For 16th December 2011

Straight Thinking Digest: Getting Local Government back on the Rails.

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Contents.
1. 2. 3. 4. 5. 6. 7. 8. Background The Promise of the New Cabinet. Three Cheers for Urban Sprawl. Another Good Read this time from Australia. Our Propensity for Moral Panic. Phil McDermott dissects the Auckland Council Rail Link. The Real Issue is Travel Times by Wendell Cox. ST NBR Column Why we must learn to Love Asset Sales. Entertainment An Ideal Christmas Present. Read it, then Give It.

1.

Background the Promise of the New Cabinet.

Governments new Cabinet reflects the determination to promote innovative enterprise and remove road-blocks to business growth and development. Stephen Joyce is now Minister for Economic Development, Science and Innovation, and Tertiary Education, Skills and Employment, and Associate Minister of Finance the portfolios that set the necessary high-level strategies. John Banks is now Minister for Regulatory Reform and Small Business, and Associate Minister of Commerce and Education. As a former Minister of Local Government and former Mayor of Auckland, he should be well equipped to deal with the nonsensical regulations presently killing innovation at the local level. Hopefully, Metropolitan Urban Limits (a.k.a. Rural Urban Boundaries) will be among the first to go. Then new enterprises, similar to the Blue ice-cream caf at Matakana, will no longer have to waste time and money fighting repeats of ARCs objection that an ice cream store was an urban activity and must be quarantined behind the MUL. (The blue comes from the range of blue berries grown on the small farm behind the store.) Fortunately, the Rodney District Council came to Blues defense and the Blue caf has further enriched the Matakana experience. 1

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But who would defend them now? My 2005 paper The Rise of Urban Romanticism or The New Road to Serfdom included the following observation (6 years ago): The new Romanticism does not meet all the tests of classic fascism. But the new designer movement in self-labeled Smart Growth is surely its consummate expression. These new Urban Romantics (or dense thinkers) speak the language of aesthetics. They talk of greenbelts, greenfield and brownfield development, and see the control of the colour of buildings as a natural extension of the control of land use itself. All paintings must sit within a frame. Hence they design great cities firmly bounded by an urban fence surrounded by unspoiled nature the greenbelt of open space. They want towns to be pure towns, and the countryside to be pure countryside, with a tidy line between them. Urban Romantics insist that all urban activities remain within urban areas, so the countryside remains pure and unsullied by commerce. They seek to maintain the historical schism between urban sophisticates and rural folk at precisely the time when this distinction is completely breaking down. Lets hope that Ministers Joyce and Banks combine their skills, experience and knowledge to put an end to such nonsense.

2.

Three Cheers for Urban Sprawl.

The debate about the case for compact cities and metropolitan urban limits goes on in spite of the copious evidence of the disastrous impact of these policies especially on the quality of life and on economic wellbeing in the UK where it all started. Earlier this week a report on Radio New Zealand suggested that the Productivity Commission was likely to recommend allowing land to be freely developed on the urban periphery in order to reduce the cost of land in general and of new housing in particular. Naturally, Jenny Dixon, Dean of the Creative Arts and Industries Department of the University of Auckland countered with the argument that while this might appear to save costs, the high cost of the extra travel from these remote suburbs to the central city would cancel out any apparent benefit. The Professor must be totally unaware of the copious evidence that people naturally follow available housing and in response, the jobs follow too. In fact, the urban economy benefits 2

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from lower cost land and from reduced congestion as fewer commuters travel on the radial routes into the City Centre. This is why the low density cities of the lightly regulated US States have the shortest commute times in America, and indeed these commute times of just over 20 minutes are the lowest in the world for major cities. Anyhow, Martin Durkin of the UK has had enough and has finally devastated the anti-sprawl arguments with this powerful polemic. All those trying to put together a thirty year plan for Auckland should take note. Please dont inflict the English folly on our green and pleasant land. Durkin writes (or shouts):

THREE CHEERS FOR 'URBAN SPRAWL'

