Keith Johnson: Wellington City Council Debt: Big Ideas and the Gamble for Growth

UNWELCOME FACTS

New Zealand as a whole is very similar in terms of both population and GDP to the US State of Kentucky. As far as the Wellington Region is concerned, the metro areas of Minneapolis, Minnesota and Tulsa, Oklahoma are reasonable comparators. Getting down to Wellington City itself, you can pair it off with Tacoma, Washington State or Oxnard, California.

As for comparisons with the UK, New Zealand is similar in terms of its population to the East Midlands [Derbyshire, Nottinghamshire, Rutland, Leicestershire, and parts of Lincolnshire]. The population of Greater Wellington is roughly equivalent to that of Leicester plus Loughborough and its immediate hinterland. The population of Wellington City is similar in size to that of the city of Northampton.

I haven’t gone to the trouble of working out the corresponding UK:NZ GDP figures but I’ll bet you a dollar to a button that they aren’t that far off equality.

New Zealand is also incredibly remote from the centres of gravity of world population and economic activity as my map illustrates [most remote areas in terms of population reddened]. The only country that is demonstrably more remote is Chile but this has a population that is four times larger than that of NZ.

Justin Lester, Jo Coughlan, Celia Wade-Brown and Kevin Lavery – please note.

 

We do not have the population or the location to justify Big Ideas with the hope that domestic and international demand will materialize.
I was not at all surprised then to learn that when Mike Houlihan was parachuted into Wellington to head up our national museum Te Papa, he made an absolute pig’s ear of the job. Having been Chief Executive of National Museums and Galleries of Northern Ireland, Director General of the National Museum of Wales, and Keeper of the Department of Permanent Exhibitions and Head of Exhibitions Research at the Imperial War Museum in London, he was clearly completely disorientated when he dropped in.

Last year Te Papa made a loss of $8 million loss necessitating severe cost cutting. This resulted from the gambles made by Houlihan in Thinking Big by organizing signature events like the Aztecs and Colour and Light Exhibitions. Both were disasters in terms of visitor numbers and revenue earned.

The Aztecs: Conquest & Glory Exhibition was expected to attract 115,000 people, but it drew just under 40,000. It was pegged to make a $478,000 profit, but ended up losing $403,000.

See: http://www.stuff.co.nz/business/industries/10184622/Te-Papa-looks-for-turnaround

Houlihan’s results are in a nutshell what portends if we allow another UK hang glider Kevin Lavery to swoop in to pick up a big salary, write fine words in coloured smoke across the sky, and then swan off.

 

Saying these things does not mean that you don’t love Wellington. In fact I firmly believe that given low rates, excellent infrastructure and proactive land development to reduce housing costs, the city will sell itself and prosper within its own capabilities at its own pace.

 

THE GAMBLE FOR GROWTH

However, as reported in the Dominion Post by Hank Schouten [15/09/2014] WCC CEO Kevin Lavery believes ‘It’s time to reinvent the city’ [whatever that means].

He questions New Zealand’s focus on agriculture and tourism and offers the platitude that cities – more than countries – attract talented people, investors, people and visitors with New Zealand’s future depending on strong successful cities:
“We’ve got loads of opportunities in Wellington and we’ve just got to build on them.”

His wish list includes a new film museum, a new convention centre, the extension of the airport runway, the provision of a science park and possibly the development of a Marine Centre.

Of course, we don’t know the full and final costs of these projects, nor do we know the proportions of costs that will have to be picked up by WCC Ratepayers.

Anyhow, I’ll hazard a few guesstimates for the WCC contributions:

  • Wellington Airport Runway Extension $100 to $220 million
  • Lyall Bay Marine Centre $7 million – $15 million
  • Film Museum $10 million
  • Hilton Conference Centre $10 – $35 million [over 10 years]
  • Science Park $150 million? [Phase 1 of the Hong Kong Science Park cost # $2 billion].

Add also the expenditure backlog:

  • Leaky Buildings Liability $53.2 – $90 million
  • Water Reticulation Earthquake Preparedness $40 million plus
  • Earthquake Strengthening Town Hall $60 million.

And you easily have the $400 million or so extra spending that I talked about in a previous article which will be loaded onto ratepayers [predominantly residential ratepayers] over the medium term in the form of higher rates or increased debt:

http://kjohnsonnz.blogspot.co.nz/2014/07/wellington-city-council-debt-overall.html

This is a lot of reinvention.

