The Forgotten Impact Kaikoura Earthquake: Wellington Still Paying the Price May 2017 the Forgotten Impact | Kaikoura Earthquake: Wellington Still Paying the Price

The forgotten impact Kaikoura earthquake: Wellington still paying the price May 2017 The forgotten impact | Kaikoura earthquake: Wellington still paying the price

Kaikoura earthquake: Wellington still paying the price

The Kaikoura earthquake has had a devastating and on-going effect on Kaikoura. The earthquake also affected Wellington, but (thankfully) at greatly reduced force.

However, as we will highlight, even this We estimate that there is a $1.25 million We will look more closely at the types smaller magnitude effect has had a lasting hit on regional GDP for every week of inefficiencies that contribute to this impact on many Wellingtonian’s way of Wellingtonians are working away from on-going impact in Wellington – in life. This reality prompts questions: how their primary office space - re-housed particular the inefficiencies for firms resilient is Wellington? What might have somewhere across the city. For every week and the approach to building repairs. happened if the Kaikoura earthquake that passes, the economic impact grows. We will also illustrate the economic occurred even slightly closer to Wellington? 25 weeks have now passed, so the total impact of a similar magnitude event And finally, what should be our response as impact of this effect alone is at least to the Kaikoura earthquake occurring a country to this event? $20 - $30 million. Even so, our estimate in Wellington, before concluding on is likely to under-state the productivity the possible opportunities that the In the immediate aftermath of the Kaikoura impact on GDP, as there are many Kaikoura event affords us as a country. earthquake, building owners and engineers businesses who have understandably had the run of Wellington’s CBD - checking chosen not to publicise the disruption to damage to buildings, inspecting road, rail, their operations. and port infrastructure. Employees were told to stay away from their places of work. It also does not take into account the impact Ferry sailings were cancelled, delaying on retailers let alone the impact of a port freight movements. Schools were closed, that continues to operate at substantially and NCEA exams cancelled. reduced capacity. And while many building owners have insurance, there must also be For many living and working in Wellington, a cost to those building owners who are still life largely returned to normality within working through next steps as they face a matter of days. Schools re-opened, up to the reality of substantially lowered the CBD was declared safe to re-enter. New Building Standard (NBS) assessments. However, there has been a significant over- In short, the impact of the earthquake on hang from the events of November 2016. Wellington is not immaterial.

2 The forgotten impact | Kaikoura earthquake: Wellington still paying the price

How resilient is Wellington? What might have happened if the Kaikoura earthquake occurred even slightly closer to Wellington?

3 The forgotten impact | Kaikoura earthquake: Wellington still paying the price

The impact on Wellington firms re-entry period.1 Delays to engineering Thousands of workers in Wellington have assessments has prolonged the period of been displaced as a result of their buildings time that workers have been displaced, being either declared unsafe or requiring impacting the productive capacity of their remedial work. The resulting drop in loss firms. Many workers remain displaced of firm efficiency has been felt on several some six months on. levels. A further more opaque drag on firm 01. In the immediate aftermath, businesses efficiency has been the deferment of are unable to return to their offices and projects and initiatives, which, prior to in some cases, unable to work at all. November’s events, were part of an During the scramble by businesses to organisation’s work programme. These secure alternative accommodation for were, in some cases indefinitely, deferred their workforce and establishing the as focus was (understandably) diverted necessary support infrastructure, such to core day-to-day operations. The as desks, servers, etc., working hours Wellington Airport runway extension are lost and output declines. hearings saw delays until mid-year due 02. The alternative accommodation to a shortage of court space caused by available for displaced businesses earthquake hearings.2 Arguably, it is these tends to be of a lower standard – not non-core projects that deliver the greater reflecting the modern collaborative productivity gains relative to day-to-day layouts found in more modern operations, as organisations explore new buildings. As workers are adapting to opportunities and ways of working. a new working environment, which may not be equipped with the same "We also need to learn the equipment as in their previous location, worker productivity takes a hit and lesson of the earthquake businesses are not performing at pre- and make sure we make quake levels. the city as resilient for 03. Most significantly, the disparate working environment that many of the future. This will mean these organisations find themselves in changes to the council creates productivity challenges, where “Some people will find if workers that used to be co-located are financials and a change of they're working from home now spread across multiple locations. priorities." With increased communication and that it might be a bit more transport costs, in both time and Justin Lester money, inter-firm efficiency is reduced convenient but overall, I and less collaboration reduces the With Wellington being a government think our members would quantity, and potentially quality, of any town, the deferment of ministry and output. prefer to be working in a departmental initiatives is likely to have had stable place. It's going to Another efficiency impact for Wellington a significant ripple effect on government firms has been the mismatch of labour partners and suppliers. Wellingtons affect their productivity, in the months following November 14. Mayor Justin Lester began his assignment there's no doubt about A prime example of this is that while “ready to roll up his sleeves and get stuck engineers were stretched beyond capacity, into issues like housing and transport.”3 that." businesses had to wait for their buildings With the unexpected quake taking to be inspected. Due to a shortage of priority over these issues, earthquake Glenn Barclay engineers, 18 buildings in Wellington resilience became the immediate focus PSA national secretary were given extensions on their invasive for local and central government. testing deadline, leading to a lengthier