Hands off Our Land! screams the Daily Telegraph, like some shotgun-toting redfaced farmer. The newspaper, on behalf of the reactionary toffs who form the least pleasant section of its readership, has launched a campaign directed against urban sprawl (ie. the rest of us). On a good day, the Telegraph serves up enlightened articles by progressive liberals like Janet Daley and Simon Heffer and Jeff Randal (Im talking about real liberals here, not American Trotskyites). But then it disappears under the desk, drinks some devilish, bubbling potion and emerges looking like Mr Hyde, all wonky teeth and messy hair. Hands off Our Land is the Telegraph at its worst - a campaign to thwart the governments all-too-modest suggestions to reform Britains vicious planning laws. NIMBY (Not In My Back-Yard) is a misnomer. As James Heartfield observes in his brilliant book Build It! if it was their back-yard there wouldnt be a problem. By Our Land, the Telegraphs Colonel Blimps do not mean land owned by us. They mean other peoples land, over which they wish to continue to exercise control via the State. The battle against suburbanisation (which the Greens these days clothe in the jargon of 'sustainability') has been going on for decades, and the success of the NIMBYs in keeping the bulk of Britains population locked inside towns and cities, has disfigured Britain and blighted the lives of millions of people. As a result of State planning restrictions, Britons are stuffed into towns and cities like battery-farmed chickens. We are among the most densely packed people in the world. In Britain, 90 percent of people live in urban areas. In Germany (which has a similar population density) only 75 percent of people live in urban areas, while only 68 percent of Italians live in urban 3

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areas, and only 62 percent of the Irish (is the Italian or Irish countryside so awful?). In India only 30 percent of the people live in urban areas. And to make matters much worse for the Brits, our urban areas constitute a mere 9 percent of total land use. Thats right - 90 percent of the people crammed into 9 percent of Britain. Compare that to the 13 percent of land devoted to Green Belt (the stuff holding us in). Even in the South East of England, by far the most densely crowded bit of the UK, woodland and farmland, absurdly, accounts for more than three quarters of land use. Read the whole essay here. Durkins scream of rage is based on evidence, rather than Romantic yearnings, and paints a powerful image of the dreadful housing conditions now imposed on the ordinary families of Britain. Yes, it is quite long and may challenge those with the attention span of a pre-schooler but its worth hanging on to the end to enjoy this condemnation, which is about as close to treason as one get without being dragged into the Tower. Durkin writes: Its time to get angry with the angry-brigade at the Telegraph. To get angry with the organic, home-grown TV chefs and their agro-hobbyist friends, with the grungy middle class road protesters (imagining themselves to be radical), with the suburb-hating, supermarket-opposing, free-range chicken loving reactionaries, the metropolitan elite who can afford second-homes, yet who would deny first-homes to others, the heritage bores and bearded ramblers and people who drink cloudy expensive beer from local breweries and write bad guide books and erect plaques everywhere and think Ruskin had a point. Its time to get angry with Prince Charles the Dark Lord, and his toady friend Richard Rogers, who thinks we should all live in shoe-boxes. This collection of bigots are trying to keep us in our place. They have damaged the lives of millions of people. Now they must be stopped. So now you know.

3.

Another Good Read this time from Australia.

Macrobusiness has posted an excellent monograph by Oliver Marc Hartwich and Rebecca Gill, Price Drivers: Five Case studies in How Government is making Australia Unaffordable.

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The policy recommendations for the housing sector are excellent see pages 10 to 23 and reinforce many of the reforms promoted by the Centres own papers over the years such as replacing infrastructure levies (our development levies) with funding streams based on income tax, or alternatively, giving councils access to a share of the locally generated GST revenue. However, the other case studies tend to show where we have got things right, and where Australia could learn from us. Christmas shoppers will be fascinated by the case study The great retail rip-off. The Centre may do a similar comparison on where New Zealand retails sits compared to the United States, United Kingdom and Australia and elsewhere. Remarkably, Sydneys Pitt Street Mall, (US$901/m2) is more expensive than the Champs Elysees in Paris ($US873) and twice as expensive as Los Angeles Rodeo Drive (US425). Internet access to the global retail market is making these differentials in costs untenable given that they flow through to retail prices. The Australians have caught on rapidly and the retail chains are protesting vigorously against unfair competition. Read the whole monograph here.

