, water and energy projects are not access regimes and regulation conducive every state and territory. They were the unique to particular locations and it to business and consumers. They have to people who sat in trains, on buses and seems that everyone has their own wish be interstate and intra-state and plugged on ferries; the people who sat in motor list. What communities are coming to into international markets. Nothing is in vehicles, idling in congestion, waiting, understand is that every item on wish isolation. Everything is connected. frustrated, for traffic to move; the people lists cannot be delivered. The ports, Take rail as an example. The tracks who walk or ride bicycles. The people the roads, the rail lines, the water and spread across Australia, across state and consulted may not be intimately involved energy grids and pipes, the broadband territory borders. Everyone – government, in the development and design of new telecommunications, all are vital to meet those responsible for the tracks and those infrastructure, but they are the ones who Australia’s infrastructure needs. But responsible for the trains that run on the eventually pay for government projects. just as vital as the concrete and steel of tracks – have a basic and unrelenting They are also the people who will use the infrastructure, things that people can commitment to safety. But from state to projects on a daily basis. As both end- see and touch, is the need to continue state we have different safety regulators users and project financers, they have to promote reform in how we do things, and sometimes different regulations. expectations, aspirations and demands. how we price things, and, as discussed

Page 38 – Policy Quarterly – Volume 6, Issue 4 – November 2010 earlier, what forms of governance are in Across the national government there ivity gains by helping Australia do place to work to and with. are clear indications and evidence that what it does best even better, and more We also need to accept that, when things are being done. In financial and competitively. In many respects, the task it comes to delivering infrastructure, economic parlance, Australia is a ‘player’ has only just begun. The infrastructure Australia is not, and cannot be, confined in the most dynamic and growing region deficiencies have been identified and by borders. No one could seriously in the world: the Asia–Pacific region. And Infrastructure Australia has appraised and consider, for example, that the New South infrastructure will not only keep Australia recommended projects across the nation Wales economy stops at the New South in the game, it will enhance its place. that are now being rolled out or are ready Wales border. Nor does the economy of If rail and road connect the ports to begin. Strategies and policies are being Victoria stop at the border with New that link Australia to the world, then the developed for the future of Australia’s South Wales or South Australia. Ports, national broadband network (NBN) is ports, freight networks and cities. transport (road and rail) energy, water the link to every corner of the nation. Simultaneously, Infrastructure Aus- and telecommunications are, in economic The NBN is infrastructure vital for the tralia is working across government terms, national. A national approach to future economy, and perhaps epitomises on redefining governance through co- infrastructure delivery is not only vital to a change of approach for Australia. operation and reform, both statutory the national economy, and to the lives of Like transport, communications are a and economic. Through this there is a all Australians, but it is common sense. vital part of everyday life, commercial combination of: The borders drawn on maps in the 19th and personal. The NBN will keep all • forces and factors; century exist, and will continue to exist, Australians in instantaneous contact with • people and experiences; but those colonial lines on a map no economies and people around the region • a desire to grow and share prosperity; longer inhibit the Australian economy. and the world, as well as in the next • acknowledging problems and If some states want to resist the national Australian street. resolving them; and approach, then they are flying in the face Underlying all aspects of what • building for the future with governance of reality. Infrastructure Australia does is the theme that works for the future. This is even more of a denial of of building and rebuilding Australia’s This combination is now showing the reality when you realise that it is to the infrastructure. It is being done so potential of Australia and that potential Australian government that the states there is growth and prosperity for the is unlimited. look for the majority of funding for Australian nation and the Australian major infrastructure projects. people. Infrastructure underlies product-

TheTH PerfEormance IRON Managemen CAt ofGE State Organisa RECREAtions in NewTE ZealandD Edited by Derek Gill

New Zealand’s public sector pioneered the development the state sector. It examines the formal design of the of comprehensive and rigorous systems for planning, performance management system, how the design has managing and reporting government performance in the evolved over time and uses survey and case study 1990s. Among the major innovations was bringing evidence to show how the system has been together financial and non-financial performance applied in state sector organisations. The book information. While effective financial reporting was concludes with proposals for achieving a established by the early 1990s, after twenty years, step change in public management in non-financial performance information was assessed by a New Zealand. This will require building former Controller and Auditor General to be uneven at more shared understanding about best and ‘crap’ at worst. performance improvement among The system for managing public organisations is citizens and civil society groups as widely seen as a relic from the 1990s that is past its ‘use well as Ministers, managers and staff by’ date. In recent years – like the proverbial New in public agencies. Zealand bach – there have been a number of features The book will be available in ‘tacked on’ while little has been removed. February 2010. More details on the This book reports on the results of a three-year project are available on research project on the use of performance information in http://ips.ac.nz/events/Ongoing _research/M4P/index.html

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 39 Todd Bridgman Empty Talk? University Voices on the Global In this article I report on my empirical study of public discussion of the GFC in Financial Crisis New Zealand. I consider the contribution of New Zealand university academics alongside the contribution of others with expertise, and assess the performance of the The global financial crisis (GFC) which began in 2007 with a mainstream news media in covering this liquidity squeeze in the US banking system and which continues global event of massive significance to our local communities. For me, the study raises to play out today has affected us all, whether through the questions for policy makers about how collapse of the finance company sector, rising unemployment, we view the role of universities in society and what the public can and should expect falling housing prices or the recession which followed the initial from their investment in them. Clearly, a number of academics have made valuable market crash. The speed and scope of the crisis surprised most contributions to a public understanding experts – policy makers included. Specialists from a myriad of of the impact of the GFC on New Zealand. The Institute of Policy Studies, for disciplines, from economics and finance to risk management, instance, hosted roundtable discussions corporate governance and property, are trying to make sense of on the GFC and the recession and in 2009 published contributions from five New what happened, why it happened and what it means for us now Zealand economists in Policy Quarterly. Overall, however, I have concluded that, and into the future. Members of the public rely on the news despite being a significant reservoir of media to keep them informed of the crisis as it unfolds and they knowledge in relation to many matters at the heart of the GFC, the public voice of rely on experts to translate these complex events into a language our universities has been faint. Universities claim to be active public contributors which they can understand. The GFC is educating us all, and it and relevant to the communities which is important that we all learn from it to avoid making the same support them, but, at least in the case of the GFC and its effects on New Zealand, mistakes again. these claims sound like empty talk. I want to stress that this is not all of their own making, however, since in many ways their Todd Bridgman is a senior lecturer in the Victoria Management School at Victoria University of actions can be seen as rational responses to Wellington. This article is based on research conducted as part of a grant from the Marsden Fund. the policy environment they inhabit, which

Page 40 – Policy Quarterly – Volume 6, Issue 4 – November 2010 places little value on communication with speaking in the public domain, is in a state What does it mean for universities a lay audience. Another contributing factor of decline and that this adversely effects to act as the critic and conscience of is an increasingly resource-starved and the quality of public debate (Jacoby, 1987; society? Wilf Malcolm, a former chair commercialised mainstream news media, Posner, 2001). ‘Public intellectual’ is not a of the New Zealand Vice-Chancellors’ which makes the inclusion of academic term that rests easy with New Zealanders. Committee who pushed for its adoption, voices less likely. Turner (2007, p.85) concludes that ‘just describes it as an enabling function which Veteran broadcaster Paul Holmes talking about public intellectuals makes provides people with the knowledge and recently lamented the quality of expert you … a wanker rather than a well- understanding to be able to exercise comment on the New Zealand economy, rounded bloke’. New Zealand’s small judgement. Performance of the critic describing economists who appear in the population, geographical isolation, a and conscience role takes place in the media as ‘fundamentally, intellectually dishonest’ (Holmes, 2010). According to Holmes, those who work for banks The contribution of New Zealand academics to our cannot be trusted because their employers have a commercial incentive to maintain public conversation on the GFC has been muted, in confidence in the economy. Those working for economic research firms are also comparison with other experts, apart from a small suspect because they depend on corporate clients for their survival. If we can’t listen number who have made frequent comments. to them, who can keep us informed about New Zealand’s economy? Interestingly, Holmes makes no mention of academics. ‘The only people who know what is prevalence of colonial attitudes and a classroom, through research and also really going on, fundamentally, are the pioneer culture which privileges Kiwi through engagement with the wider life shopkeepers and Fonterra.’ I mention Paul ingenuity over academic achievement is of a community (Malcolm and Tarling, Holmes because his comments highlight a said to create an environment which is 2007). It is made possible through the central theme to emerge from my research: hostile to intellectualism, especially in the protection of academics’ freedom to that academics are largely forgotten when public arena (Horrocks, 2007). ‘question and test received wisdom, we consider sources of expert comment The public role of academics is an issue to put forward new ideas and to state on major events such as the GFC. When particularly relevant for New Zealand controversial or unpopular opinions’ we hear an economist talking in public because our universities are distinctive for (Education Act, 1989). about the economy, chances are it will not having a statutory obligation to act as the My own institution, Victoria Univer- be a university economist, but rather an ‘critic and conscience’ of society (Education sity, has recognised these obligations as economist employed by a large bank or Act, 1989). The philosophical origins of ‘public contribution’, one of eight strate- a research consultancy. This applies not this obligation can be traced to Cardinal gic goals in its 2009–2014 plan (Victoria just to economics, but to other disciplines John Henry Newman’s 1852 lectures on University, 2008a). According to the for- relevant to the GFC, such as finance, The Idea of a University. For Newman, mer chancellor, Emeritus Professor Tim property, law and management. My study the purpose of a university education was Beaglehole: explored why this is the case, what the to cultivate the intellect, both within the We want to ensure our research and implications are for the quality of public boundaries of the university and beyond, knowledge are shared with the public discussion and what could be done if we in order to better enable people to make in a way that enriches New Zealand’s wanted academics to play a more active sense of their world (Newman, 1976). culture, society and economy. Victoria public role. In the following section, I The term ‘critic and conscience’ emerged University’s staff and students are provide an overview of the study, followed out of the 1988 Hawke report on tertiary well placed to contribute to the by some key findings. I then consider what education (Hawke, 1988) and subsequently opportunities and challenges in the is distinctive about the voice of academics, found its way into the Education Act. world today and we will continue to and conclude by suggesting how we might The act identifies five characteristics encourage and support staff in their strengthen that voice to take more seriously that distinguish universities from other role as the critic and conscience of our responsibility as public educators. tertiary institutions: universities are society. (Victoria University, 2008b) primarily concerned with advanced Universities as the ‘critic and conscience’ of learning; research and teaching are closely For the purposes of the study, ‘public society connected; universities are international contribution’ was defined broadly The impetus for the research was a in their standing; they are a repository of and included public presentations, suggestion that globally, the university- knowledge; and they accept a role as critic appearances in the media, material based ‘public intellectual’, defined as an and conscience of society (Education Act, written for a general audience, blogs, academic who has a commitment to 1989). submissions to public bodies and

