Tuesday, August 15, 2017

Is investment attraction an economic distraction?

In Australia we invest a good deal of taxpayers money and public sector energy into what is known as “investment attraction.”  Designed to secure new economic opportunities for particular regions, investment attraction strategies frequently resort to a menu of features designed – it is hoped – to catch the attention of businesses looking for places to invest or expand or open new facilities.

All too often, these become cliches and are stretched to incredulity. Take this effort from the hapless South Australians (with my comments in parentheses):

“South Australia offers a range of cost advantages that no other state in Australia can match, improving your company’s bottom line. (So why are so many businesses there reportedly struggling?) … Private sector labour costs in South Australia are 10 per cent below the Australian average making our state a great place to expand your workforce. (With so many unemployed, you’d hope so) The Adelaide market continues to be one of the most cost-competitive CBD markets nationally when it comes to setting up business and leasing office space. (Because so much of it is vacant, and has been for a long time) South Australia has a range of office space and industrial land available in, or close to, the CBD at rates lower than other mainland Australian states. (They’re worth less for a reason) With a well-planned supply of affordable industrial land, linked to strategic infrastructure and transport corridors the cost of doing business here is highly competitive. (Until you try turn on a power point)”

“South Australia’s central location provides the ideal gateway into Australia and out to Asian markets and beyond through our modern air, sea and rail freight channels. (Central to what? The Southern Ocean?) Our international airport is only six kilometres from the CBD (so is Bogota’s, so what? New York’s JFK is around 25 klm from Manhattan, do they feel threatened by Adelaide because of this?) … Flights to Sydney and Melbourne also depart, on average, every 20 minutes during operating hours. (So you can escape at short notice?).”

Apologies to my South Australian friends for picking on them for this example, but the point is that any potential business looking at investment locations in Australia would likely find these heroic claims equally amusing. Being in denial is not a strategy. Propaganda is not a strategy.

South Australia has some very real, deep seated and widely publicised economic problems that stretch back for decades. Overcoming these cannot be easy. Denying they exist at all is far from achieving anything.

It’s worth noting that they – like many other regions trying to attract new investment - have resorted to the oldest investment attraction trick in the book: the bribe. They’ve set up an Economic Investment Fund and a Future Jobs Fund, which are aimed at “investment projects (that) deliver significant strategic and economic benefits for the state.”

The bribe attracts all sorts of interest, often for the wrong reasons. It can be counter productive – costing taxpayers more in upfront cash grants and foregone taxes than the benefits to the region. Elon Musk of Tesla fame is a big believer in the bribe. He played off several US states vying for the privilege of being home to his Tesla Gigafactory, finally settling on a remote site in the Nevada Desert in exchange for a reported USD$1.3 billion in up-front cash, free land and forgiven future taxes. It turns out that’s just a part of the nearly USD$5 billion in total grants and tax relief his business has managed to talk out of the hands of US taxpayers. (See my article on the Gigafactory story).  Is it any coincidence that Musk is now praising the wisdom of the SA Government, promising to work together on energy ‘solutions’?

The bribe isn’t confined to South Australia. It is immensely popular Australia wide. Competing and even neighbouring regions often get locked into bidding wars in the name of “investment attraction.” Also known as ‘the pork barrel’ the bribe is used with great political effect, and can easily run into billions of taxpayer dollars with little or no business case justification. It helps explain why, for example, Australian taxpayers are spending $50 billion on building new submarines in South Australia rather than buying them ready to go for much less. If you’re a fan of the TV series ‘Utopia’ you’ll be familiar with how ‘nation building’ and the bribe are rarely separated by much. It’s practically essential viewing to understand how this country works today.

The sad part of all the effort and money directed at “investment attraction” is that so little attention is paid to investment retention. Identifying the problems faced by existing industries and business, and ensuring we don’t make things worse for them, might be a step in the right direction. Lumbering innovative businesses in a rebounding manufacturing sector with excessive electricity costs while talking up “innovation agendas” or being in hot pursuit of technology “start-ups” is just one example of neglecting the needs of existing business while efforts are focused on attracting new ones. South Australians might find this a depressing but familiar story but they can take some comfort in knowing it’s a problem that is Australia wide.

Too often, tackling the problems faced by existing businesses are glossed over in favour of the much more glamourous role of chasing shiny new investment bling. For every new business opportunity secured, how many others receive little support or are allowed to fail?

Monday, July 17, 2017

Why it’s way too early to write off retail

The bears are out in force again, this time predicting the demise of bricks and mortar retail centres due largely to the forecast impact of online retailer Amazon. How’s this for an example: “We think the magnitude of this short could be bigger than subprime," says Stephen Ketchum, the head of Sound Point Capital, a US hedge fund that manages more than $13bn in assets. That was from a story run in the AFR (17 July).

The US retail property market has been affected both by overbuilding and the accelerating impact of online. But to suggest the same impacts in Australia might be taking things too far.

There’s one very telling difference between ourselves and most US markets: overbuilding here is virtually impossible due to the “blue dot” factor. What’s the blue dot? For decades, planning schemes have enshrined restrictive land uses through rigid zoning laws. In the case of retail centres, these extended to creating a legislated “retail hierarchy” of centres with various overlaps of trade areas (based mostly but not exclusively on centre size and nature of retail offer). The hierarchy, happily supported by shopping centre owners and major retail tenants, had to be protected to avoid overbuilding or encroachment of retail uses into residential areas (so the official line went). This meant that prospects of developing a competing retail centre within the trade area of an existing centre, were very limited if not impossible.