4.

Our Propensity for Moral Panic.

"The Perils of Urban Consolidation" by Patrick Troy, (an Australian university professor) looks to be a useful vacation read. He wrote this in 1996: .....(we) have some significant environmental problems and we should address them. But what seems to have happened is that in place of a considered review of the problems.... we have had what amounts to a moral panic. Solutions have been proffered and adopted with scant regard for scientific evidence either about the extent of the problems and their sources, or any understanding of the history of the cities and why they take their form. There is little scientific evidence that the solutions proposed to cope with environmental stress can or will have the beneficial effects claimed. The more extreme activists have played on fear and have offered doomsday scenarios to support their nostrums. Governments desperate for the green vote have simply adopted environmental arguments without subjecting them to a conventional prudent sceptical review......

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5.

Phil McDermott dissects the Auckland Council Rail Link.

Phil McDermott has done us all a great service by bringing his analytical skills to an analysis of the proposed Rail Link. He does what should have been done by any transport analyst from day one. But the ARC always worked on the premise that doomsday scenarios justified their grand transformational solutions. In opening his analysis of the Business Case, McDermott writes: For a start, while it claims to consider alternatives, it departs from convention by looking only at different transport responses to fixed assumptions about land use. Normally, transport evaluation for urban development starts with land use options, and considers their differing transport needs to decide which combination is favoured economically. (Incidentally the Centre has found the Business case similarly departs from convention in the of cost and benefit analysis in order to achieve an extra billion dollars of benefits.) McDermott then goes on to carry out a standard analysis of real and actual trip movements around the greater Auckland area. The results show that the CBD is a small player in the Auckland transport network. For example: So, 54,000 trips went past the CBD, nearly as many as destined for it (58,000). And 127,000 went to other parts of the Isthmus. While the CBD is the largest single destination (around 14% of the citys total jobs using our definition) the real congestion issue is how to cater for or reduce cross-city commuting, and especially north-south trips that must use the motorway system to drive round it? His overall conclusion, after examining the lower-cost proven alternatives available, is that the rail link is the least effective way of reducing overall congestion in Auckland. He concludes: A high cost rail system will reduce this flexibility, and instead lock us into a set of costs and structures that will be more of burden to the city, its residents and businesses, than a benefit. Continuing to push it at all costs could well be the game breaker for Auckland's Draft Plan. Read the whole post, Rethink the Link Does Auckland Really need to pour money into a hole in the Ground and wonder why this kind of analysis has been bottom-drawered in

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favour of the Romantic Designer Planning mythologies of the ARC. (And, it would appear, of the Planning School of the University of Auckland.)

6.

The Real Issue is Travel Times by Wendell Cox.

Once again, all advisers on Transport Policy should take note of Wendell Coxs summary essay, based on decades of experience in the field and on experience rooted in reality, rather than mythical beliefs. This essay endorses McDermotts approach. Its the travel times over the whole urban area that count. Wendell writes: The principal benefits of transportation in an urban economy occur from minimizing travel times. Atlanta is one of only four major metropolitan areas with a one-way work trip travel time of more than 30 minutes. This is primarily the result of metro Atlantas less-than-robust freeway system and a low-capacity arterial street system. If Atlanta is to become more competitive, it will be necessary to speed up car travel. Yet, transit has an important role, especially in providing mobility to the downtown area. Transit also provides mobility for low-income households, though most of their travel is by car. However, transit is incapable of providing competitive travel times to most of the metro area, which is why people travel by car. Few places make the case better than Atlanta. For more than 30 years, Atlanta has been expanding its transit system and has built one of the largest new rail systems in the world. Whats more, MARTA is a world-class metro similar in design and capacity to the Paris Metro or the London Underground, rather than the lower-capacity trolley systems built in Portland, Dallas and elsewhere, using the catchy marketing name light rail. Yet, since 1970, transits share of travel to work has fallen nearly two-thirds in the metro area and by nearly one-half in the city of Atlanta. A recent Brookings Institution report highlights the scarcity of competitive service. Only 3.4 percent of metropolitan area jobs can be reached by transit in 45 minutes by the average employee. This is an astounding figure, since the average single occupant automobile commuter spends one-third less time traveling to work.