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 41 Empty Talk? University Voices on the Global Financial Crisis

various engagements with community the GFC has been muted, in comparison undertaking research on the New Zealand organisations. My assessment of the with other experts, apart from a small context, because it placed greatest value contribution of academics was based on number who have made frequent on research published in prestigious an extensive archival search of online comments. This group of active academic international journals, many of them in news databases, university websites and contributors are typically driven by the US, which were not much interested other online content such as blogs, as the desire to have an impact on policy, in New Zealand. As a result, research that well as 43 interviews conducted with practice and the wider community, with was relevant to local communities and academics, other experts and members of many seeing their public work as a service which could have genuine impact on the media. The study does not provide an to the public, in return for the public those communities was forgone in the objective measure of academics’ public funding of universities. Most felt that, pursuit of research more likely to appeal contribution vis-à-vis other experts. while such work benefited their university to an international audience. A combined However, the qualitative data provides by providing it with good publicity, the effect was home-grown researchers convincing evidence that New Zealand university did little to recognise or reward losing touch with New Zealand issues academic voices on the GFC have been their efforts. In contrast, the group of and university departments increasingly muted. expert commentators who were not seeking to recruit international faculty with excellent publication records but little interest in local concerns, such as New Zealand’s experience of the GFC. Respondents from the media typically found it difficult Not everyone blames the PBRF for the to find academics willing to comment publicly and retreat of academics from the public sphere. One respondent believed that it felt academics needed to become better at speaking predates the PBRF, beginning in earnest with the election of the fourth Labour in a language accessible to those without specialist government in 1984, when academics expertise. became genuinely fearful of putting their heads above the parapet. A lack of incentive is not the only reason for academics to shy away from Through my analysis of the archival academics had stronger institutional public commentary. Those who speak in data I identified academics who had support for their efforts. Economists public can attract strong criticism and regularly commented on various aspects and other private sector experts spoke sometimes the threat of legal action. Many of the GFC, including economics, of the commercial benefits of their academics avoid media requests because of finance, corporate governance, property, public commentary in building their a fear of their views being misrepresented tourism, agriculture and politics, as well organisation’s profile and credibility, while by journalists, although those academics as academics in these fields who have not interest group spokespeople saw their active in the media accept this as an been active in public, to understand why. public engagements as an effective way of unfortunate but inevitable consequence All of New Zealand’s eight universities ensuring their organisation’s perspective of not being in control of the way stories were represented in the sample. I also was heard. are presented. Some academics avoid talked to experts who made public Many of the academics interviewed, public interactions because they want to comments but are not academics, such including both those active in providing avoid trivialising academic knowledge, or, as bank economists, private sector public commentary and those who are perhaps more importantly, want to avoid economists and spokespeople for various not, regarded regular engagement with being seen by their academic colleagues interest groups, such as unions and the wider public, particularly through as engaging in that process. Others employer associations, to learn more the media, as detrimental to an academic questioned whether they were sufficiently about their motivations for undertaking career. This work is time-consuming, in touch with current events to offer such activity, as well as their perception of which leaves less time for ‘outputs’ which anything meaningful to the conversation. the contribution of academics. Finally, I are accorded higher value, especially Respondents from the media typically spoke with people in the media, including research articles in academic journals. found it difficult to find academics journalists, journalism educators and Respondents spoke at length about the willing to comment publicly and felt media commentators to discuss their negative influence of the Performance- academics needed to become better at interactions with academics and other Based Research Fund (PBRF), which speaking in a language accessible to those expert sources. began with an initial round in 2003 and without specialist expertise. Experts is nowadays an increasingly important outside the university have dominated The faint voice of academics funding stream for universities based the public discussion of the effects of the The contribution of New Zealand on their research performance. Some GFC on New Zealand partly because they academics to our public conversation on felt the PBRF discouraged them from are adept at providing what the media

Page 42 – Policy Quarterly – Volume 6, Issue 4 – November 2010 are looking for. Bank economists, for and consulting arrangements which government seems mindful of criticism instance, understand well the news media’s could raise conflicts on various issues. that the PBRF discourages academics predisposition towards sources that are In addition, New Zealand universities from engaging with audiences outside the suitable, available and accessible. Bank routinely seek funding from industry, university, recognising that ‘research in economists can talk on a wide range of such as the University of Canterbury’s universities needs to combine excellence issues, from interest rates to immigration, agreement in 2005 with Provincial Finance with impact’ (ibid., p.16). But impact is business confidence to housing, exchange to fund a professorial chair in investment defined narrowly: ‘We will ensure that rates and commodity prices. They watch finance (University of Canterbury the Performance-Based Research Fund closely the daily flow of economic data Foundation, 2005). The university hoped recognises research of direct relevance to and are therefore well positioned to offer the deal would strengthen ties with the the needs of firms and its dissemination expert comment at short notice and they business community, fund world-class to them’ (ibid.). When policy makers are also highly skilled in speaking in a research and contribute to the economic regard universities as the handmaiden of language the public can understand. development of the region, but Provincial industry we should not be surprised when But does it matter if academics Finance was put into receivership the they pay lip service to their critic and have contributed little to the public’s following year. In light of the collapse of conscience obligations. understanding of the GFC and its effects the finance company sector, we should We also need to be mindful of the on New Zealand? What, if anything, are be mindful about the potential influence ability of our news media to transmit we missing out on? There was a consensus which corporate funding has on the the voices of academics. New Zealand’s amongst respondents that academics are perceived as more independent than other sources of expertise. They believed that when academics speak, they do We also need to be mindful of the ability of our news so as individuals, whereas almost all others who contribute in public are media to transmit the voices of academics. New spokespeople for organisations, which Zealand’s population means we have a small media are perceived as having vested interests in promoting particular viewpoints. Paul with little diversity amongst the mainstream print and Holmes’ distrust of bank economists is a case in point. The bank economists I broadcast offerings and limited funding for public spoke to vigorously refute this suggestion, broadcasting. pointing out that their influence depends on their credibility, which would be nil if their expert comments bore little relation to economic reality. Rather than capacity of universities to act as the critic population means we have a small deliberately misleading the public and and conscience of society. If we want our media with little diversity amongst ‘talking their book’, as Holmes claims, academics to be a source of independent the mainstream print and broadcast several respondents felt that bank expert comment on the state of an offerings and limited funding for public economists were likely to avoid discussing industry, do we want them reliant on that broadcasting. As a former journalist, it was issues which placed the actions of the industry for funding? sad to encounter through this research a banking sector in a negative light. It was widespread feeling of despondency about important, therefore, to have other experts Strengthening the voice of academics the current state and future prospects of in economics and finance, especially In defence of universities, they have simply journalism in New Zealand. Mass media academics, to provide an independent mirrored policy makers’ neglect of the organisations, especially newspapers, have view. For their part, bank economists critic and conscience role. It is clear from been hit hard by the GFC, at a time when were supportive of greater involvement by government’s Tertiary Education Strategy they were already struggling to deal with academics, acknowledging that academics 2010–15 that the priorities for the tertiary the implications of technological advances were better equipped to provide the ‘big sector lie elsewhere. The government’s on their business model. Newsrooms picture’ overview of the economy, as well vision is for tertiary education to act as have always struggled to retain their as to put today’s economic events in a a driver of productivity and economic experienced personnel because of the lure broader historical context. growth – ‘tertiary institutions need to of higher paying jobs in public relations, Having said that, it would be naïve work more closely with business to but, with them now having to operate to assume that the independence of ensure that research meets the needs of on small budgets, there are even fewer universities is absolute. None of the the economy’ (Ministry of Education, senior reporters with the knowledge and journalists interviewed routinely ask p.7) – in essence what the University of experience to pursue complex stories of academics if they have conflicts of interest, Canterbury set out to achieve through its major public interest, such as the GFC. yet many academics have private research relationship with Provincial Finance. The One journalist identified a trend towards

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 43 Empty Talk? University Voices on the Global Financial Crisis