This also led to the delicious irony of the generally pro-free enterprise shopping centre and major retail industry campaigning for more competition when it suited them (less restrictive trading hours, for example) but opposing competition when it didn’t (objecting to any new retail centres and frequently even objecting to tenancy changes or extensions in competing centres). The anti-competitive nature of our retail planning was wryly observed by retailer Gerry Harvey as posing a significant barrier to entry for the likes of Amazon. According to Harvey, quoted in Fairfax media: "Let's assume I buy a block of land tomorrow. I've got to buy it, pay for it, put in a development application. If that happens within three years, that's very quick… And I read that Amazon is going to be fully operational in late 2018."

Amazon will need more than one major distribution centre to service Australia. Finding the sites and getting the approvals will not be as easy as it might in the US. Plus, we have a particular tyranny of distance which any online retailer must confront when it comes to delivery: as customers, we are more spread out than in major US population centres.

The same hurdles faced the arrival of other retail competitors like Aldi and Costco. Both faced difficulties in finding enough sites to build a viable network – Aldi is getting there but Costco has a way to go. Both faced legal and planning objections from those invested in existing “blue dots” who did not want more blue dots on their trade area maps.

The downside of this has been that some parts of Australia’s retail property sector are vulnerable to competition not mostly because of online retailers like Amazon, but due to the lack of competition which has encouraged a laziness towards the asset. Many centres (too many to name) are little changed from their original design which could be 30 years old: a big box containing a supermarket, supported with a mix of specialty stores and a large on-grade (rarely shaded) car park. The enshrined lack of competition, described as a virtue of the planning system, has shielded these assets from the need to remain competitive and denied consumers access to a higher quality retail offer in the process.

The opportunity to anticipate some fairly obvious changes in consumer appetites and redesign these centres seems, to date, to have been largely overlooked. Leading centres are ahead of the curve, reinventing themselves as food, entertainment and community centres while other retail centres languish. The leading centres that are getting prepared for the future are typically held in institutional hands or in REIT structures so it’s ironic that these are the funds being shorted.  But the opportunities for the sector as a whole are significant, irrespective of private or institutional ownership. Health and social welfare will be the fastest growing industry by employment by a country mile in coming decades. Education is not far behind. A suburbanizing economy, enabled by advances in digital technology, means workplaces closer to home will become much more feasible. The advent of driverless cars (probably some time off) also has the potential to liberate a lot of on grade carparking from occasional to more permanent use (for something else besides a carpark). 

These and other factors present a host of mixed use offers that many shopping centres are well suited for. Nestled in amongst established urban communities with usually good transport connections, the opportunity is there to transition the land use from a purely retail use to one that combines retail with office, professional and medical suites, training and education facilities, health and wellness centres, short term accommodation, retirement living, and community uses. 

But first, the planning system has to allow it and centre owners need to want it. In the meantime, no doubt market analysts who don’t appreciate the significance of our “blue dots” and our various other barriers to entry will exaggerate the short term impact of Amazon, while the real problem – outmoded design and strategy  – poses greater long term risks (or opportunities for those smart enough to identify them).

Saturday, June 17, 2017

How the future of work will reshape our cities

The growth industries and professions of the future will shape our cities in very different ways to the industries and professions that shaped our cities in the past. There are profound implications for urban planning and property, if we’re ready for them

The biggest growth industry for coming years and for the foreseeable future, the official forecasts all seem to agree on, will be in health care and social assistance. This includes professions from surgeons to GPs to nurses to child care or aged care, various therapies and counsellors, dental, and even laundry workers, cleaners and administrative support roles. Already our biggest single industry, it employs more than 1.5 million Australians. It grew by over 20% in the five years to 2015 and that rate of growth is unlikely to change going forward. Nearly half of everyone in this industry has a bachelor’s degree or some higher education qualification so they’re not all hospital cleaners – many will be skilled professionals.

This will be followed by the professional, scientific and technical services industry and very close behind that, the education and training industry. Construction, manufacturing (yes, still growing despite all attempts to kill it off) and accommodation and food services round up the top six biggest growth industries of the future.

This is important because the nature of growth industries of the future - and more particularly where they will be located - is going to reshape our cities in a very different way to the industries that grew with and shaped our cities in the past. This was highlighted in a recent report on employment in the growing region of South East Queensland, prepared by Macroplan for The Suburban Alliance.

The health care and social assistance industry is predicted by government authorities to grow more than any other industry in the years to 2041, producing around 220,000 extra jobs. But this industry has very different spatial needs to, say, the legal industry which has the highest inner city concentration of any occupation in the region. In health and social assistance, 200,000 of those 220,000 jobs will likely be in suburban business districts or otherwise scattered across suburbia. The biggest growth industry has little need or preference for clustering in the inner city.

Consider the implications for transport networks, property development and urban planning. What will it mean in terms of additional medical centres, hospitals, professional and consulting suites, new aged care and child care, and all the peripheral jobs that hang off these occupations? Where will they go? Will we see existing shopping centres morph from a largely retail focused offer to embrace a wider range of mixed uses? And if not in existing centres, what planning changes will be needed to accommodate this growth in new centres?

Our urban model, reflecting a 100 years of employment centralization, is changing to one of employment dispersal. Jobs are not moving from the city centre to the suburbs but the industries which fuel growth are changing, and with them, the patterns of employment location.

Even in the professional, scientific and technical services industry – one you would presume is largely centralized - much of that future growth (based on current spatial preferences) will occur outside the inner city. Take for example the generically titled occupation of “professional.” There were 284,300 of these in the South-East Queensland region but only 24% of them in the inner city. A further quarter were in a number of defined suburban business districts and the balance – half – elsewhere in suburbia. This is our second biggest growth industry and those patterns of employment distribution are unlikely to change meaning of the 146,000 new jobs in this industry to be created to 2041, the clear majority will likely be suburban based.

The third biggest growth industry (education) also shows little evidence of centralization – only 7% of educators are inner city workers the rest are suburban. Even of those professionals who describe their occupation as “Chief executives, general managers or legislators” delivers a surprise: there are only 21% of them in the inner city. And for clerical and administrative workers, it’s a similar picture: only 22% are inner city workers. The rest are suburbia based.

