New technologies and light-handed regulation are a recipe for disaster.

 

Listener: 16 March , 2013.

 

Keywords: Business & Finance; Regulation & Taxation;

 

The leaky-building debacle involved homes and commercial and public buildings being built with new technologies that the builders were not competent to use, coupled with weak supervision and regulation. The failures were not found out for many years, by which time a lot of the builders had retired and/or closed their companies.

 

Remediation has generally been clumsy and expensive. The substantial burden of the costs has often been carried by innocent parties.

 

Other new building technologies have met a similar fate. Evidence presented to the Canterbury Earthquakes Royal Commission suggests much the same happened when new buildings were being earthquake-proofed; people may have died as a result – buildings certainly did.

 

Such failures were not confined to Christchurch (elsewhere the buildings have yet to be tested by earthquakes). So  as well as the massive construction effort going on in Canterbury, many buildings around the country have to be earthquake-strengthened. This includes older buildings not built to today’s standards as well as those that were purported to have been but weren’t. (There may be faults in some recent buildings that even the owners are unaware of; this was the case in Christchurch a couple of years ago.)

 

Additionally, other owners of buildings built during the years of negligence are struggling with similar – albeit not always as onerous – difficulties arising from new technologies not being used properly; apparently, decks were often very poorly installed.

 

The backlog of remedial rebuilding does not stop there. Many publicly owned rental houses (and probably some private ones) were not adequately maintained, are near their end of their life and need to be rebuilt.

 

What such a backlog means in economic terms is that although we paid builders and others in good faith, their work must be replaced or redone. Much of what was paid has been wasted, with the spending having gone into consumption with little in return. Now we have to reduplicate their efforts. How is remedying the backlog being paid for?

 

We could cut back our consumption, in effect offsetting the past consumption funded by the outlays on poor-quality buildings. It’s more likely we will borrow offshore, which shifts the offsetting of lower consumption onto future generations. (In the interim, the borrowing will drive up the exchange rate, inhibiting economic growth, especially in the export sector.)

 

The terrible fact is that much of this past capital investment was not effective. Much of the investment over the next few years will be diverted to dealing with past failures, rather than adding to our productive capacity. The long global recession aside, we might well expect slower economic growth in the future as a consequence.

All reminiscent of Robert Muldoon’s “Think Big”. Then we invested enormous resources in (mainly) the energy sector, which gave little contribution to net output but came at a considerable cost to the taxpayer. The difference this time is that while taxpayers and ratepayers cough up for badly built schools, hospitals and other public buildings that are leaking or earthquake risks, much of the burden will be borne by the private sector.

 

We took action to avoid a repeat of Think Big, but there is less thought about this failure. “Light-handed regulation” still pervades public-policy thinking, with its confidence that the market will find a solution. Yeah, right. If we don’t have enough competent builders, the market will use incompetent builders. Construction prices are already rising, which is another market solution.

 

You will notice that this column is bereft of statistics. Few secure ones exist. Once upon a time, a public body would have calculated the size of the backlog, added in the construction needs of a growing population and any infrastructural backlog, and projected the future size of the construction industry. It was called “indicative planning” and would have provided a useful foundation for public discussion as well as sectoral guidance, such as to the numbers of builders our apprenticeship and polytechnic sector would have to provide. That approach of thinking about the nation’s problem in a systematic way has long gone – better leave it to a market that has already failed us.