Failing KiwiBuild not the final word

Dr Eric Crampton
19 June, 2019

Economists, or at least economists of a policy-bent, like to distinguish between outputs and outcomes. Focusing on the former comes too easily at the expense of the latter, especially in the case of KiwiBuild and the Government’s overall housing supply agenda. 

But let’s step back. 

An outcome is something policy tries to achieve: improved wellbeing; longer life expectancy - or well-functioning housing markets to provide affordable homes. 

Outputs are what government bureaus will produce when trying to improve outcomes: more contracted mental health services; funded vaccination programmes; government-built or government-backed houses delivered through programmes like KiwiBuild.

Bureaus often have a hard time thinking about outcomes because they are more typically contracted to provide outputs, which are a lot easier for the government to monitor. It can be easier to tell if a District Health Board is hitting its targeted number of hip replacement surgeries than to tell whether people living in the DHB’s area are happy with the state of their health. 

Because outputs feel more tangible than outcomes, they can also prove attractive to politicians in election campaigns. Promising shorter waiting lists for hip replacements and more hip surgeries feels more credible than promising improved overall health outcomes. 

But targeting outputs can provide perverse outcomes. 

A DHB facing a hard target on hip replacement surgeries might prioritise that procedure over others it knows could do more to improve overall health outcomes. 

And an opposition that has promised to build 100,000 houses can find itself over a barrel if it ever finds itself in government. Worse, an effort to deliver on an ill-thought-through promise about outputs made while in opposition can make it harder to deliver on the intended outcome of improved housing affordability. 

It was always a bit daft to promise delivery of 100,000 government-build houses over a decade. If the housing market were working well, the programme would be unnecessary. As the housing market is not working well, underlying blockages in that market needed to be solved before KiwiBuild had any chance to succeed. But if those blockages were solved, the programme would be unnecessary.

New Zealand’s housing affordability problems were never due to the government having failed to build enough houses. They were rather due to a toxic mess of perverse incentives facing local councils bearing the costs but not enjoying the benefits of population growth; council debt limits making it difficult to roll out the infrastructure necessary for growth; difficulty in revising district plans under RMA processes; and a construction sector geared up to the relatively small levels of construction possible under those institutional structures – as a starting point. 

Achieving the outcome of improved housing affordability always required addressing that mess. The same barriers stymying private developers would also stand in the way of any government-led building programmes. 

While KiwiBuild’s failures to meet its targets have attracted headline attention, Housing Minister Phil Twyford has been making slow but real progress on the rest of the Government’s supply agenda. The Government’s new infrastructure financing mechanisms in particular have a lot of potential to enable more new construction. 

American cities that have managed to deliver affordable housing despite sharp population growth do not typically load the costs of the necessary infrastructure development straight on the local council’s balance sheets, where it will attract opposition from existing residents, or onto the developer’s balance sheet, where it will increase the project’s capital cost. Instead, infrastructure is financed through bond issues tied to the specific development project through a levy on the future owners of land serviced by that infrastructure. The beneficiaries of the infrastructure pay for it, and spread the cost of it appropriately over time.

This project-based financing brings greater commercial discipline to infrastructure provision as projects unlikely to succeed will not gain creditor backing. Because there is no recourse to the local council if the development fails, ratings agencies do not treat those bonds as council debt under another name. And because the costs of infrastructure roll-out are borne by the beneficiaries of that infrastructure rather than by council more broadly, long-standing residents see fewer reasons to oppose new development.

Minister Twyford and Treasury have been developing a similar mechanism for project-based infrastructure financing. Progress has been slower than it should have been, in part because Kiwibuild has diverted bureaucrats’ efforts away from the ultimately more important work. Legislation has yet to make it to Parliament, but we understand it will allow the issuing of infrastructure bonds on approval through Order in Council, repayment of the bond through levies on the owners of property benefitting from the funded infrastructure, and no recourse to council should anything go wrong. 

The new financing mechanism offers a lot of promise. If combined with easing of the rural-urban boundary, it could enable developments that leapfrog existing landbanks, and in doing so completely change development incentives. Owners of idle zoned land will want to get developed properties to market ahead of the flood of development opportunities that could ensue. 

And there are ways of applying that model to encourage brownfield development as well. That extension may require stronger democratic accountability requirements that a bond issue and levy could only proceed by a supermajority vote of affected property owners – but that is an argument for a future column. 

The overall supply agenda that is progressing, behind the scenes, away from the furore of KiwiBuild, is exceptionally promising. The Government campaigned in 2017 on fixing our broken housing markets. We have a promising chance of achieving that outcome despite the failure of KiwiBuild as output. 

Minister Twyford deserves the chance to see his agenda through. 

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