Engineers appear to have a preference for central locations with 42% of the 16,639 engineers of South East Queensland in the inner city as do the lawyers with 65% of them in the entire region to be found in the inner city. But there are only (fortunately?) just over 9,000 lawyers in the entire region so unless there’s to be an unpredicted explosion of work in the legal profession in the future it’s hard to see this occupation fueling demand for space and transport in the inner city of the future.

Fifty years ago, cities were full of clerical and administrative, managerial and professional workers, shuffling in to centralized offices in their cars or on trams, trains or buses to clock on at 9am and clock off at 5pm. The suburbs were centres of manufacturing and heavy industry, and retailing, wholesaling and transit related industries. That pattern is still there but in another fifty years’ time, our cities will have different industries generating the bulk of jobs and many of those jobs will need to be based in suburban centres to be closer to their markets or regional transport arteries.

And what are the implications for our city centres? Will they continue to evolve to embrace yet more entertainment, recreational and culture based hubs for the regions they serve, rather than largely just places of work? And how will different cities behave, given the economic drivers can be so substantially different?

There’s much more to be explored in this because the implications are profound. Sadly, much of our thinking around urban planning seems firmly rooted in traditional models which owe more to a sentimental rear vision view of urban development rather than a forward looking one.

Footnote: If you or your organization is interested in exploring what this means in more detail, or for specific regions, please just drop me an email. I’d be very interested to discuss this with you. I’ve got a useful presentation which runs through all this in a bit more detail which I’d be happy to share. You can download the entire report prepared for The Suburban Alliance here.

Sunday, May 21, 2017

Energy and industry

Predictions of the demise of manufacturing in Australia as the economy slowly becomes more service oriented are increasingly widespread. The reason – we are told – has mostly been an uncompetitive labour cost structure. We just can’t make stuff as cheap and as quickly as they can in China, Vietnam or India. 

But there are two problems with this. First, manufacturing is far from dead and remains our fifth largest employer: more than double the entire financial, insurance and property sector. The second is that it may no longer be labour costs but something else that could threaten the viability of our manufacturing sector. 

That something is energy and the cost of it. Only 20 years ago or so, Australia enjoyed some of the cheapest energy costs in the developed world. Now they are among some of the highest and most worrying is that they are predicted to continue to escalate well beyond inflation. Some hawks are even suggesting prices may double within the decade.

Responding to this is going to mean much more than turning off a few domestic lights at night or switching to energy save mode in the office. A bit like the city kid who hasn’t seen a cow and doesn’t know this is where milk comes from, we city slickers can easily get detached from the bigger reality - and in terms of energy consumption in Australia, the reality is that domestic and commercial are not the major consumers.

Manufacturing – our fifth largest industry – consumes nearly a quarter of energy in the country: more than double the entire residential sector and more than the entire residential and commercial sectors combined. This graph from the Office of the Chief Economist spells it out:

Transport is the largest consumer of energy (chiefly fuel) while in manufacturing it is chiefly electricity. What produces electricity is mainly coal, although renewables are fast on the rise (subsidised as they are for the time being). The graph below courtesy Origin Energy data shows generation by energy source:

So here’s the problem. In public policy and media discussion, much of the debate over energy costs seems to revolve around domestic and perhaps also commercial considerations. The cost of cooling or heating the home, the cost of appliances, even the cost of leaving the TV on at the wall occupy our minds and our thinking and much of the policy debate in the daily media. The answers, we are told, rest in renewables and as a nation we seem happy to embrace them: roof top solar for example was adopted quickly (many of us due no doubt to a mix of environmental responsibility plus a desire to break free from the power companies). We seem content with policies which cast coal fired power as the enemy and renewables as our saviour, without much question on the wider economic impacts beyond “will I still be able to have the lights on and fridge running?”

Where is the national debate about how rapidly rising electricity costs may cripple our fifth largest employer in manufacturing? There are countless stories of significant innovation in manufacturing where even our high labour costs haven’t been the death blow we’ve been told. Away from the trendy inner city coffee shops, energy costs – more specifically the cost of electricity – are becoming a bigger and bigger concern for these businesses and enterprises involved in manufacturing.  It would be criminal in a public policy sense if our national energy policy was more finely tuned to the sensitivities of the inner urban greenie doing their bit for sustainability by growing some zucchini plants in a broccoli box on their balcony, while the industries that power one in four jobs are left out of the debate.

I am not full of hope. The recent Federal Budget announcement of an inland freight line from Melbourne to Brisbane (hoo-ray by the way!) met with a suggestion from The Green’s Sara Hanson-Young that the steel used should be Australian, and preferably from Whyalla. “"If you care about the steel industry, then make sure Government money is being spent on Australian steel and give those steelworkers in Whyalla actually something to smile about,” she said.

Well yes. Except for one thing. Making steel is massively energy hungry. To do so, you not only need loads and loads of reliable energy, but the cost of energy is critical. Increase that cost and making steel becomes uneconomic. Massively so. Plus, Whyalla is in South Australia. Their experiments with renewables and reliability to date have hardly been stellar. What do the likes of Sara Hanson-Young have in mind? A solar powered steel smelter?

The energy source that once powered energy hungry industries like steel manufacturing is coal. And coal is very much on the nose, especially with The Greens but also the wider community too. The logical connection between the cost of replacing coal with renewables and the cost and viability impact that will have not just on steel but right across the manufacturing spectrum, seems to rate little thought.

If we are to make this energy transition, we need to have a sensible debate about the impacts on industry and how they can handle that transition without suffering needless economic hardship. Otherwise, yet more might look at closing their Australian operations and head for more cost friendly markets. Letting that happen without at least trying to prevent it would be economically reckless in every sense of the word. 