1 http://www.stuff.co.nz/national/nz-earthquake/89300037/owners-of-18-wellington-buildings-get-extensions-to-invasive-testing-deadline 2 http://www.stuff.co.nz/business/89207176/earthquake-delays-wellington-airport-runway-extension-until-mid-year 3 http://www.stuff.co.nz/dominion-post/news/88592332/earthquake-resilience-transport-and-housing-top-wellingtons-2017-agenda 4 The forgotten impact | Kaikoura earthquake: Wellington still paying the price

It goes without saying that a similar size earthquake occurring directly under Wellington city would have a catastrophic impact on Wellington and, as Wellington’s economy is second only to Auckland in size, the country more generally.

5 The forgotten impact | Kaikoura earthquake: Wellington still paying the price

The response was funding reprioritisation In our Deadly Heritage report, which was co- Our report also found that: and projects being pushed out. While one authored with NZ Initiative last year, can only speculate where funding was we found that: The main barrier to the lost, and what projects were pushed out, the transfer of money and time from new Respondents (owners of heritage remediation initiatives to repair and replacement is an process is the tremendous inefficient outcome faced by Wellington city. buildings) were unanimous in their opinion that cost of strengthening. This Inefficient approach to building repairs is exacerbated by limited As firms focused on restoring their pre- engineering assessments quake operations, insurance companies were markedly wide- access to capital from both were inundated with claim requests. The public and private sources Insurance Council of New Zealand stated ranging with an artificially that private insurers received business low number of so-called and the returns able to be claims valued at more than $900 million achieved after the process from the Kaikoura earthquake. The ‘safe-bet' low-NBS Wellington region has taken the brunt of assessments. We noted has been completed. business losses with two thirds (65%) of the total losses.4 that this may be due to These findings are likely to apply equally to conservatism among non-heritage buildings. In which case, ‘safe- It’s not clear what proportion of the bet’ NBS assessments and the uncertain approximately $600 million relates to engineers due to the costs necessary to lift NBS ratings to building repairs in Wellington. However, unprecedented level of acceptable levels may, in some cases, lead we do know that to date, 61 Molesworth building owners to elect for demolition over Street, Defence House, Reading Cinema scrutiny on the profession repairs and strengthening. carpark, and MSC Building have been after the experience in demolished or are planned to be, and If true, this is an inefficient outcome, as not question marks still hang over the fates Christchurch. only are buildings with remaining economic of a clutch of buildings including Statistics value being removed, but their demolition House and BNZ Harbour Quays. 5,6 impacts the surrounding environment far more than remediation (e.g. closed roads and near-by businesses). The Cook Islands High Commission has continued to sit empty and in limbo for months while decisions about the Revera House are being made, despite being declared as unaffected itself.7 Over the long run, this inefficiency is partially offset by the economic value of the build process and higher quality replacement.