‘churnalism’, where press releases are Zealand universities’ neglect of their conscience might involve raising difficult published with little or no intervention statutory responsibility to act as the questions, exposing uncomfortable facts by a journalist, either to check facts or critic and conscience of society. Apart and presenting unpopular positions, source an opposing view. The quality of from being an effective means to raise meaning the potential for controversy New Zealand’s business and economic their profile and demonstrating that the is ever-present. A recent example of this journalism is especially vulnerable as university is engaged with contemporary concerned the comments of Massey there is no specialised training and it is issues, there are few tangible rewards University management academic Greg not a popular destination for graduates. for universities making an active public Clydesdale, who, in 2008, sent a report This environment of increasingly scarce contribution. There are some costs, to New Zealand media which questioned resources reinforces journalists’ reliance since it reduces the time academics the economic contribution of Pacific on their established sources, such as bank have for the seemingly all-important Islanders’ to New Zealand society. economists, on whom they can rely to task of performing on the PBRF. In a The report became the lead story in provide an informed comment at short more conducive policy environment, Wellington’s Dominion Post newspaper, notice, and makes it less likely that they there is much more universities could sparking accusations of racism and will search out an academic perspective, do to encourage, support and recognise counter-claims of political correctness, unless they are already an established the public contributions of academics, which led to a review by the race source. including giving this work greater relations conciliator. Two peer reviews The end result is a New Zealand mass weight in promotion processes, creating commissioned by the Ministry of Pacific media ill-equipped to perform their awards to recognise outstanding public Island Affairs questioned the quality of Dr function as the ‘fourth estate’ by holding contributions, awarding honorary degrees Clydesdale’s research, and, while Massey University had concerns about the way he had made the work public, it affirmed his right to academic freedom (Chalmers The risk for universities is that they have limited and Ling, 2008). control over the public contributions of their faculty, Without entering into the debate about the quality of Dr Clydesdale’s work, the since they speak as individuals and not on behalf of manner in which he distributed it to media or the actions of the Dominion Post in the university. giving it such prominence, Dr Clydesdale was asserting his role, and that of Massey University, as the critic and conscience of powerful institutions in our democracy to those in society who act as critic and society. The risk for universities is that accountable for their actions. In an conscience, making media training for they have limited control over the public increasingly commercialised industry, academics more freely available and contributions of their faculty, since they it is becoming less obvious that they getting those academics active in public speak as individuals and not on behalf even identify with those responsibilities. to mentor colleagues. of the university. While universities have Capital + Merchant Finance sponsored An issue for policy makers is whether staff whose job it is to manage public TVNZ’s nightly news updates until it the PBRF, in its current form, really communications, academics will often was placed in receivership in 2007, and provides taxpayers with value for money work independently of them. We must we must not forget TVNZ’s infamous from their investment in university be careful that the freedom of academics voiceover provided by former news research. When New Zealand’s academics be respected because if academics can presenter Richard Long: ‘This One have such little to say in public about an only make public comments which are Weather Update is brought to you by issue as significant as the GFC, perhaps approved by their universities, the very Hanover, a New Zealand business with this is indicative of good intentions essence of the critic and conscience role the size and strength to withstand any producing unintended consequences. will have been lost. conditions.’ Might New Zealanders have The PBRF could be changed to value This article has focused academics’ been better informed by our public more highly research published locally, engagement with a wider public, but I broadcaster about the finance company and greater weight could be given for acknowledge that this is but one form of sector without commercial arrangements academics having an impact on a wider public contribution. Many academics are such as this? audience than other academics and even active in providing expertise to various The extent of academics’ public industry; but then measuring impact is public bodies and in conducting research contribution depends on a range of problematic. for government. For example, my own interactions between the funders of It should also be remembered dean, Professor Bob Buckle, had a recent universities, universities, the media, and that there is risk for universities in high-profile appointment as chair of the of course, individual academics. There encouraging their academics to reach Tax Working Group, an independent are, then, no simple solutions to New out to the public. Acting as critic and group of experts endorsed by government

Page 44 – Policy Quarterly – Volume 6, Issue 4 – November 2010 ministers to consider tax policy challenges complex events in a manner accessible to governance and many other aspects facing New Zealand. I am also aware a lay audience. of business. Experts who work New that academics from a range of policy While it has become common Zealand universities have been largely fields have been advising the government for governments around the world, silent in public about these issues. Our behind the scenes on their response to including New Zealand’s, to justify public understanding of the effects of the GFC the GFC. My aim is not to discount these expenditure on tertiary education with on New Zealand, and therefore our activities, but to suggest that there is also reference to productivity and economic ability to avoid making the same mistakes a responsibility for academics to engage growth, we would be foolish to neglect again, is poorer for that. One hopes that with an audience beyond academics, the broader contributions of universities we can learn from this experience to take policy makers and others with specialist to society. The events of the GFC have more seriously universities’ fulfilment expertise. This is the concept of academics challenged received wisdom about risk, of their distinctive role as the critic and as public educators, helping to translate the financial services industry, corporate conscience of society.

References Ministry of Education (2010) Tertiary Education Strategy 2010-15, Chalmers, A. and J. Ling (2008) ‘Massey faces claims of supporting poor Wellington: Ministry of Education research’, Dominion Post, 7 June Newman, J.H. (1976) The Idea of a University, Oxford: Clarendon Press Hawke, G. (1988) Report on Postcompulsory Education and Training Posner, R. (2001) Public intellectuals: a study of decline, Cambridge, in New Zealand, Wellington: [Office of the Associate Minister of MA: Harvard University Press Education] Turner, S. (2007) ‘The public intellectual is a dog’, in L. Simmons (ed.), Holmes, P. (2010) ‘We had it all, then we spent it all’, New Zealand Speaking Truth to Power, Auckland: Auckland University Press Herald, 15 August University of Canterbury Foundation (2005) ‘Provincial Finance directors Horrocks, R. (2007) ‘A short history of “the New Zealand intellectual”’, investing in their past’, University of Canterbury Foundation in L. Simmons (ed.), Speaking Truth to Power, Auckland: Auckland Newsletter, 4, July, pp.1-2 University Press Victoria University of Wellington (2008a) Strategic Plan 2009-1014, Jacoby, R. (1987) The Last Intellectuals: American culture in the age of Wellington: Victoria University of Wellington academe, New York: Basic Books Victoria University of Wellington (2008b) Annual Report 2008, Malcolm, W. and N. Tarling (2007) Crisis of Identity? The mission and Wellington, Victoria University of Wellington management of universities in New Zealand, Wellington: Dunmore Publishing

Recent Research

A loss of ‘white’ male privilege? Why are a group of mid-life men on Gender and ethnic dimensions of the margins of work and family? A domestic student participation in literature review bachelor degree studies by Paul Callister and David Rea by Paul Callister Since the 1960s and 1970s New Zealand and other Against a background of constrained government industrialised countries have moved away from a finances that have led to the government capping situation where most mid-life men were in full-time funding for bachelor degree study, this research paid work, married and living with dependent children, considers the changing ethnic and gender highly unlikely to be in receipt of benefit income, and composition of domestic students. In particular, it most likely to be economically supporting their partner explores who is now under-represented in bachelor and children. This study explores why these changes level study. have taken place.

IPS WP 10/12 September 2010 IPS WP 10/13 October 2010

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 45 Harshan Kumarasingham

Executive Power 60 Years On Has Anything Changed?

When New Zealand changed its electoral system from After being prime minister for three terms, the Labour leader conceded defeat first-past-the-post (FPP) to mixed member proportional after a convincing loss at the general election. The long and eventful Labour representation (MMP), the move was heralded as the end administration was to be replaced by a of old politics. Prime ministers and their Cabinet would National one headed by an energetic and ebullient leader untested in experience as no longer be the ‘elected dictatorship’. The executive would prime minister, but primed and prepared now be constrained by greater checks and balances. The for power. John Key, the 11th National Party leader, in 2008 replaced Helen two-party system that had held New Zealand politics Clark, the 11th Labour Party leader, as prime minister after nine years just as Sid hostage for at least 60 years would end and instead a greater Holland succeeded Peter Fraser almost 60 diversity of interests would be represented in the House of years earlier. Key, like Holland (except for a few Representatives, a House that could better hold the executive months in the War Cabinet in 1942), to account. This was the aim, but has it happened? This became prime minister without having critical experience of government, and article examines recent instances of executive actions that are yet both Key and Holland had long held the ambition to become leader of New akin to those taken in the FFP era that MMP has been unable Zealand. They had also both campaigned to eliminate. It also offers suggestions for how to increase on the promise that National had something new to offer the electorate after the accountability of the executive by strengthening the the long years of Labour rule. However, Holland and Key astutely did not seek constitution and other branches and offices of state. to tamper with many of the successful policies of the previous administration. Harshan Kumarasingham is currently the Henry Charles Chapman Fellow Instead they projected their vitality and in Commonwealth Studies at the University of London. He previously worked for the New Zealand Treasury, and is the author of Onward with freshness, because, although government Executive Power: Lessons from New Zealand 1947-57 (Wellington: had become almost synonymous with Institute of Policy Studies, 2010), which this article is based upon. ‘Old Peter’ and ‘Aunty Helen’, the