Thursday, April 27, 2017

Does the world need a cure for living longer?

We are quick to celebrate advances in medical science which allow us as a species the opportunity to live longer. But the consequences of living longer are often glossed over. The economic consequence is that – worldwide – there are going to be more and more people in their old age relying on a smaller and smaller proportion of people of working (and taxpaying) age. It will affect different nations in different ways, so this is a quick wrap up based on the latest predictions from the United Nations population division.

The old age dependency ratio is a formula that expresses the population of people aged 65 and over as a proportion of those aged from 15 to 64. A rising ratio simply means that there are more people aged 65 plus relative to those aged 15 to 64. There is almost nowhere in the world this is falling. The world picture shows that we have gone from around 10% in the 1980s to one in four by 2050. Meaning that there was one person aged 65 plus for every 10 in 1980 but that this will change to one for every four in 2050. Those four will have to do the work that ten did in 1980, relative to supporting the 65 plus age group.

The rising dependency ratio is going to affect higher income nations with more developed economies to a much greater extent than lower income, less developed nations. The reason is pretty simple: wealthy nations can afford better health care and higher living standards. The difference is profound though – by 2050 high income nations will have a dependency ratio approaching 50%, compared with less than 10% for lower income nations. Will they be able to remain high income nations with this future burden? 

The continents that will be most affected broadly align with income status. The worst affected will be Europe, with a dependency ratio nudging 50% by 2050. North America is not far behind and Asia will be rapidly closing the gap.

Amongst the major European nations, Germany has a particularly nasty problem emerging on the forward radar – a dependency ratio of almost 60% by 2050. Little wonder German Chancellor Angela Merkel was so keen to attract such large numbers of refugee migrants (said to be more than 1 million in 2015 alone). France and the UK are following a similar pattern although with slightly lower dependency ratios and Russia only passes 30% in around 2045.

Closer to home, Japan is facing some serious problems. A forecast dependency ratio of 70% means there will be seven people aged 65+ for every ten aged 15 to 64. Japan’s dependency ratio is already problematic and this will get worse. China is also facing a rapid escalation in its dependency ratio which will rise quickly from around 2025, effectively almost doubling in the ensuing 25 years. I wrote about China’s people shortage (being a shortage of working age people) a couple of years back. You can click here to read it.

Australia itself shares a great deal in common with the USA and Canada in terms of our aged dependency ratio. We are currently in the midst of a significant increase which will see our dependency ratio rise from a fairly stable band of 15% to 20% from 1980 to 2010, to one in three by 2035. This will pose a range of budgetary challenges on both the income (tax) and expenditure (health and welfare) sides going forward.

The good news at least is that while we are increasingly better informed about the economic challenge of an ageing society, we are not ageing quite as fast as some places. Maybe we can observe closely how nations like Germany or Japan handle this escalating dependency challenge, and essentially copy the policies that seem to work best?

The bigger challenge is that further advances in medical science and disease prevention will mean these dependency ratios could in reality be much greater challenges in the future. Living to 100 might be commonplace for today’s millennials. Their children may expect to live to 120. But the question of how world economies – which were never designed for this demographic pattern – are going to afford to support societies where there will be nearly as many people aged 65 plus as there are of working age, is a big one and it’s unanswered.

Maybe in the future old age will no longer be an ambition but something for which we need a cure?

Monday, March 20, 2017

Retirement affordability: a bigger problem than housing affordability?

Housing affordability is such a hot topic now that evidently a number of Federal backbenchers – along with Pauline Hanson - are urging that young homebuyers be able to access their superannuation to enter the housing market. This is not good policy and reeks of short term reactive opportunism. Hopefully the government will resist the idea - for the very good reason that an even bigger problem could be looming: affording retirement. The facts are sobering.

The retirement and superannuation industry likes to promote the idea of post-work lives that feature images of couples with groomed waves of silver hair, perfect teeth, dressed in pastel coloured knit wear and walking their Labrador along a deserted beach. It’s a nice image but so far removed from the reality for the majority of Australians that it’s bordering on deceitful. 

According to a 2013 OECD report, Australian’s aged over 65 were second only to Korea as having the worst seniors poverty in the world, based on the percentage of seniors with incomes below 50% of the median income. Australia came in at just over 35% of seniors with incomes below half the median – almost three times the average of 34 nations surveyed.

One in four retirees in Australia receives the full pension or close to it. A further quarter received a part pension. Two thirds of Australians aged over 65 earn less than $400 a week from all sources. Roughly one in four people aged over 65 are still paying off a mortgage or are renting. Superannuation is yet to deliver the retirement incomes promised.  The proportion of Australians aged over 65 with no superannuation at all if roughly 65%. The average superannuation balance for someone aged 70-74 is just $102,000. The median superannuation balance on retirement in 2016 was $100,000 for men and $28,000 for women. Estimates of what’s needed in superannuation at retirement vary but usually start at $500,000 and rise to $1 million. So we’re falling a long way short.

This picture may begin to improve if super contributions rise in the future, and as more people reach retirement with a lifetime of contributions behind them. But even then, the ability to look to superannuation as a retirement self-funding option for the majority of Australians is slim indeed. What’s going to make things worse is our success at living longer. If you’re a 65 year old woman alive today, the chances are you will live to nearly 90. An estimated 10% of you will reach 100. For men born in the mid-1970s, life expectancy was around 69. Meaning if you retired at 60, you needed to fund an average nine years of retirement. But for millennials, their life expectancy will be in the 80s. Meaning they will somehow need to fund 20 years of retirement if pulling stumps at 60, or 15 years if retiring at 65. For the high proportion that will live into their nineties or longer, it may not be anything to celebrate unless you're loaded. So while the next generation might have acquired superannuation over a longer period, it’s going to need to last a lot longer too.