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Even the most effective transit systems New York, San Francisco and Boston provide access to only around 10 percent of jobs. And, unless transit agencies are permitted to print money, there never will be enough to do much more. In Europe, where cars carry the largest share of commuting in major urban areas, the European Conference of Ministers of Transport has characterized attracting people out of cars to transit as comparatively ineffective. If it were possible to reduce travel times with transit, local planners would have long ago proposed such a system; they havent anywhere. The reality is that transit, on average, takes 70 percent longer than commuting by car in the metro area and the roundtable plan will not change that. Transit accounts for barely 1 percent of metropolitan travel. Yet the roundtable plan would commit more than 30 times that on transit. Nearly a quarter of this would be spent on repairing the MARTA system which, if it were sustainable, would have no need of new taxes. Metro Atlanta needs a vision that focuses on objectives. This means one that reduces peak-hour travel delays as much as possible per million dollars of new taxation. How much is spent on transit or highways is not the issue. The issue is reducing metro Atlantas travel times to encourage greater economic growth, job creation and poverty elimination. Wendell Cox is a public policy expert. He is a former member of the Los Angeles County Transportation Commission and has worked on transportation projects in the Atlanta area, and many others around the world. He is frequent contributor to the NewGeography webpage.

7.

Straight Thinking NBR Column.

Why We Must Learn to Love Asset Sales Part One. There is a general consensus that New Zealand must develop more innovative and internationally oriented businesses. Innovation is a prime driver of economic development and can also support higher wages. Yet the election campaign has further locked in place a set of beliefs that deprive innovative companies of the capital they need to fund their forays into international markets. The campaign promoted wide-ranging capital gains taxes and promoted No Asset Sales.

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Capital gains taxes can be a serious disincentive for venture capital investors because they can make it more difficult to achieve the targeted rates of return required by investors. We should avoid imposing fines for success. High capital gains tax rates also tend to lock in early original investors because exiting from successful investments can realize a capital gain and incur a tax liability. Smaller venture capital funds specialize in start-ups and must be able to sell down their shareholding to allow the company to receive investments from larger funds specializing in mezzanine finance. They in turn exit by promoting IPOs which allow the company to attract funding from the widest pool of investors. Venture capitalists have been recycling their funds for years. Professor Brophy of the University of Michigan argues that a robust venture capital industry requires the following: 1. A low or zero capital gains tax. (Tick) 2. A low cost IPO board. By US standards our NZX is a low cost board. (Tick) 3. A Prudent Manager Rule. This allows pension funds and the like to invest a prudent percentage of their funds in risk ventures. We now have this rule but it has been interpreted as a Rule requiring fund managers to be super-cautious. (Semi-tick.) 4. Special or Limited Partnerships. (Tick) New Zealand, like many agricultural economies, allowed special partnerships and Strada used them to become the worlds largest financier of musicals, starting with their investments in CATS. (Tick) So, four ticks and we should be in. However, the business culture is equally important. Sadly, the No Asset Sales campaign has seriously impeded the development of an entrepreneurial and risk management culture by making false claims preying on public ignorance. Our so-called expert commentators failed to explain why partial asset sales are a vital tool for funding the growth of any business, whether in public or private ownership. Back in the late seventies it was hard work explaining that an entry into the US market with high value innovative products needed an American partner to provide both knowledge of the