Page 46 – Policy Quarterly – Volume 6, Issue 4 – November 2010 New Zealand people had decided it was business of government but has left she puts the emphasis on “prime”, being only fair to ‘give the other fellow a go’. untouched the essential ground-rules well briefed on what is happening across Clark, like Fraser, had generous of Westminster government … In its all portfolios, jumping on colleagues who experience of the Treasury benches and essential respects, the Cabinet system muck up and even taking over if things are had won three election victories. These New Zealand inherited in the 1850’s not fixed’ (Armstrong, 2008). The same Labour titans, however, after nine years in has remained remarkably resilient could have been written of Fraser. Clark the top job were both unable to persuade … From a constitutional perspective, had a loyal deputy prime minister and the voters to give them another term in there has been an almost seamless finance minister in Michael Cullen (just office, allowing the National Party to gain transition from the former plurality as Fraser had Nash concurrently in the office with a mandate for reform, but not voting system to MMP. The cabinet same positions) to buttress this state and revolution. remains much as it was before … provide much of the policy grunt required Retaining the confidence of the House to action prime ministerial edicts often The MMP era remains the axis around which the without the involvement of Cabinet. So, 60 years on is executive government entire system revolves. This imperative in New Zealand the same? No. The MMP facilitates the democratic ideal and representation system has revolutionised is the bedrock of the Westminster the electoral system and changed the system. It has been so ever since the political landscape without question. The cabinet system was introduced in The Clark government’s hegemony over the political system that 1856. (Joseph, 2008) decision to abolish Labour and National governments exerted under Fraser and Holland is effectively MMP has given more choice and more appeals to the Privy over. The two-party dominance is gone representativeness to the New Zealand and instead the House of Representatives voter, but this is not the same as giving Council and create and the Cabinet table must be shared by more formal or informal checks and a Supreme Court in other parties and partners in a way that balances on the political executive. a parliamentary historian would have to New Zealand in 2010 is still unitary, New Zealand as the look way back to the Massey–Ward era unicameral, and governed by an unwritten to find some form of precedent for. The constitution. The executive, and prime final appellate court proportional system has compelled the minister in particular, still retains many in 2003 was arguably, ‘Wellington model’ of the Westminster of the prerogatives that were available system to adopt governing arrangements to Fraser and Holland. In the Clark–Key after MMP, the biggest and parliamentary accommodations era there have been subtle and not so that would have been unthinkable and subtle executive emanations that have constitutional change unnecessary 60 years ago. demonstrated that prime ministerial However, many of the constitutional power is still alive and well. since the abolition of the issues that faced the era of Fraser and Legislative Council. Holland can also be seen in the era Enduring executive prerogatives of Clark and Key. The change to New Helen Clark’s political style has been Zealand’s electoral system did not cause described as ‘presidential’ since ‘[h]er the evaporation of concerns over the focus is squarely in her ability to go over excesses of the executive. Indeed, it Parliament, front for the Executive and would be delusional to heap on MMP work her way through and around the Executive vs. judiciary the responsibility for curing all our constitutional checks and balances, and This method of government increased constitutional ills. The executive may no persuade New Zealanders of the rightness tension between the executive and longer be unbridled, but nor has it become and rectitude of her policies and unite judiciary as well. The Clark government’s completely bridled. The Westminster them behind her’ (O’Sullivan, 2005). The decision to abolish appeals to the Privy system’s innate flexibility allows many commentator cited admits, however, that Council and create a Supreme Court in of its core principles to continue despite ‘the move towards a more presidential New Zealand as the final appellate court in key changes that MMP has demanded. As style of direct action did not suddenly 2003 was arguably, after MMP, the biggest legal scholar Philip Joseph argues: emerge under Clark’s regime. Over the constitutional change since the abolition past 20 years New Zealand prime ministers of the Legislative Council. Unlike MMP, ‘The more things change, the less have increased the Executive’s reach’. An the abolition of the right to appeal to the they change.’ And so it is with MMP. analysis of Clark’s leadership by a respected Privy Council was not put to a referendum MMP has wrought major changes to political journalist assessed that Clark (Harris, 2006, pp.117-9). Thus, as with the the New Zealand political landscape. ‘imposed iron discipline on colleagues, her removal of the upper house, the Privy It has changed the way we do the caucus and the party … As Prime Minister, Council appeal was eliminated from the

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 47 Executive Power: 60 Years On Has Anything Changed?

Attorney-General v Ngati Apa1 with the National’s justice minister, Simon Foreshore and Seabed Act 2004. Around Power, has carried on the executive ... New Zealand’s the same time the chief justice, Dame Sian tradition of expecting the other branch unicameral Parliament Elias, was also worried that the judiciary’s of state to keep away from its exercise independence was being eroded by many of power. Dame Sian delivered a speech is dangerously the of its administrative functions being taken which, among other issues, raised over by the Ministry of Justice (similar concerns about overcrowding in prisons ‘plaything of the concerns have been made about the Office and the question of whether alternatives executive’, lacking of Governor-General being administered to prison sentences might have to be by the Department of the Prime Minister discussed. Power immediately responded, even with its select and Cabinet) and it therefore being with the prime minister’s backing, stating ‘beholden to a minister’, further ensuring brusquely, ‘This is not Government committees ‘the multiple the judiciary to the executive. Clark policy. The Government was elected to set layers of consideration replied to Dame Sian’s position by stating sentencing policy, judges are appointed to she should ‘stick to the bench’. Further to apply it’. Even though Dame Sian’s speech that bicameralism this Clark appointed Cullen, ‘who had acknowledged that the elected politicians led the parliamentary charge against the must decide on this the head of the provides’. Chief Justice’, as attorney-general, thereby judiciary was again told to ‘stick to the charging a non-lawyer, finance minister bench’, even though constitutionally it is and deputy leader of the Labour Party within her role to discuss such matters, (among his other important political especially with her ‘extensive first hand New Zealand political landscape without roles) to become the ‘principal legal experience of criminal justice matters’ direct public involvement. Questions over advisor to the Government’ and ‘disregard (Geddis, 2009). judicial independence arose during the partisan advantage in exercising his duties’ Clark era when the government, clearly in recommending judicial appointments Strained conventions annoyed with the judiciary, overturned (see Stockley, 2006; NZ Herald, 2005). The new National-led government in its the Court of Appeal’s 2003 decision in short time in office has already tested many With Respect Parliamentarians, officials and judges too By Mark Prebble

With Respect is an important and students of politics, public law, public practical book about the people policy and public management. involved at the heart of government Mark Prebble is a Senior in New Zealand. It covers history, Associate at the Institute of Policy constitutional principles and the law, Studies. He was State Services but it is mostly about people and the Commissioner during 2004-2008. In roles they play. Recent events in New the course of his distinguished public Zealand are used to illustrate the key service career he was Chief Executive issues. The examples include court of the Department of Prime Minister cases, parliamentary inquiries and and Cabinet and Deputy Secretary to debates. Subjects range from the high the Treasury. drama of military deployments to the day-to-day business of parliamentary

expenses. Events are brought to An Institute of Policy Studies publication by Mark Prebble life with a combination of wisdom Publication April 2010 Format B5 paperback, pp 238 and wit, to give a clear picture of ISBN 978-1-877347-38-2 Price $35 (including P&P within New Zealand) Place your order by email, phone, fax or mail to how government really works. With Institute of Policy Studies, Victoria University of Wellington Respect is an invaluable resource for Email [email protected] Telephone +64 4 463 5307, Fax + 64 4 463 7413 PO Box 600, Wellington, New Zealand parliamentarians, public servants and An invoice will be issued with your order.

Page 48 – Policy Quarterly – Volume 6, Issue 4 – November 2010 constitutional conventions in asserting it wants’. Parliament would be relegated Guardians of the state the New Zealand practice of impressing to the inglorious role of being ‘a rubber Senior public servants have increasingly executive power over the other branches stamp that transforms the wishes of the had to deal with their advice competing for and offices of state. The legislature in government parties into law as quickly ministers’ attention with that of political the Westminster system has always been as possible’ (Geddis, 2008). The more advisers during the Clark–Key years.2 The open to dominance by the executive. deliberative democracy role of the House public service, as Colin James has argued, MMP has lessened this trend, but it has of Representatives hoped for under MMP has the ‘opportunity – I would say the duty not succeeded in completely evading this has not eventuated enough to stymie – to develop and keep in mind a longer political reality. In fact, the Key Cabinet is executive inclinations, as urgency has perspective on what constitutes the public almost like the FPP cabinets of old, since become a more frequent practice which interest’. However, National ministers, he there is only one party at the Cabinet table raises too few constitutional eyebrows. observes, like their Labour predecessors – the support party ministers sit outside Distinguished political and legal have taken on an influential phalanx of Cabinet – and has been acting like an FPP philosopher Professor Jeremy Waldron personal policy advisers, endowing them one. National’s November 2008 result recently argued that New Zealand’s with ‘mirror[ed] the certainty that had resulted unicameral Parliament is dangerously the quasi-public service status despite from elections under the FPP system’ ‘plaything of the executive’, lacking even being clearly political [they are often since ‘[f]or the first time under MMP it with its select committees ‘the multiple paid for by departments though seemed a coalition agreement would not layers of consideration that bicameralism answerable to the minister and not be necessary’ (Hayward, 2010, p.227). The provides’. Looking at our slender the chief executive] … Ministers are Clark ministry had already tested concepts institutional structures, Waldron confesses often frustrated by constitutional of ministerial and collective responsibility that he is ‘worried that New Zealand not niceties. They want things done. when Clark creatively allowed for an ‘agree only abandoned its second chamber, but Departments and agencies often fall to disagree’ concept to reign. However, abandoned also other safeguards in its this left, for example, a constitutionally legislative process’, leaving the country awkward situation and, especially for ‘with virtually none of the safeguards our international partners, the confusing that most working democracies take for Whether New Zealand spectacle of having a foreign minister granted’ (Waldron, 2008). The purity of (Winston Peters, the New Zealand First the executive largely remains. is a republic or realm, leader) vocally and publicly against critical Select committees were a New Zealand the necessity of checks aspects of foreign policy trade initiatives. innovation meant to provide a pragmatic Despite this, the foreign minister parliamentary check on the executive. and balances on the retained his authority over the ministry The appointment of the associate local that implements foreign policy and the government minister, John Carter, executive is critical. confidence of the Cabinet by representing in May 2009 to chair a special select the government overseas. In terms of the committee dealing with Auckland local coalition politics expected of MMP this government issues has been described as was pragmatic politics on the part of ‘unconscionable’ and an act that shows short of ministers’ hopes, for ideas Prime Minister Clark in accommodating the government ‘riding roughshod over and in execution. So ministers are Peters, but for the health of conventions parliamentary convention’, since it ‘draw[s] tempted to, and occasionally do, step and executive accountability it was a the executive too closely into Parliament’s over the boundary. (James, 2009b) further strain on responsible Westminster role of scrutinising how ministers spend constitutional practice. the money that Parliament votes for the Therefore, if the public service is not running of their portfolios’. Labour had guarding the guardians, who, asks James, Executive vs. legislature allowed comparable practices during its is? He states that although it should be After just a week in office the new term, and the Carter episode is a further the the governor-general this is actually government surprised many by using reminder ‘that the independence of select a nominal power, since the contemporary urgency to rush through five major committees is more a mirage than reality’ truth is that ‘in our constitution now the legislative enactments. The previous (Armstrong, 2009). And government Governor-General is the cabinet’s gopher’, administration had also used urgency. members of Parliament making up the which is a great concern when there is What this showed to one astute observer majority of the committee’s membership ‘a Prime Minister who is accumulating was that ‘National appears to be behaving is a further reminder of the danger of constitutional minuses’ (James, 2009a). no better. Its first week in control of select committees being facsimiles of the new Parliament indicates that it executive instruction as they were in the How to check the excesses of the executive? also intends treating this institution’s FPP days. What is the solution to all these lawmaking power as nothing more than a conspicuous exercises of executive power? convenient means of getting the outcomes Can they be remedied? Should they be