This is going to become a much bigger problem in the near future, as the ‘boomer’ bubble ages. Australians aged 65 and over are now the fastest growing age group. They will represent a staggering one in every five Australians by 2033 – that’s just 15 years or so away. The current crop of 65 plus Australians number around 3.5 million. That will increase by nearly 3 million – effectively nearly doubling – in the next 20 years.

So not only are we living longer, but there will be millions more of us doing so. Which means spending longer in retirement and either drawing a pension from a depleting (relatively smaller) tax base or relying on superannuation. The latter looks improbable and the former is probably unaffordable.

And so into this worrying picture we have the wooly thinkers enter the debate about housing affordability by suggesting a national raid on limited superannuation balances in order to further stoke the buying capacity of an insatiable property appetite (focussed mostly on just two cities) while doing nothing about the cost side of the housing equation (which policy makers have studiously ignored for the best part of 20 years). It’s a recipe for disaster in the short term by effectively further fueling housing demand without addressing the fundamental supply side problems, and in the longer term by depleting future retirement savings, the demands on which will only increase as we continue to live longer.

You wonder where we get them from. 

Saturday, March 11, 2017

Cross your fingers on Cross River Rail

Earlier this year I wrote a story about the costs of Brisbane’s cross river rail, relative to the number of people who might actually use it. A number of readers – some of whom are in positions to know – corrected me. I was off by several billion dollars on the costs. The true costs of this project are much more than I had realised.

The Cross River Rail is a proposed 10.2 kilometre new rail crossing under the Brisbane River. It will include five new stations and is, we are told, essential to avoid passenger and freight rail networks choking. The proposal first emerged under the Bligh Government. Back then we were told the choke point would come at 2016. It was amended under the Newman Government to include a bus tunnel. And then amended again under the Palaszczuk Government, without the bus tunnel. The choke point didn’t arrive so the rail transit Armageddon date is being pushed back.

We are told the project will cost $5.4 billion, which is what I based my numbers in the last article on. Wrong. This does not include the cost of the five new stations. Nor the rolling stock, marshalling yards and other bits and pieces. Some of these stations are 60 metres below ground. They won’t be cheap. In reality, the actual cost of the cross river rail project will be closer to $10 billion – and that’s before the inevitable cost blow outs.

To allay fears that this very expensive project might in some way be out of proportion to current use, we have now been promised that “SEQ rail commuters will double in 10 years: Government figures.”  This story contained parts of the business plan not released publicly but selectively shared with that media outlet. But a doubling of passengers in 10 years? Seriously? Is there anywhere in the known universe where public transit under similar circumstances has doubled in the space of 10 years?

This is little more than a prayer, not an evidence based projection. To find it repeated in the media without challenge is a sign of our times I guess.  If the project feasibility is relying on this sort of faith based expectation, particularly given rail transit has been falling both in terms of its share of travel and the actual number of people using it, then some meaningful justification ought to come with it.  

Recent experience with traffic projections should mean that heroic promises of this nature are immediately viewed with extreme caution. Look no further than the predicted vehicle traffic through tolled tunnels and bridges, detailed in this story. The heroic inaccuracies of the Clem 7 tunnel predictions sent investors broke on that one. And the Airport link tunnel opened with 56,000 vehicles against a predicted 194,000. It was still in 2016 sitting at 57,000 against a predicted 221,000. That’s some margin for error.

Maybe we shouldn’t start with much in the way of expectations. Queensland Rail happily cut the ribbon on the $1.2 billion Moreton Bay rail line but forgot to have enough drivers to drive the trains. You’d like to know how many people are using this new service but that information is not publicly available. Are we not to be trusted? I am told though that the actual number of users, relative to the cost, is horrifyingly small.

It also emerges Queensland Rail have ordered $4.4 billion worth of New Generation Rolling (NGR) rolling stock but oops… the new rolling stock won’t work with existing platforms. Which means each of every 143 platforms that form part of the city train network will have to be upgraded before the new rolling stock can be used. And what will this cost? Dunno.

So let’s do a quick tally. New rail link to Redcliffe $1.2 billion but a fiasco in the opening months. New $4.4 billion of rolling stock but woops, we now need to upgrade all the platforms. Proposed $5.4 billion cross river rail – “essential to avoid system collapse” we are told (as if it hasn’t collapsed already thanks to mismanagement) – is actually closer to double that price. But trust us, we know what we’re doing.  Hardly confidence inspiring and outright worrying given that tally of projects comes to $15.6 billion.

Project proponents will claim the cost of the cross river rail will be less because they will recover the cost of the stations through ‘value capture’ – which means a benefitted area levy that taxes property owners in the vicinity of the stations. These owners will be so happy with a new station that this won’t be a problem. There are also proposed hikes to motor vehicle registration fees, a car park levy (because parking’s so affordable already isn’t it) and for good measure a public transport infrastructure levy that property owners will also pay, irrespective of whether they are near a station or not. But these are all just extra tax measures, designed to make the $10 billion project sound a lot more digestible. Like suggesting that train users will double in 10 years, it’s very hard to believe.

There are some big corporate names earning massive fees to support this fantasy. How much would you think we taxpayers have spent so far on various consultants and seconded staff, reports, office space etc – all in the name of Cross River Rail? That figure, I’ve been reliably informed, is conservatively around $100 million. No wonder there are some people so keen to see the project proceed – this could be a cross river gravy train carrying consultant gold by the carriage load.