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local market, and the financial grunt to defend the patents, copyrights or trademarks insofar as they existed at all. The N.Z. entrepreneurs would all too often consult with some expert who would say But you will have to share your profits with Burroughs, or IBM, and furthermore, they only have 25% market share. How lone New Zealanders, with virtually no capital, working out of a spare bedroom, thought they could take a 25% market share away from a multinational giant without generating a counter attack, was beyond me. It gave me no pleasure to watch them go broke. Then there was the cultural reluctance to sell shares in return for new investment. Many had borrowed against the house to provide the seed capital and were prepared to borrow against a second mortgage rather than sell a minority share in return for equity. No Asset Sales was already deeply embedded in their minds. Venture Capital investors want to see their funds put to good use growing the company rather than paying interest. Many hopeful clients were dismayed to find that venture capital investors were not in the business of providing equity to pay off personal debts rather than grow the business. This is what seed funding, venture capital, mezzanine financing, and investment banking is about. The aim is to finance the growth of the business at a rate that more than compensates the existing parties for their reduced share of the total equity. We used to say 10% of an elephant is better than 100% of a mouse. What surprised me about the No Asset Sales campaign was the weakness of the defense. The so-called financial analysis consistently asked whether reduced interest bills resulting from partial asset sales and the repayment of debt could compensate for the lost dividend stream. The consensus seemed to be that any financial benefits were outweighed by the loss of companies that the taxpayers already owned, and by claims that the dividends were lost forever, and could never be bought back all very appealing to the latent Marxists among us. Theses analysts also seemed to overlook the difference between the risk associated with a dividend stream compared to interest payments.

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There is of course a third revenue stream to consider. The revenue stream from taxation explains why many Governments are prepared to forego some taxes on the capital gains from partial asset sales in new ventures. The Government claims 28% of all pre-tax profits from every company in New Zealand. Company taxes are paid prior to any distributions based on shareholding. Partial privatizations as such, have no impact on these pre-tax claims by Inland Revenue. The investors aim is to grow the company, and sensible governments know that rapidly growing companies can increase government revenues. Mighty River Power, which is presumed to be the first SOE off the block provides a useful case study. Last year the Groups total after-tax profit distributed to the government as the sole shareholder was $110 million. Selling 49% of the shareholding to private investors would reduce this dividend by $54 million. However, the taxpayers of New Zealand continue to be compensated for their past investment in Mighty River Power by Governments claim on company tax. The pre-tax profit is $185 million and the Government 28% tax-take (ignoring imputation) will be $52 million per annum, about the same as the lost dividend. The Government also collects all the income tax paid by their 725 staff. Then there is the GST paid by the staff, their dependents, and their customers. Consequently, many Governments are prepared to waive the revenue from a capital gains tax on new ventures. The long term benefits of growth and expansion into international markets can far outweigh any early costs. How much tax has been paid by Intel, Microsoft, and Apple?

7.

Entertainment: An Ideal Christmas Present Read it, then Give It.

Books are a great present because you buy one, read it yourself, and then make it a gift. So getting two bangs for the buck. And Rae Roadleys book Love at the End of the Road makes a great present for all the right reasons. Rae weaves several narratives together and just about anybody will will relate to one or all of them.

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There is the personal love story, which is also a major life journey of the city girl to the farmers wife, there is the story of the restoration of the historic Batley House (fortunately painted before the Auckland Council decided white was no longer an appropriate colour for houses visible from the harbour), the story of the settlement of the Otamatea River (the river made famous by Jane Manders Story of a New Zealand River and the film The Piano) by Maori and Pakeha, the history of the families of the peninsula, all accompanied by beautiful photographs and illustrations. But in addition Raes story documents the way the old rural-urban divide is disappearing as more people move back to the rural areas after growing up in cities here and around the world, and bring their professional skills and experience, which the locals grow to recognize as a resource. Without using the word, Rae finds that the internet and finally broadband, allows her to telecommute rather than spend half her life negotiating the tortuous roads that connect Batley to the outside world. Finally, you can buy it on line, at a discount, and hence avoid the Christmas rush for at least one of your presents. Go to Raes home page here: http://www.raeroadley.co.nz/ And click on the click here to order button and its a breeze. We live across the river from Batley and this splendid house sits in the middle of our bedroom view. This is Northlands own Under the Tuscan Sun but with more tales to tell.

8.

Assistance.

If you need assistance in challenging your Councils destructive planning policies, feel free to contact the Centre for Straight Thinking to discuss how we might be able to help. Or help us finance our own research and submissions by making a donation using the form attached to the email message.

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PDF of this Digest.

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