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 49 Executive Power: 60 Years On Has Anything Changed?

changed? Do we care? Yes, we should the potential constitutional calamities no review of inquiry, no select committee care, but the solutions, remedies and that can arise in rapid sequence. hearings’. Temple and others such as Green changes are not as easy to determine. Party co-leader Metiria Turei believe ‘an There is no constitutional crisis in New Republic? independent review of how MMP was Zealand, but we cannot be mollified by Will becoming a republic allow New working with full public consultation that tired cliché ‘if it ain’t broke, don’t fix Zealand the comfort of being immune would be better in the first instance than it’. Crises are not in the habit of providing from constitutional emergency? No. If spending millions on a referendum’. a detailed forward agenda. Small events the country were to change from the Indeed, rather than weighing in against can quickly spiral into the chasm of Realm to the Republic of New Zealand or for MMP, many feel jilted by having constitutional unrest. We need only look it is almost certain that it would remain the issue decided by Cabinet decree with to comparable constitutional monarchies a parliamentary-based democracy, which its ‘simplistic yes–no referendum’ which for constitutional crises such as what means most of the same issues would apply. does not give opportunity to examine occurred in the United Kingdom during Comparable systems that have similar the merits and demerits of the electoral the early part of the 20th century, when characteristics of multi-party politics, system and any alternatives (NZ Herald, the monarch was actively drawn into a non-executive heads of state, Cabinet and 2009b). Justice minister Simon Power parliamentary fracas; in Australia in 1975, parliamentary-based government which confirmed that a referendum will be held which witnessed ‘The Dismissal’ by Sir we could credibly emulate in becoming a in 2011 on MMP and that voters will be John Kerr of Gough Whitlam; and more republic are India, Ireland and Italy. Their asked two questions: ‘the first will ask recently in Canada in December 2008, vaunted republicanism has not prevented voters if they wish to change the voting when the governor-general controversially executive excess. system from MMP. The second will ask prorogued Parliament, thus anticipating Whether New Zealand is a republic what alternative voting system they would a vote of confidence that could have or realm, the necessity of checks and prefer from a list of options’. However, brought down the government. In our balances on the executive is critical. even the Cabinet papers released with own backyard Pacific pool, Fiji (as both a However, most countries, including this October 2009 announcement voice constitutional monarchy and a republic) our own, have the checks and balances; concern about the potential that ‘voters and Solomon Islands have demonstrated the problem is how aware we and will not know the alternative voting our representatives are of them. A systems they will have to choose from’ and greater awareness and appreciation of therefore could ‘have difficulty in making The British prime the responsibilities and duties of our an informed choice’ (Power, 2009). governor-general, prime minister, Cabinet minister, like ours, and individual branches of state, and of A new separation of powers exercises ‘authority our own as conscientious citizens would Such feelings illustrate the need and the do much to limit the excesses of executive importance of knowing and being involved in the name of the power. Too often there have been major with our constitution before undertaking constitutional changes and executive system change. Whatever your view on Monarch without the actions without comprehensive review the change itself, it should be elementary or participation. The principal political that comprehensive contemplation and people and their elected actors have, knowingly or not, abdicated participation be demonstrated before any representatives in their responsibility. If not abdicated, then action is taken. A greater emphasis on they have willingly colluded to abuse and understanding of the separation of their Parliament being constitutional safeguards by their actions powers is required, and that relies on the or inactions that have resulted in change executive admitting and supporting the consulted’, and when to our system with worrying ease. fact that it is just one of the branches of using these prerogative state. A ‘new separation of powers’ could Get rid of MMP? see a ‘constrained’ prime minister and powers ‘it is difficult The prime minister as part of a campaign Cabinet by granting independence and pledge promised a referendum on the influence to ‘other checking institutions’ for Parliament to electoral system. This is more than what and give a renewed impetus to providing scrutinise and challenge Sid Holland did with the change to constant attention to checks and balances unicameralism, or Fraser with the end of (Akerman, 2000). government’s actions’. the country quota. How can a new separation of However, there is still a fear that despite powers be realised in New Zealand? Our a referendum being held in conjunction constitutional infrastructure is somewhat with a general election there would be, bare so it would require an enhancement in Philip Temple’s understanding (NZ – though sometimes nothing more than Herald), ‘no consultation with the voters, a realisation – of the powers of existing

Page 50 – Policy Quarterly – Volume 6, Issue 4 – November 2010 institutions whose duty it is to check the outlined recommendations that would is subject to a pre-appointment executive and hold it accountable. restrict executive power to the benefit of hearing with the relevant select Parliament. The British prime minister, committee.3 An upper house? like ours, exercises ‘authority in the name Another recommendation is that the Parliament is the natural fulcrum and of the Monarch without the people and granting of honours has strictly limited forum of our system. I have argued their elected representatives in their political involvement. Indeed, an editorial elsewhere on the value an upper house Parliament being consulted’, and when by the New Zealand Herald which backed could have added to the New Zealand using these prerogative powers ‘it is the Key government’s decision to bring system (Kumarasingham, 2010). Even difficult for Parliament to scrutinise and an appointed upper house could use its challenge government’s actions’. Based on position, despite a weak veto power, to the recommendations in the green paper, highlight legislative or political questions here are some proposals for reform that The Council of State about government policy. could restrict executive power in our own could act like a Privy A legislative council could have Westminster. copied Britain’s approach and created an • The royal prerogative powers exercised Council, but without independent and effective appointments by the prime minister are put onto a commission to make recommendations statutory basis and brought under political executive on ‘non-party-political members’. The stronger parliamentary scrutiny domination, advising the commission could have the power to ‘vet and control (though this does not all recommendations to the House of propose changes to the governor- governor-general in the Lords’, including political appointments, general’s ‘constitutional or personal which would enhance the convention of prerogatives, although in some areas discharge of the office’s political parity in the upper house (House the Government proposes to change powers. of Lords Appointments Commission, the mechanism by which Ministers 2008). Recent scholarship in the United arrive at their recommendations Kingdom argues for the importance on the Monarch’s exercise of those of an appointed chamber as a critical powers’). source of ‘deliberative democracy’. • A convention is developed under back titular honours in March 2009 Rather than focusing on elections and which the government could deploy nonetheless advocated that: voting procedures to define democracy, armed forces without the approval of The whole system should be taken ‘deliberative democrats concentrate on the House of Representatives. out of politicians’ hands. The the processes by which opinion is formed • A prime minister requires the approval honours are awarded in the Queen’s and alternatives debated’: as such, the less of the House of Representatives before name and there seems no reason that politicised House of Lords has the power asking the governor-general for a her representative, the Governor- with its ‘scrutiny and accountability role’ dissolution. General, could not appoint a panel to force government ‘to defend in public its • A majority of members of Parliament to sift nominations and recommend actions and intentions’ by being effective can ask the speaker to recall the a list of worthy recipients. So long in ‘drawing media or activist attention to House, ‘including in cases where the as it was one function for which the an issue’. Therefore, the House of Lords Government itself has not sought a office did not have to act on ministers’ can ‘catalyse public debate and influence recall’. advice, the system would be relieved the nature of that broader democratic • The attorney-general is no longer a of suspicion that it might be used for discussion’ (Parkinson, 2007). At the very senior member of the government political rewards. (NZ Herald, 2009a) least an upper house in New Zealand and attends Cabinet only when legal would have added another level for issues are directly concerned. This legislation to go through, and would have could enhance public confidence and Greater role for the governor-general? potentially halted the fast-tracking of bills trust in the office of attorney-general This conveniently suggests another and other constitutionally questionable as the chief legal adviser to the Crown proposal: strengthen the role of the methods of enacting controversial policy and his/her role as guardian of the governor-general as our de facto head (Cooke, 1999, pp.140-1). public interest. of state to act more confidently as the • Greater transparency, more ‘guardian of the Constitution’. This would More power to Parliament? consultation and a greater role give the office that sits atop the entire In response to the rumblings over his for Parliament in major public system a greater check on the system. predecessor’s creative constitutionalism appointments that are carried out Brown’s green paper for Britain did not and executive power, Gordon Brown and by executive instruction. In addition, make direct proposals for changing the his lord chancellor, Jack Straw, published for certain appointments, where Queen’s personal and constitutional a green paper in July 2007. The paper appropriate, the government nominee prerogatives (reserve powers), instead