So back to our $15.6 billion in commuter rail investment – recent and proposed. Who benefits, other than the consultants? Based on the last Census and supported by QR figures, there are around 65,000 people using the trains. (That’s people – not trips. It’s a trick to multiple the number of people times the number of trips they make each day then multiple that by a weekly number and that number in turn by 52 to get an “annual trips” number. Once again, exaggerate use and underestimate costs seems to be the preferred model). Train travellers – again based on QR figures – are overwhelmingly inner city workers. The current six inner city stations account for 84% of all boardings and alightings.  The inner city workforce of around 160,000 to 180,000 people (depending on how you want to define inner city) represents only one in ten of south east region workers.

Simple back of envelope sums reveal we have spent and plan to spend something like almost a quarter of a million dollars per user. In reality, that cost should be spread across the increase in travellers we will achieve as a result of this investment. A 50% increase – itself almost fanciful – would mean the cost of each additional user is half a million dollars.

Yes, this isn’t very scientific and no, it isn’t very fair. There are network wide implications. Benefits to road users (which it seems they will pay for via increased registration fees anyway), freight (although I am told that freight – which is where heavy rail can be so effective moving bulk goods long distances – could actually be worse for some users under the CRR proposal), and the economy generally.

We absolutely need to reinvest in infrastructure to keep our cities and regions functioning. Efficient transport infrastructure is central to that. But with so many competing needs and money so scarce (or so we’re told) the business case for each needs to be robust, economically justifiable and transparent. The money for Cross River Rail needs to compete with plenty of other projects, and their merits weighed equally in terms of greatest public benefit.

There are some legitimate questions the public might feel entitled to ask:

- What is the true full cost of the Cross River Rail, including stations, rolling stock, marshalling yards etc?

- What key assumptions have been made about how many additional rail users will be serviced as a result, and how many vehicles will come off the road network as a result?  

- What is the cost of not proceeding with the project as envisaged? How were these assumptions arrived at?

- Were alternative infrastructure proposals considered? (This 2012 report for the SEQ Council of Mayors “proposes a new vision for SEQ Public Transport that puts the commuter at the heart of the system.” It suggested that rather than a Cross River Rail, there were better alternatives to create a more efficient regional public transport system).

- How much is planned to be raised from motorists via registration fee increases to fund the project? How much is planned from parking levies? How much is planned for by way of property taxes and who will be asked to pay these property taxes?

As taxpayers, you would think we’re entitled to a bit more transparency when it comes to spending some $15 plus billion dollars on an outfit that forgets about train drivers or matching rolling stock to stations. It reminds me of that famous episode of “Yes Minister” when Jim Hacker opens an empty hospital.

Sir Ian Whitchurch (hospital chief): "First of all, you have to sort out the smooth running of the hospital. Having patients around would be no help at all."

Sir Humphrey: "They’d just be in the way." 

Wednesday, February 8, 2017

Is housing affordability the egg we can’t unscramble?

The new NSW Premier Gladys Berejiklian has made housing affordability a commitment of her government and our Federal Treasurer Scott Morrison has been to London investigating alternative means to providing low cost and social housing, while Opposition Leader Bill Shorten claims only Labor has the solution to housing affordability. Politicians are starting to get the message, but is it all too late? Has the affordability horse bolted, permanently?

It was ten years that a research paper I wrote for the Residential Development Council first started doing the rounds of various Parliaments in the country. “Boulevard of Broken Dreams” as it was titled, warned – ten years ago mind – of the impending problem with housing affordability. It got plenty of political attention at the time and the debate over housing affordability was a key issue in the 2007 Federal Election. No one can say there weren’t warnings back then. Here’s what it predicted at the time:

“While much media and political attention is focused on the role of housing interest rates, these do not explain the very high costs of housing in Australia. [Indeed not – we now have record low interest rates and record high housing prices] The root cause of worsening housing affordability lies squarely at the feet of various public policy settings, identified in this discussion paper. If these policy settings continue on their present path, there is no question that housing costs will continue to spiral beyond reach of many Australians. As this happens, dependency on rental housing will increase. Future generations of Australians will not be able to afford a home of their own, and will increasingly be consigned to rental housing - and rising rental costs.

Home ownership will be in the hands of an increasingly elite group of Australians: those wealthy enough to afford a home and those who bought into the housing market before the affordability crisis reached a tipping point.

Housing standards will fall - due to price constraints - and new homes will be built on smaller and smaller lots, with cheaper and cheaper materials to stem the tide of ever increasing government and regulatory costs.

The signs of a deepening crisis are now evident, and industry groups are united in voicing their concerns that present policy settings will only lead to a worsening problem. Failure to act now will leave future generations of young Australians a dismal legacy of housing stress - in a country which by any other assessment should boast the highest standards of home ownership and affordability.”

It’s worth a read if you want a reminder of how ineffectual governments can be in dealing with the bleeding obvious, or of ignoring good advice when there’s plenty of bad advice to be had. There is a copy of “Boulevard of Broken Dreams” you can download here.

Ten years have since passed and – as predicted – the problem is now much worse. Which also means that remedies are now more complicated since the problems are more deeply rooted. If we really wanted to do something meaningful about housing affordability today, there are quite a few more issues for politicians and policy makers to deal with. Here’s a sample:

Are we even measuring the right thing? The city wide median house price is primarily a reflection of second hand (established) housing in established urban areas. It’s the half way price point and can be distorted by heightened activity at either end of the price scale. What this doesn’t measure is the typical cost of new housing supply, being either house+land, or apartments. Nor does it measure within established markets what proportion of houses fall into the lower quartile, and whether these are accessible to new entrants or lower income households. As a market wide measure, the median has some use but in the affordability debate, it can tend to disguise as much as it reveals.

Land supply. It’s no longer a simple case of adding to supply, given that new supply is more heavily taxed than second hand (established) supply. Adding to land and housing supply with highly taxed and over regulated new stock is hardly likely to make things instantly better – it just adds more needlessly expensive stock to the market. So for improving supply to work the distortionate tax system as it applies to new land and housing needs to be addressed first.