The decision of whether to repair or replace a building can be especially difficult if the building has been given heritage status. The demolition process involves a much lengthier regulatory process, and regulation regarding like-for-like heritage replacement specifications often make repairs unnecessarily expensive. Our Deadly Heritage report found:

4 http://www.scoop.co.nz/stories/BU1702/S00017/kaikoura-earthquake-business-claims-reach-900-million.htm 5 http://www.radionz.co.nz/news/national/328094/revera-house-slated-for-destruction 6 http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11797820 7 http://www.stuff.co.nz/national/nz-earthquake/86810672/thursday-daily-update-on-wellingtons-quake-affected-and-damaged-buildings 6 The forgotten impact | Kaikoura earthquake: Wellington still paying the price

Where demolition is We calculated this estimate using a The first thing it tells us is that Wellington is computable general equilibrium (CGE) an important part of the national economy an available option to model. CGE models are a class of economic and even modest levels of disruption building owners (i.e. models that use actual economic data to have economic impacts that are nationally estimate how an economy might react significant. repair strategies are to changes in policy, technology or other uneconomical), that option external factors. We used data from the 22 It also tells us that the consequences of February 2011 Christchurch earthquake to such events are hard to predict, making is often unavailable for quantify the shock, which includes impacts it more important that we invest more (heritage) listed buildings. such as: systematically in resilience as a country. Our report, State of the State 2017, The regulatory process involved in the •• cost of damage estimates of around 2.5% discusses this in detail. demolition of a heritage building is a of the nation’s capital stock; particular concern for public safety. Fundamentally, it also underlines the As we recommended in Deadly Heritage, •• a reduction in employment of 9% in the importance of central government working central government clarification of two years following the earthquake; and hand in glove with local government. the NBS, leading to a more uniform/ Investment in resilience cannot be ad standardised application, should make •• the doubling of the overall cost of hoc and piecemeal. Too often central and for quicker decision-making by building dwelling insurance. local government appear to be pulling in owners and more efficient outcomes. opposite directions rather than jointly for Running sensitivity analysis on this Switching to a liability-based regime, which the benefit of New Zealanders. result allowed us to see the reduction in would ensure that the most important the economic costs if the shocks were strengthening works are completed the Nowhere is this more starkly demonstrated minimised due to an intervention, such fastest, and the worst-off buildings are than in Wellington as the capital. If as proactive resiliency efforts. We found made safe first, would reduce safety Wellington were to experience a major the relationship between the building concerns and prevent further disruption event, the impacts on central government damage, labour supply, and insurance caused to surrounding buildings. would be much more far-reaching than premiums versus economic costs were the inability to access computers currently linear. Therefore, Wellington’s regional GDP Economic Impact of a larger trapped inside Statistics House, or is estimated to benefit$260 million for earthquake in Wellington relocation of Defence staff from Thorndon every 1% reduction in these factors. The lasting economic impact created by to Trentham for a few weeks. the Kaikoura earthquake in Wellington is a This highlights the importance of improving wake-up call. But with adversity comes opportunity. resiliency in the highly earthquake- If Kaikoura really jolted us into action vulnerable capital city. Investments today It goes without saying that a similar size metaphorically as well as physically, then will see a stronger and better-prepared earthquake occurring directly under what form should those actions take? In city for the unfortunate occurrence of any Wellington city would have a catastrophic our view, these actions must comprise larger-scale event in Wellington. impact on Wellington and, as Wellington’s a combination of regulatory reform, economy is second only to Auckland in size, substantially closer working relationships We consider the above modelling is a the country more generally. between central and local government, and good starting point for further work that, investment in a range of measures to boost among other things, can help authorities To give a sense of the economic impact future resilience. better understand the inter-relationships, of such an event, we have modelled a dependencies, and trade-offs of extended shock similar in size to the Christchurch Utilities, such as Wellington’s port and disruptions across the regional and earthquake occurring in Wellington. water facilities are fragile, yet will be hugely national economy. important in delivering an emergency The results of this modelling show that response. Now is the time to plan and Possible Opportunities New Zealand’s GDP could be almost invest in strengthening Wellington’s vital Remember our first questions: how $29 billion lower between 2017 and 2030 lifelines – land, sea, and air. resilient is Wellington? What does the (a loss of 1.2 per cent over this period). The Kaikoura event tell us we need to do to vast majority of this impact is concentrated make it more resilient? in the Wellington region, with a $26 billion reduction in regional GDP over the same period (a loss of 10% over this period).8

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