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 51 Executive Power: 60 Years On Has Anything Changed?

concentrating on those the government making other judgements concerning such No magic formula or constitutional exercised in her name. However, it is responsibilities as Crown appointments fantasy will make New Zealand into useful to reform (not remove) those and honours, could rely on a ‘Council of some democratic utopia. There can be no ancient prerogatives to strengthen a State’ to assist and add credence to the hope of some divine oracle announcing governor-general’s authority over them. his or her choices. This Council of State granite laws of constitutional perfection Sir Michael Hardie Boys has outlined the with a membership similar to the Irish to a Moses or Maui on Mount Sinai or five powers, ‘which need not be exercised Council of State4 could act as an ‘integrity Mount Ruapehu. We should, however, be in accordance with advice’, as being: branch’ (Akerman, 2000, pp.294-6) made ever mindful of the dangerous potential • to appoint a prime minister; up of the highest practitioners from the for executive excesses that have been • to dismiss a prime minister; three branches of state and chaired by the demonstrated since before the time of • to refuse to dissolve Parliament; governor-general (see Power, 2008). The Fraser and Holland, and certainly since, • to force a dissolution of Parliament; Council of State could act like a Privy due to ignorant or lazy observance and and Council, but without political executive understanding of the New Zealand • to refuse assent to legislation. (Hardie domination, advising the governor- constitution. We would do well to be Boys, 1997) general in the discharge of the office’s vigilant and prevent further misuse. These five powers are all, or at least powers. The Council of State would thus 1 [2003] 3 New Zealand Law Reports 643 can be if the situation is not clear, strengthen the governor-general by not 2 For a more thoroughgoing analysis of these issues see controversial and critical. However, a only providing expert advice, but also Boston and Halligan (2009). 3 These recommendations are taken directly from Secretary of governor-general in such situations where by removing through its existence and State for Justice (2007). 4 The Irish Council of State is composed of the prime minister, the decision is far from obvious or where mana a sense of submissiveness towards deputy prime minister, chief justice, president of the High he or she is unsure as to the validity the political executive. It would end the Court, presiding officers of the two houses of Parliament, attorney-general, any former president, prime minister or of the choice is compelled to make isolation a modern governor-general feels chief justice willing to serve and up to seven presidential decisions with minimal opportunity for when making major decisions to become nominees. consultation. The governor-general in a real guardian of the constitution. the exercise of the reserve powers, and in

References Constitution: 15 years past, 15 years forward’, New Zealand Centre Ackerman, B. (2000) ‘The new separation of powers’, Harvard Law for Public Law, Victoria University of Wellington, 26–27 August Review, 113 (3), pp.633-729 Kumarasingham, H. (2010) ‘What if the upper house had not been Armstrong, J. (2008) New Zealand Herald, 4 October abolished?’, in S. Levine (ed.), New Zealand as it Might Have Been Armstrong, J. (2009) Otago Daily Times, 23 May II, Wellington: Victoria University Press Boston, J. and J. Halligan (2009) ‘Public management and the new NZ Herald (2005) New Zealand Herald, 26 March political governance: reconciling political responsiveness and neutral NZ Herald (2009a,) New Zealand Herald, 10 March competence’, paper presented at the symposium in honour of Peter NZ Herald (2009b) New Zealand Herald, 8 September and 12 October Auconin, Halifax, Nova Scotia, Canada, 11–13 November O’Sullivan, F. (2005) New Zealand Herald, 29 March Cooke, R. (1999) ‘Unicameralism in New Zealand: some lessons’, Parkinson, J. (2007) ‘The House of Lords: a deliberative democratic Canterbury Law Review, 7, pp.233–45 defence’, Political Quarterly, 8 (3), pp.374–81 Geddis, A. (2008) Dominion Post, 19 December Power, J. (2008) ‘A discipline colonised by a policy community? Semi- Geddis, A. (2009) New Zealand Herald, 22 July presidentialism and Australian political science’, paper presented at Hardie Boys, M. (1997) Speech to public law class at College House, the School of Government, Victoria University of Wellington, 17 June Christchurch, 10 September, http://www.gov-gen.govt.nz, accessed 3 Power, S. (2009) ‘MMP referendum to be held at 2011 election’, http:// November 2008 www.beehive.govt.nz/release/mmp+referendum+be+held+2011+el Harris, B.V. (2006) ‘Constitutional change’, in R. Miller (ed.), New ection, accessed 20 October 2009 Zealand Government and Politics (4th edition), Melbourne: Oxford Secretary of State for Justice (2007) The Governance of Britain, University Press presented to Parliament by the Secretary of State for Justice and Hayward, M. (2010) ‘Leadership and the prime minister’, in R. Lord Chancellor by Command of Her Majesty, CM 7170, London: Miller (ed.), New Zealand Government and Politics (5th edition), Her Majesty’s Stationary Office, July 2007 Melbourne: Oxford University Press Stockley, A. (2006) ‘Judiciary & courts’, in R. Miller (ed.), New Zealand House of Lords Appointments Commission (2008) Annual Report Government and Politics (4th edition), Melbourne: Oxford University 2007/08, London: House of Lords Appointments Commission Press James, C. (2009a) ‘An impatient PM and the constitution’, Otago Daily Waldron, J. (2008) ‘Parliamentary recklessness: why we need to legislate Times, 2 June more carefully’, John Graham Lecture, Maxim Institute, October, James, C. (2009b) ‘Who guards the guardians?’, address to the Institute originally published in Real Issues, 312, July, pp.14-20 of Public Administration, 25 June Joseph, P.A. (2008) ‘MMP and the constitution: future constitutional challenges’, paper presented at the symposium ‘MMP and the

Page 52 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Clair Mills

Health, Employment and Recession The Impact of the Global Crisis on Health Inequities The recession has given rise to debate in the public health literature over the effect of such economic changes on population in New Zealand health (McLeod and Blakely, 2009; Horton, 2009; Bambra, 2010; Bartley and Ferrie, 2010). However, there has been less Introduction focus on its potential impact on health New Zealand entered a period of economic recession in early inequities (defined here as inequalities in health between population groups 2008, intensified by the global economic crisis of September that are preventable, can be considered unfair and that are amenable to policy 2008. Gross domestic product (GDP) fell consistently during intervention (Whitehead, 1991; World 2008,1 and that year saw the economy’s worst performance Health Organisation, 2008)). This article discusses the relationships between in over a decade (The Treasury, 2010a). Real per capita economic recession, determinants of GDP contracted through 2009 and, despite some market population health and health inequities. A conceptual framework is proposed to optimism in early 2010, economic indicators remain sluggish. explain why health inequities may increase in times of recession. The limited evidence Unemployment rates have risen and remain the highest seen for public policies and strategies that may since the last recession in 1997–98. The Treasury recently protect or promote equity in health is reviewed and, from this, priority areas for stated that ‘the current recovery is likely to remain muted intervention during recession outlined. relative to past recoveries’ (The Treasury, 2010b). Effects of recession on population health and inequities in health

Clair Mills is a public health medicine specialist currently working at Since the beginning of the 20th century Te Kupenga Hauora Mäori, University of Auckland. She has extensive mortality rates in developed countries have experience in international health, having worked at the field and consistently declined, with an oscillating headquarters level with Médecins sans Frontières, Save the Children (UK) pattern around that downward trend line. and the World Health Organisation. This trend appears resistant to even major

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 53 Health, Employment and Recession: The Impact of the Global Crisis on Health Inequities in New Zealand

Figure 1: Model – ‘basic causes’ of inequities in health (adapted from Williams, 1997)

