Sunday, January 29, 2023

Matthew Birchall: The seduction of grandeur

New Zealand is small and relatively young, but it has a rich history that can help us think through today’s problems. Unfortunately, we often ignore the lessons of the past.

This historical amnesia has a cost, even if it is difficult to quantify.

Over the last several months, I have been exploring the history of our critical infrastructure. It has been a more enjoyable experience than it sounds! From Julius Vogel’s national rail network in the 1870s to the rollout of broadband in the new millennium, New Zealand’s past is littered with fascinating success stories.

But it also contains plenty of cautionary tales that should give us pause for thought.

One example that lingered in my mind over the summer holidays was Robert Muldoon’s ill-fated energy programme, later dubbed “Think Big.”

After the second oil shock of 1979, New Zealand suddenly found itself in deep trouble. World oil prices doubled, growth plummeted, and inflation ran rampant. Muldoon’s response was to ramp up investment in New Zealand’s energy sector, with the intention of attaining 50% energy independence by 1987.

His government calculated that 410,000 additional jobs would be created.

Many readers will recall ventures such as the Clyde Dam or the methanol plant at Waitara. They were fiercely debated at the time and came with an astonishing price-tag.

Some estimates put the total cost of the flagship energy projects as high as $11 billion. Much of the funding and financing was paid for by government borrowing. Brian Easton humorously recalls a Treasury official telling him that it “seemed impossible to stop the b*****s building power stations.”

If you want to catch the full story, take a look at John Boshier’s excellent Power Surge: How Think Big and Rogernomics Transformed New Zealand, published last year. Boshier had a ring-side seat at the Ministry of Energy while the events unfolded.

I think we would do well to learn a few lessons from the fiasco.

One of the most important concerns the economics of megaprojects. Large infrastructure ventures often fail to live up to expectations. Costs begin to spiral, timelines blow out, and the end result frequently pleases no one.

Did someone mention the new Christchurch stadium?

New Zealand is not alone. History shows that proponents of megaprojects tend to overestimate benefits and minimise costs. We might usefully call this the seduction of grandeur.

It is perhaps unsurprising that big ticket items are frequently plagued by an optimism bias. Promoters, after all, have an incentive to champion their projects.

But this means that important information about viability is often misrepresented. The goal is to get the greenlight, not to produce a realistic cost-benefit analysis that could potentially tilt the scales against implementation.

Economic geographer Bent Flyvbjerg notes that nine out of ten megaprojects have cost overruns, and that time delays and benefit shortfalls are ubiquitous. Flyvbjerg’s findings have encouraged him to posit an “iron law of megaprojects,” namely, that such ventures are doomed to come in “over budget, over time, over and over again.”

Success, in other words, is very much the exception rather than the rule when it comes to megaprojects. And, unfortunately, Think Big was no exception.

Those jobs that Muldoon and his Cabinet promised? They turned out to be as solid as methanol. By 1989, the core energy projects employed fewer than 4,000 people with a further 9,000 in jobs only loosely attached. Think Big had turned into a damp squib.

Worse still was the cost of Muldoon’s energy dream. While high inflation in the 1970s and 1980s necessarily pushed up costs, the capital overruns were nonetheless enormous. Boshier calculates that five of the eight projects cost more than double the approved cost, while another was 60 per cent more expensive.

The broader economic picture was equally dire. Public debt ballooned from just over $4 billion at the start of Muldoon’s premiership in 1975 to nearly $22 billion by the time he left office in 1984.

Finally, Think Big illustrates what can go wrong when political considerations unduly influence what ought to be commercial decisions. Muldoon’s eagerness to achieve energy independence was at heart a political calculation, not a sober assessment of what was in New Zealand’s best economic interests.

To be sure, the oil shocks of the 1970s demanded a response. No government could have expected to survive by sitting idly by as prices at the pump rose exponentially. But that did not exempt the government of the day from carefully weighing up the trade-offs between energy self-sufficiency and alternative investment opportunities.

Politics made that difficult. Muldoon had hitched his political fortunes to Think Big, and so there could be no thought of backing down.

This was most apparent in the run-up to the 1981 general election. By this point, three of the big projects were already languishing.

When a decision on a second smelting plant came due, it was clear what Muldoon’s political preferences were. The plant, which would be overseen by the government-sponsored company New Zealand Steel, would increase steel production from 150,000 to 775,000 tonnes per annum.

However, there was a snag. Almost everyone involved thought that it was a bad idea.

No matter.

National was desperate to enter the election campaign with a Think Big story to champion, and so it approved the New Zealand Steel plan at cabinet on 27 October, a month before the polls. Politics, in other words, had decisively won the day.

Think Big was an unmitigated disaster. The search for energy independence, in the final analysis, proved a huge drain on the New Zealand economy.

No less harmful was the manner in which it was undertaken. Political expediency took precedence over economic prudence, and the taxpayer was on the hook when it all came crashing down.

The episode stands as a cautionary tale for what can happen when governments exert too much power over the commanding heights of the economy. It was an expensive lesson for New Zealand to learn in the 1980s, and it bears repeating today.

After all, those who forget history are condemned to repeat it.

Matthew is a Research Fellow at The New Zealand Initiative, focusing on infrastructure and the housing market. This article was first published HERE


Robert Arthur said...

Is the privatisation of the eletricity supply industry seen as good or bad?
Very effective in reducing staff numbers but who gains most? Overseas shareholders?

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