Economic concentration. There has been an increasing concentration of economic opportunity in the inner urban regions of (mainly) Sydney and Melbourne – which is also where the worst housing affordability is. A report earlier this year noted that half the country’s new jobs were within a couple of kilometres of the Sydney and Melbourne CBDs.  Decentralising some of the jobs - both government and private - into suburban business centres and into the regions would remove some of this pressure cooker effect, but few seem willing to do so. I’m with Barnaby Joyce on this one – if you want affordable housing and views of Sydney Harbour, you’re being unrealistic. But without higher order jobs and more of them, Barnaby is unlikely to be welcoming hordes of housing refugees into Tamworth, where the housing is - like many regional towns and cities - quite affordable if you have a job.

Regulatory reform. Urban Growth Boundaries, introduced in the late 1990s and early 2000s, sought to contain outward growth. “Sprawl” as it was pejoratively called, was an evil that would lead to social decay, dislocation, congestion, obesity, pollution, environmental degradation, loss of farmland – pretty much a full catalogue of sins, most of them unverified. But these growth boundaries immediately limited supply and saw land prices escalate. To address housing affordability, especially of new housing, we’d have to have a grown up discussion about the effect of urban growth boundaries, which itself will be a challenge.

Planning regulations. More regulatory reform, this time on a host of planning regulations and prescriptive policies which can mean that even a car port application can become a topic of council debate in some places. There is too much planning and not enough doing but we are so attached to “having our say” that the community now seems entitled to advise other property owners what they should and shouldn’t do with their properties. There are regional plans, state planning policies, council town plans, neighborhood plans, plans for everything and the red tape and delays (and costs) that go with it. In the history of this country, I struggle to think of one government at any level which has actually left office with fewer rules and regulations than when it entered, so hope on this front seems remote.

Industrial relations. The militancy of building industry unions is a matter of public record. This particularly affects multi-level or large scale housing projects and adds significantly to the costs of new housing supply. But our appetite for taming the excesses of building industry unions doesn’t seem sufficient to achieve meaningful reform. Without it, new housing will continue to cost more than it needs to.

The GST. The GST adds directly to the cost of all new housing and the cost is borne by the buyers while the tax revenue flows to the federal government and is redistributed to the states. The GST does not apply to established housing. This distortion remains little discussed but it does mean that new housing is taxed at a higher rate than established housing. Talk of reform to the GST seems to end in political apoplexy so we tend to avoid it if we can. Fixing or countering this tax anomaly would be another component needed in any moves to improve housing affordability. 

Stamp duty. As house prices rise, so does the money made by State governments via stamp duty, to the extent that some governments become addicted to it. The NSW Government is one that enjoys a very healthy stamp duty revenue, much of it paid for by the very people it says it is concerned about in terms of the high cost of housing. Paul Keating once warned you should never stand between a State Treasurer and a bucket of money. He was right and Stamp Duty is a good example. In NSW it is now a $9 billion per annum bucket. In 2011, it was $3.8 billion.

Land tax. Argued by many economists to offer a more equitable property tax base than stamp duty and other levies, the extension of a broadly based land tax seems off the agenda for discussion, full stop. But any meaningful discussion of housing affordability can’t be had without a grown up discussion about property taxes, of which land tax is one.

Infrastructure levies. Introduced mostly in the early 2000s as a “user pays” approach to funding infrastructure associated with new development, these quickly became usury and applied without a transparent connection to the purpose for which they were raised. Councils and State Governments got away with calling them a “developer tax” knowing full well that it was home buyers of new housing that were paying. And pay they did – levies at one point exceeded $100k per dwelling in some parts of NSW. The HIA and other groups still say they can account for a quarter to a third of the cost of a new home. Any serious moves to improve housing affordability must look at the equity of these levies as part of the mix.

Negative gearing. What a hot potato! If this was to be reformed, how would you do so for just housing and exclude other investments? Could you confine reform to limitations in just parts of the Sydney or Melbourne markets, because if you limited this nationally, many struggling regional markets would fall into even deeper holes. It was never intended that negative gearing would see speculators holding large portfolios of rental housing and outbidding new entrants to the extent that now happens, but how to contain what has become an orgy of real estate speculation through negative gearing is now a problem of monumental proportions. Good luck untangling this one.

Population growth.  We could slow our immigration to a trickle and try ease demand pressure on housing but this could come at a broader cost to the economy. Or migrants could be directed to settle in regions to ease demand in capital cities, but without regional jobs for them, what would this achieve?  The demand side of the equation being population growth is mostly fueled by immigration and until we can get supply in step with demand, this also needs to form part of the discussion around housing affordability. Good luck again with this emotionally charged policy battleground.

Financial reform. The banks, ah what can we say about these great community institutions of conservative and moderate lending, restraint and discipline. Maybe the less said the better. Reform of lending practices has been debated, studied and investigated ad nauseum. While a contributing part of the affordability problem through some of their less savory lending practices, achieving meaningful reforms of mortgage lending practices could be a Sisyphean challenge.

So there you go. If you’re a politician who has worked your way through solving all of these issues, you’ve improved housing affordability by making housing cheaper, through falling house prices. Just think how popular you will be then… in a country so heavily vested in seeing house prices continue to rise. 

Tuesday, January 17, 2017

The pain with trains lies mainly in the brains (or lack of them)

Unless you’ve been on holidays in some remote place over Christmas you’d have noticed that trains have been making the news a lot lately in south east Queensland. Mainly it’s because of the lack of them running, which it seems in turn is because there are not enough people to drive them. Much of which was triggered by the opening on one extra line of just 12 kilometres in length, which has been talked about for close to 130 years and which has been in detailed planning or under construction for the past decade. Kind of snuck up on them all I guess.