Basic Causes Social Status Surface Causes Biological Health Status Processes Racism, Socio-economic Stress and Cardiovascular, Mental and economic and status, gender, psychosocial CNS, endocrine, physical health legal structures, ethnicity, age etc resources metabolic and biological/genetic Health practices immune Morbidity & make-up and medical care responses mortality shocks, such as recession or conflict. proportionately much better off (Ministry largely responsible for the impressive International evidence also suggests of Social Development, 2010). fall in mortality seen since the end of that economic recession is associated, In parallel, health inequalities the 19th century. The impact of modern somewhat counter-intuitively, with increased from 1984 to the mid-1990s: health care and technology, and changes short-term decreases in total population relative inequalities in child mortality in culture and in societal and personal mortality. The largest recession effect on by income group (Shaw et al., 2005) health behaviour, such as tobacco use or mortality appears to be a decrease in road increased, as did relative inequalities in the increased autonomy of women, are traffic deaths, with smaller reductions seen adult mortality. These were particularly the other theories proposed. All three in child mortality, cardiovascular deaths evident in low-income young men, in have likely contributed to mortality and cancer deaths (Tapia Granados, 2005; whom rates of suicide, and absolute and decline, with debate continuing over Gerdtham and Ruhm, 2006; Bezruchka, relative mortality inequities, increased the proportion and importance of each 2009; Stuckler et al., 2009). (Blakely et al., 2007; Blakely, Tobias over different time periods. What is well However, the differential distribution and Atkinson, 2008). Geographical and established is that population health of the impact of economic recession on ethnic inequalities also widened in the is significantly influenced by broader differing population groups is not as well period 1984–1996, and for Mäori men social determinants, rather than solely by studied. Effects have been shown to vary life expectancy stagnated (Pearce et genetics, personal behaviours or access for different age groups and diseases, by al., 2006; Blakely, et al., 2008). Overall, to medical care (Marmot and Wilkinson, sex, and by method of measurement of relative inequalities in mortality and life 2006; World Health Organisation, economic change (Brenner, 1983; Brenner, expectancy gaps between Mäori and non- 2008; Adler and Stewart, 2010). But 1987; Edwards, 2008; Stuckler et al., 2009). Mäori widened in the mid-1980s–1990s, in although these mortality declines and Importantly, from an equity perspective, a parallel with trends in social inequalities; ‘determinants of health’ models may net positive effect of economic recession these were most noticeable in the period explain how improvements in population on life expectancy could occur despite 1991–94, and in men (Tobias et al., 2009). health have occurred, they generally fail to some groups being negatively affected. make explicit the key drivers of inequities Evidence from New Zealand research How does economic recession affect in health: that is, what has created, and also suggests that if past trends and population health and equity? maintains, inequities between socio- policy responses to economic recession A conceptual framework or theory must economic and ethnic groups. are replicated, relative and in some cases be able to satisfactorily explain the long- Williams (1997) identifies these drivers absolute, inequities in health have the term decline in mortality; the relative as the ‘basic causes’: those factors that potential to increase during this current (and sometimes absolute) inequalities require change to fundamentally create economic downturn, despite ongoing in mortality between socio-economic changes in population health outcomes, decline in overall mortality (Pearce et al., and ethnic groups, which have largely and thus address inequities (Figure 1). 2006; Blakely et al., 2007; Blakely, Tobias persisted or even increased over time; and In this conceptual model, ‘surface’ and Atkinson, 2008; Tobias et al., 2009). the effects of economic recession on both causes are related to the outcome, but During the period of economic recession population heath and inequities. altering these factors alone does not and major economic reforms in New Three dominant theories for the produce corresponding changes in the Zealand from 1984 to the mid-1990s, consistent reduction in mortality are outcome (i.e. health inequalities persist). unemployment became a structural postulated in the literature (Murray and As long as the ‘basic’ causal forces driving feature of the economy, median income Chen, 1993). McKeown (1976) argued inequities are in operation, the inequitable levels declined, and income inequality that declining trends in mortality distribution of socio-economic factors increased dramatically. Even by 2009, preceded major medical advances, such as income, employment and the incomes of the bottom 30% of the and that economic growth, resulting education will remain, and alteration population were on average only a little in improved incomes and standards of surface factors alone will give rise to better in real terms than those of their of living, improved housing, sanitary new intervening mechanisms to maintain counterparts two decades earlier in 1988, engineering and nutritional status (i.e. the same outcome (Williams, 1997). The while the upper income quintile was the ‘social’ determinants of health), were persistence of socio-economic and ethnic

Page 54 – Policy Quarterly – Volume 6, Issue 4 – November 2010 Table 1: Unemployment trends in New Zealand 1992–2009 in the United Kingdom, especially those who had illness, never regained the em- Population Group 1992(i) 1998 (ii) June 2008 December 2009 June 2010 ployment rates seen before the 1990s re- Unemployment 10.9% 7.1% (iii) 3.9% 7.3% 6.8% cession (Bartley and Owen, 1996), and rate (total) a similar pattern has been seen in New Youth (15-24 n.a. 17.4% 15.8% 26.5% (15- 24.7% (15- Zealand, with rises in the rates of long- years) 19yrs) 19yrs) term unemployed, sickness and invalid 12.2% (20- 13.7% (20- beneficiaries. Secure employment -in 24yrs) 25yrs) creases the likelihood of recovery from Päkehä 8.1% 5.5% 2.8% 4.6% 4.4% limiting illness, and deterioration in job Mäori (iv) 26.1% 18.3% 6.3% 14.8% 14.3% security may be an important factor in Pacific (iv) 28.8% 16.4% 6.7% 14.0% 14.1% the increasing prevalence of limiting ill- ness in the community (Bartley and Fer- Total Unemployed 100,000+ 129,000 87,500 168,000 159,000 rie, 2010). Total “Jobless” n.a. 208,300 170,500 275,900 255,700 Unemployment also has significant

Notes: Data from Statistics NZ Household Labour Force surveys or Department of Labour unless otherwise stated. acute impacts on health, particularly (i) The peak period of unemployment during the 1980-1990s recessions. (ii) The last economic recession in New Zealand was in 1998-1999 poorer mental health status and (iii) Statistics That Matter: Employment and Unemployment in NZ May 1998 See: http://www.jobsletter.org.nz/stt/stathome078. parasuicide (Platt, 1984; Bartley and htm#age (iv) Ethnicity collection methods have changed since September 2008 so direct comparisons over time from published data are Owen, 1996; Morrell, et al, 1998; Keefe et not possible. “Total response” data are presented for Mäori for 2009 & 2010. See: http://www.stats.govt.nz/browse_for_stats/ al., 2002; Blakely et al., 2003; Gunnell et work_income_and_spending/Employment/HouseholdLabourForceSurvey_HOTPDec09qtr/Technical%20Notes.aspx al, 2009; Stuckler et al., 2009). Those with inequalities in health during this past the mid-1980s to 1996, there has been mental illness are at greater risk of losing century, despite the overall mortality some narrowing since 1996–99, in parallel jobs, but even where there is no history decline, changes in the major causes of with increasing median income levels and of serious mental illness, longitudinal death and in their underlying risk factors, lessening income inequalities from 2001 studies show a 70% greater suicide risk is consistent with this analysis (Krieger, to 2007 (Ministry of Social Development, and evidence for a causal influence 2000). 2010, p.65). of unemployment on depression and When economic recession occurs, As Williams’ model predicts, the suicidal thinking (Jin et al., 1995; Mathers Williams’ model predicts that although impact of economic recession on two and Schofield, 1998; Lundin et al., 2010). there may be a range of factors contrib- key determinants of health, employment New Zealand already has the highest uting to ongoing overall population mor- status and income, is not equally youth suicide rate in the OECD and tality decline, the power and structural distributed across population groups in Mäori rates of youth suicide remain 1.5 factors in society that determine access New Zealand (McLeod and Blakely, 2009). times higher than non-Mäori (Te Röpü to these socio-economic and ‘surface’ The effect of unemployment on health Rangahau Hauora a Eru Pömare, 2007). elements (e.g. income, employment, ac- and health inequities will be used here Increasing unemployment rates in young cess to health care) are not random, and to illustrate further Williams’ model, and adults, particularly given their unequal will continue to operate differentially. It propose potential policy interventions for distribution by ethnicity and region, is thus highly plausible that there will be reducing inequity. should therefore be a grave concern, not differential health impacts of economic Unemployment increased steadily least for mental health equity. recession. This may then result in an in- over 2008–09, peaked in December 2009 Reduction in income associated with crease in relative and/or absolute inequi- at 7.3% (a ten-year high) and remains increased unemployment is likely to be ties in health, despite overall reductions elevated (Statistics New Zealand, 2010). another key mediator of the effect of in mortality. Unemployment is highly differentiated economic recession on health (McLeod How might this play out in the New by age, ethnicity and place. Youth (15–24 and Blakely, 2009). Income is a marker Zealand context? As demonstrated above, years), Mäori, Pacific people and those of tangible material resources, and may health outcomes in New Zealand closely living outside major urban centres have indicate limited access to basic needs like mirror socio-economic and ethnic the highest rates and are most affected adequate housing and nutrition. Recent inequalities in income, employment (see Table 1). As in previous recessions, adjustments to social benefit levels have and other social determinants of health. increased unemployment is expected to not aligned with increases in the net There are significant Mäori: non-Mäori be prolonged, well beyond the return of average wage (Work and Income, 2010), inequities in a range of child and youth positive GDP growth. and as increasing numbers of households illness and injury outcomes (Craig et Increasing unemployment is associ- rely on unemployment benefits, this will al., 2007). Ethnic and socio-economic ated with a wide range of adverse social likely contribute to increased numbers of inequities in most major causes of adult outcomes, particularly when prolonged households on lower incomes, as well as morbidity and mortality persist; after (Welfare Working Group, 2010). Low resulting in greater income inequality. generally widening in relative terms from socio-economic status and unskilled men

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 55 Health, Employment and Recession: The Impact of the Global Crisis on Health Inequities in New Zealand