IS THIS LIKELY TO PRODUCE VALUE FOR MONEY?

Asking: ‘Would you support higher rates to fund ‘Big Ideas’ in Wellington?’ Wellington City Council has polled ratepayers online on choosing one of the following options:

  • Yes – this city needs growth desperately. Do it now.
  • Yes, if it funds the airport runway extension.
  • Probably – but I want a real say in the projects.
  • At a push – we need growth but not white elephants.
  • No – big ideas = big waste of money.
  • I need far more info before I decide.

Well I’ll put my money on the last option – and so should you.
A lot could be said about each project – that is if we had objectively determined facts and figures.

But let’s start with the simple proposition that there is no obvious rationale for WCC funding any of the Big Ideas when they can be funded as commercial investments by the private sector.

In this regard, one can immediately note that a joint venture has been formed between Willis Bond & Co and the Whitireia and WelTec polytechnics to develop a new $80 million performing arts and creative technology centre on the corner of Cuba Street and Dixon Street. As shortages of high tech / creative staff are a recurrent complaint by entrepreneurs in Wellington, the goal of the project is excellent.

It aims for 1,000 fulltime students [some of whom may be from overseas] providing course in journalism, creative writing, digital media production and animation, Maori arts, event management and photography, with an expected 15 percent growth each year over five years.

See: http://www.stuff.co.nz/dominion-post/business/commercial-property/10142093/80m-plan-for-Cuba-campus

WCC has not been approached for a contribution.

Contrast this with the proposed ‘Hilton’ Convention Centre on the vacant site in Cable Street opposite Te Papa. This is expected to cost a similar amount [$100 million]. It would be able to host up to 1200 conference delegates and banqueting for 1,400 people.

The Hilton Group apparently expects the Council to underwrite the leasing of the Centre to the tune of $3.5m a year which rises to $4.6m a year when rates and insurance are added. Hilton estimates that there will be a net burden of $2m per year to WCC when revenues are factored in ‘although details of how this arrangement would work have not been made public.’

Clearly WCC is being asked to carry the risk and the subvention needed could be much greater. What’s more the Tourism Industry Association has been adamant that household ratepayers – instead of central city businesses – should bear the brunt of the City’s contribution from rates. See:

http://www.stuff.co.nz/dominion-post/10393136/Centre-should-be-funded-by-rates-TIA

Why?

Moving from the financing to the economics of the Big Idea projects, I can only say that I am deeply dissatisfied with such Feasibility Studies as have been produced by organizations like Ernst & Young and BERL.

Briefly:

  • They are based on optimistic forecasts to which no probabilities are attached
  • They use turnover rather than gross margin [revenue minus operating costs] or EVA [revenue minus operating costs and the cost of servicing capital valued at opportunity cost] as the metric for the ‘benefits’ accruing to the economy of the city from the activities of affected tourism, recreation and hospitality businesses
  • They include secondary benefit / multiplier effects which are viewed with great suspicion by most serious project economists
  • They are entirely focussed on Wellington and take no account of offsetting losses in competing cities in New Zealand [basically a robbing Peter to pay Paul approach]
  • They take no account of the impact of the projects on non-beneficiary enterprises in terms of demand diversion, and price and shortage effects with respect to factors of production.

I have previously discussed these issues at:

http://kjohnsonnz.blogspot.co.nz/2012/04/gift-horses-and-twenty-to-one-dead.html

noting that in economic terms, the net value of any apparently ‘triggered’ rise in the value of production downstream may only be legitimately attributed to a change in upstream economic activity if:

  • part or all of the induced activity in downstream activities would not have taken place under other circumstances
  • the activities in question do not result in a reduction in the level of economic activity elsewhere in the economy
  • the increase in downstream investment uses resources that would otherwise have been partly or totally unemployed.

Am I suggesting that the work of BERL and Ernst & Young is more than questionable? You could very well say that but I could not possibly comment. More revolving doors in the Mates’ Rates Economy?

Anyhow, as the Art Mistress said to the Gardener: ‘That’s me – I’m done’.

Only to add that, as the current demise of Birmingham in the UK illustrates, the implications of overstretch can be very serious – especially if one also has to deal with an unsympathetic Central Government.

http://www.theguardian.com/society/2013/apr/23/albert-bore-birmngham-city-council

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