Having so many scheduled services pulled at no notice has given the hapless Queensland Rail every appearance of being utterly unable to organise a round of drinks at a brewery. Steeped in olde worlde tradition, it’s not hard to imagine the departmental mandarins enjoying a regular cup of tea at work delivered by a tea lady, her trolley complete with lace doilies as it rattles along the corridors of rail power. 

It’s not just management which gives the sense of something scripted around Reg Varney in “On the buses” (a British sitcom of the early 1970s) but the Rail Tram and Bus Union too seems rooted in a bygone era. According to the Union’s website “The RTBU was formed 1 March 1993 through the historic amalgamation of three railway unions and one tram and bus union... These unions have a strong tradition dating back to the nineteenth century.” It seems that’s a tradition they are intent on keeping alive and well in the 21st century.

There are always more accurate back stories than sensationalist headlines, and no doubt there have been many contributing factors behind the latest embarrassments. Some of these date back many years, some date back only a few years, and others just a few months. Not all have been due to decisions of QR Management either. However, as generous as we taxpayers can be, it is hard to have confidence given the opening of the new $1.2 billion Redcliffe line seems to have been quite predictable, while there was no heads up that services could be impacted in the slightest way.

The Redcliffe line came in at $100 million per kilometre, which is hardly small change for the taxpayer. We are entitled to question how well our taxes are being spent.

With this in mind, it’s very hard to have much confidence in the proposed $5.4 billion cost proposed for the 10.2 kilometre cross river rail link. This one’s $530 million per kilometre – five times as costly as the new Redcliffe link (going underground a large part of the reason). But here’s the rub: we are being asked to trust the same crowd who seemingly can’t staff the trains we already have, and who insist that without this extra $5.4 billion of our money (that’s us, the taxpayers) that the whole network will choke and congestion costs will escalate.

The cross river rail is not a new proposal and dates back many years. Successive governments have been told the same story: that without an additional crossing, the network will reach capacity. The date for that capacity breaking point keeps getting extended and the project delayed. The fact that Brisbane has only one river crossing is a real issue. But what’s at stake here is a question of trust and given the latest series of debacles, can we trust that an extra $5.4 billion is going to be well spent and well managed?

If you look for details on the business case you can find a five page PR document which calls itself a ‘cost benefit analysis summary’ but which is preciously short on evidence and long on promise. Have a look for yourself. It’s not much given the sums of money we are being asked to part with. There’s an older business case by Deloitte in 2011 which assumed a 50% increase in public transport mode share from 2009 to 2031 (from 8% to 12%); a 23% increase in rail patronage by 2031 with cross river rail, and which attributed 39% of the project financial benefit to “perceived” public transport benefits. Would you call these heroic or conservative assumptions?

All of which prompted me to check on the actual numbers of people across Greater Brisbane – an area with a population of around 1.8 million – that actually use rail. Based on the last Census, the number of people who used rail – either in whole or in conjunction with some other form of transport – was 65,212. Not a big number. That’s 65,212 out of the 925,385 employed persons in the region of 1.8 million people. The number correlates with QR’s ‘Passenger Load Survey’ (the most recent one of which was in 2009). It showed that the network carried 65,752 people in the morning peak and 57,286 people in the afternoon peak.  Which however you cut it is a small number and less than 5% of the population.

What’s more, the rail network is mainly designed around servicing inner city employment. There are around 180,000 jobs in total in the inner city – one in ten jobs of the broader metro region. Nine out of ten of us work in suburban areas which are largely not serviced by train. The same QR survey shows that, of 65,231 total boardings and alightings in the AM peak, 33,738 (52% of the network total) were at Central Station. Roma Street came next with 9,319 followed by Fortitude Valley (4,757), Bowen Hills (2,116), South Bank (2,790) and South Brisbane (1,751). Put these together and you have 84% of passenger movements across the network being at these six inner city stations.

But we are told by the rail experts that unless we spend another $5.4 billion on a transit service that moves less than 5% of the population - almost all of whom are travelling to six inner city stations to access the 10% of metro jobs that are in the inner city – then we are facing a transport meltdown.

I know it’s not fair to divide the proposed $5.4 billion for the Cross River Rail by the 65,000 users (but if you did, the answer would be $83,000 per user) or to add the $1.2 billion cost of the Redcliffe Line (which would bring the answer to over $100,000 per user) because these investments have network wide implications that benefit both public and private transport, as well as freight. It would be equally unfair to divide the project cost by just the additional number of people projected to be carried as a result of the extra investment, because that’s the sort of number crunching business people do; it’s not meant for transport businesses. It would also be wrong to point out that these are just the capital costs and that each trip – per person per direction on a CityRail train – is subsidised by the taxpayer to the tune of $10, or $20 for a round trip.

I am not suggesting an additional river crossing is not a good idea. But based on recent performance, and given the very large sums involved – all of which is taxpayer money not privately funded – then you’d hope for a bit more detail than what’s in a five page PR document for a project promoted by a government agency which seems incapable of managing the existing network.

Maybe management of the project and the network should be given to someone else? How about the aviation sector? Our airports were privatised in the late 1990s, as was our airline Qantas. Both the airline and the airports are now vastly more modern and efficient, and serve the travelling public far better than when they were basically government organisations. Plus they aren’t going cap in hand to the taxpayer on a regular basis to keep them afloat. (The privatisation of airports and Qantas, by the way, were originally decisions of the Keating Labor Government). Aviation is a type of public transport and freight business, as is rail. So why not drag some aviation experience into the rail sector?

Queensland Fail (aka QR) and the government’s insistence that we need to spend a further $5.4 billion on a network managed by the same people behind the recent debacles is just not confidence inspiring. It leaves you with the sinking feeling that they’ve based their business case and management model on an episode of the ABC’s satirical ‘Utopia’ – a “multi award-winning satirical comedy about a group of people charged with building this nation – one white elephant at a time.”