In addition, changes in individual Table 2: Strategies to protect and promote equity in health and societal behaviour such as changes Level of intervention Potential interventions to protect/promote equity in tobacco and alcohol use or decreased in health during recession access to health care are thought to be ‘Basic causes’ Macroeconomic policy: balance focus on growth with equity concerns: likely mediators of the effect of recession • Monitor monetary policy for employment and equity effects. on health (Tapia Granados, 2005; Stuckler • Progressive taxation policy to address income thresholds; extend et al., 2009). Tobacco and alcohol use ‘Working for Families’ approach to reduce wage-benefit gap and is already highly patterned by socio- proportion of families/children living in poverty. economic status and ethnicity in New • Crown to meet Treaty of Waitangi obligations, and promote Mäori Zealand. Reforms to primary care have economic development and educational achievement, especially in regions of high unemployment. increased access over the last decade, but • Enhance economic and legal rights of workers to ensure adequate job reversal due to restrained health sector security. funding, increased fees or cuts in services Social status A comprehensive employment strategy with an equity focus, including: would have a deleterious impact on those • Alternatives to early entry to the job market (e.g. increased quality already worst off, as was shown in the apprenticeships and tertiary places). Lift current caps on tertiary 1980s–1990s (Malcolm, 1996). funding and enhance skills-based, industry-based training. Williams’ model predicts that, given • Maintain an adequate minimum wage and social benefit levels in line the unequal impact of unemployment with wages; develop active labour market policies including support for and related reduction in household those choosing to move off non-unemployment benefits (e.g. childcare, incomes outlined above, already existing training and removing other barriers to paid work) (Martin, 2000). inequities in health may increase – at • Address the ‘demand’ side: promotion of job creation in regions most least in relative terms – unless the ‘basic’ affected by unemployment, for example through evidence-based structural causes are also addressed. housing interventions (environmental and rent/income/loan assistance interventions, construction of social housing, improvements to existing housing, etc); small business support; relevant public works. Implications for policy • Given the importance of the early childhood years in establishing Addressing health inequities remains social and health inequities (Poulton et al., 2002), increase funding a ‘wicked problem’ in public policy for evidence-based quality parenting and early childhood interventions, (Petticrew et al., 2009); that is, a complex especially in areas of high unemployment/deprivation. challenge unsuited to evaluation by ‘Surface causes’ • Implement and monitor strategies to increase access to and utilisation randomised trials, and one that requires of primary health care in relation to need (e.g. free primary health care different sectors to work together, often access for children, including after-hours care). with inadequate evidence for how positive • Enhance mental health, domestic violence and drug and alcohol outcomes can be best achieved. Despite services in areas of high unemployment. considerable national and international • Avoid stigmatisation of unemployed. research describing and analysing health Biological processes • Monitor and improve equity of access to, and utilisation of, quality inequalities over the last three decades, treatment, e.g. for hypertension, diabetes, heart disease, cancers, our understanding of the potential especially in areas of high unemployment and deprivation. pathways between socio-economic determinants and their distribution, their those, few were well evaluated. Perhaps and structural improvements, have intersection with ethnicity, and health unsurprisingly given the methodological the potential to positively impact on status remains incomplete. There are difficulties, there were no systematic health and equity (Anderson et al., 2003; also many fewer studies that examine reviews found of macroeconomic, cultural Bambra et al., 2009). The significant the equity effects of public policies than or environmental interventions and their evidence base established in New Zealand studies describing inequity. Although effect on health equity, and a paucity of on housing and health supports this descriptive studies frequently draw evidence on educational interventions. (Baker et al., 2000; Howden-Chapman et associations between policy interventions This review found that interventions al., 2007; Howden-Chapman et al., 2008). and outcomes, there is a lack of strong relating to health services, education and Interventions in the work environment, evidence that implementing such an transport policies were inconclusive in such as increased employee participation intervention will be effective in reducing terms of their impact on health inequities in organisational and task changes, also social inequities in health, and even less (Bambra et al., 2009). showed improved safety and enhanced specifically during economic recession. However, there was consistent self-reported mental and physical health A recent ‘umbrella’2 review found that international evidence for positive (Bambra et al., 2009). Given the limits of relatively few interventions beyond those effects on health equity in some areas of this current evidence, further strategies aimed at modifying lifestyle factors, such social policy, which may equally apply to protect and promote equity in health as smoking, had been developed with during recessionary periods. Housing during recession are proposed below, the aim of reducing inequalities, and of interventions, such as rental assistance operating at the different intervention

Page 56 – Policy Quarterly – Volume 6, Issue 4 – November 2010 levels conceptualised in Williams’ model significant negative associations of unemployment). These could include (see Table 2). unemployment with health outcomes. social housing and infrastructure The rationale for these interventions is There is evidence that these types improvements, which would stimulate primarily based on evidence from policy of interventions, although not a the construction sector and which have interventions in previous recessions panacea, can be partially successful been shown to have positive effects on and well-established associations, but in addressing both structural and health inequity, as well as other social monitoring and evaluation is needed cyclical unemployment (Martin, outcomes. New Zealand has very low to assess their impact on inequities in 2000; Betcherman et al., 2004; USAID, levels of social housing by OECD practice, as well as for possible unintended 2009). Evidence from the 1980–90s standards, with high entry costs. consequences. Additionally, addressing in Finland and New Zealand – the Strategies to stimulate the housing inequities at the ‘basic causes’ level often former experiencing greater increases market and increase access to housing, requires opposing the most entrenched, in unemployment – suggests that such as extending the ‘Welcome Home politically contentious and structurally higher social spending in Finland on Loan’ scheme (including review of embedded factors in our society (World active labour market interventions the maximum loan amount) and Health Organisation, 2008; Navarro, was associated with lower male suicide low-interest government-backed 2009) – a shift in paradigm not without rates (Howden-Chapman et al., ‘first home’ loans, could also be challenge. 2005). Stuckler et al.’s analysis (2009) implemented. Other public works Unemployment is a major contributor across 26 European Union countries and small business support schemes to reduced incomes, and is itself related supports this finding, as do other should also be considered, despite to significant adverse social and health studies (Gunnell et al., 2009). In the less positive evidence for their impact, outcomes. A major strategic focus on United Kingdom, temporary youth balanced against the immediate and unemployment is needed, underpinned unemployment schemes in the 1980s future costs of non-intervention. by an equity perspective. Priorities that were almost as detrimental to mental • Support for the unemployed and have the potential to promote equity in health as unemployment, and quality those partially employed includes health during this period of economic apprenticeships and tertiary education maintaining adequate household stagnation are identified below: opportunities provided much better incomes, especially social benefit • Active intervention in the labour mid-term outcomes (Dorling, 2009). levels. The ‘Working for Families’ market is important, given the • Interventions addressing the ‘demand’ package has had a significant positive consistent evidence for the side (especially in regions of high impact on low-income working Ethnicity, Identity and Public Policy Critical Perspectives on Multiculturalism by David Bromell Now available online To download a full copy or arising from ethno-cultural an individual chapter go to diversity in New Zealand. He http://ips.ac.nz/publications/ concludes that this is a time to publications/show/247 refine – and complicate – our In Ethnicity, Identity and thinking, and that the task of

Public Policy, David Bromell developing normative theory in Published by the Institute of Policy evaluates theory developed in relation to diversity and public Studies in November 2008 ISBN 978-1-877347-26-9 other national contexts against life is still a work in progress. For further information or to purchase a hard copy go to http://ips.ac.nz/ challenges for public policy publications/publications/show/247

Policy Quarterly – Volume 6, Issue 4 – November 2010 – Page 57 Health, Employment and Recession: The Impact of the Global Crisis on Health Inequities in New Zealand

household incomes, and a similar health care to Mäori, Pacific, children further exacerbate inequity in health level of support should be extended and youth. outcomes. to other low-income households. Without changes in the ‘determinants Tax policy and social benefit changes Conclusion of inequity’ – the structural features need to be critically analysed and International evidence indicates that of society which drive the unequal monitored not only for their potential economic recessions are associated with distribution of determinants of health – for economic stimulus or reduction short-term decreases in total population Williams predicts that health inequities in government spending, but for mortality. However, evidence from the will persist or widen, even while total their effect on low-income families 1980s–90s recessions in New Zealand mortality falls. There is little to suggest and income inequality. Increases in and from international studies suggests that a return to positive GDP growth income inequality have been strongly that, conversely, inequities in health alone – especially with current high levels associated with greater inequities in may increase. Williams’ model may of unemployment – will reduce relative health and poorer total population explain this conundrum: the negative health inequities. The reversal during the health outcomes (Wilkinson and effects of economic recession, especially post-1996 period of the trend in increasing Pickett, 2009; Kondo et al., 2009). on key determinants of health such health inequities indicates that health • Finally, the potential importance of as employment and income, impact outcomes are very sensitive markers of the health sector in alleviating and differentially on population groups, and social inequality, and remarkably rapid, addressing health inequities during predominantly on those already less positive effects on health inequities recession must be recognised (Tobias privileged. can be achieved. However, this positive and Yeh, 2009). Population health There is some evidence for trend will be in part dependent on the interventions and clinical health macroeconomic and social policy economic and social policy responses to services should be strengthened to interventions which can moderate recession. A concerted focus on equity respond adequately to increased unemployment and its consequences, and appropriate policy interventions is unemployment and its consequences. and potentially reduce health inequalities needed, alongside a return to economic Mental health, youth health, and drug even during periods of economic growth. and alcohol services are already the recession. These include active labour 1 Real GDP per capita fell from the last quarter of 2008, and ‘poor cousins’ of the health sector but market strategies, housing policies and the annual average percentage change remains negative. need to be prioritised and reinforced maintaining adequate household incomes. 2 ‘Umbrella’ reviews identify, appraise and synthesise systematic review evidence on a given topic. to address the current and future The health sector has an important role impacts of unemployment. Funding in monitoring equity in health, to ensure constraints in the health sector it remains a priority and is not rapidly should not reduce quality or access to undermined during recession. It is also services, particularly those delivering critical to address inequities in access to health services so that these do not

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