Monday, February 26, 2024

Brian Easton: Do We Take Regulatory Impact Statements Seriously?

The Sorry Story of Earthquake-Prone Buildings.

The Treasury requires that when new or amended legislation is proposed, a Regulatory Impact Statement (RIS) be provided – ‘a high-level summary of the problem being addressed, the options and their associated costs and benefits, the consultation undertaken, and the proposed arrangements for implementation and review’.

In its hurry to get back to the 2017 policy framework within 100 days, the new Luxon-led government announced it would not require RISs for its legislation. Perhaps the flouting of requirements could be justified if they were repealing recently passed legislation and could use the old RISs. But equally it could be argued that when it wants to, the Government ignores the whole exercise and that the RISs are only fig leaves to give the impression of quality decision making.

To see how ineffective RISs can be, look at their record on the 2016 Building (Earthquake-prone Buildings) Amendment Bill, which changed the way earthquake-prone buildings are identified and managed under the Building Act 2004. Up to 20,000 buildings may have to be retro-engineered or demolished as a consequence. The problem is particularly intense in Wellington, our most earthquake-vulnerable city, where there are almost 600 buildings on the city’s Earthquake-prone Building register.

As required when preparing legislation, the Ministry of Building, Innovation and Employment (MoBIE) produced an RIS. (Here) It is a fairly straightforward RIS until one gets to its cost and benefit analysis. CBAs are really no more than collecting together what is known about the economics of a project, in a systematic framework, typically using data from other disciplines (such as engineering). (We do not know when an earthquake will occur, so the analysis uses risk assessments provided by geologists.)

CBAs can be tricky. (Sorry folks, if this is quite demanding.) This CBA compared the cost of doing nothing to strengthen the building, against strengthening it to a seismic standard related to the New Building Standard (NBS). Here is my account based upon my reading of what the NBS rating means; where I have no expertise, I’ve had it checked out by qualified engineers.

The percent NBS rating is a measure of a building’s potential seismic performance when compared to the seismic performance of a similar new building constructed under current standards and codes. In Wellington, new buildings are designed and constructed to reliably withstand earthquake shaking with a return period of one in 500 years. A seismic rating of 34% NBS means the building should perform similarly to a 100% NBS-rated building at about a third of the level of shaking; buildings with a 34% NBS rating should withstand a one-in-41-year earthquake with a similar level of reliability. (Smaller earthquakes occur much more often than larger ones.)

The New Zealand Society for Earthquake Engineering considers buildings with a rating above 67% NBS, which can withstand a one-in-200-year earthquake, to be acceptable in terms of seismic risk. Buildings with an NBS rating below 34% are deemed to be ‘earthquake prone’ and are usually required to be demolished or strengthened.

To simplify, a 34% NBS-rated building is thought to have 10 times the risk of a human fatality of a similar new building. However, before the below 34 percenters rush out to live in a tent on the back lawn, they should observe the probability of a fatality is low.

The CBA concluded that if there was no further strengthening, the likelihood was that there would be up to 8.1 New Zealand deaths a year from earthquakes (they would tend to be clumped in particular years of big earthquakes). But if high-risk buildings were upgraded to the 34% NBS standard, there would be only 5.8 deaths in an average year. (If they were all upgraded to 100% NBS, there would be 2.4 deaths; the reason the death ratio is 2-3 times and not 10 is because many buildings are already above the 34% NBS standard.)

The figures are trivial compared to say, the annual deaths from the road toll (about 350) or cancer (about 9,500). But every life is precious, so we should try to reduce all deaths, providing the resources used cannot be better deployed somewhere else.

The CBA uses the Net Present Value (NPV) method to calculate the cost of the upgrading. It involves some heroic assumptions. The NPV calculated to upgrade all buildings to 34% NBS in 15 years was $1,717 billion. That number is not transparent so I simplify it to paying out $216m per year in construction costs for each of the 15 years.* That spending would reduce deaths annually by 2.3 (8.1-5.8). We would be spending approximately $10m strengthening buildings to avoid one death.

That is a much higher outlay than we spend in the health and transport sector to avoid deaths. We could save many more lives by spending the $216m in those sectors than on earthquake strengthening. So we are wasting money in the strengthening which could be used to save lives elsewhere.

Unfortunately, the CBA is not a very easy read, but I have yet to meet an economist who has looked at the RIS and was not outraged that legislation went ahead given its Cost-Benefit-Analysis. Economic considerations are not decisive but they should surely be taken into account, especially as the RIS alerted that there were expensive consequences.

I do not have the record of how MoBIE or the Cabinet Ministers discussed the CBA but I can tell you about Parliament. The bill got referred to a select committee, which received accompanying papers from the ministry, including the RIS as Appendix 2. Following submissions, the bill was reported back and then went through the various stages of debate until it became law.

None of the select committee members mention the RIS, nor did the minister (Nic Smith). Only one MP, ACT’s David Seymour, did. He was the sole MP to vote against the bill becoming law, primarily because of issues related to the CBA. Except for him, the CBA was wasted on Parliament.

If the MPs could ignore the costs, owners of earthquake-prone buildings could not. Many residents of affected apartment buildings are not able to afford the cost of strengthening to 34% NBS or higher and will lose their homes. Those that do strengthen have to suffer severe disruption during the construction work and are also likely to be out of pocket finding alternative accommodation (in one case I know of, for a year). Such costs were not included in the CBA.

Moreover, an earthquake-prone designation reduces the value of the building for sale. Even an engineer who understood the meaning of the NBS would be reluctant to purchase one because a subsequent sale is likely to be compromised. The Wellington apartment market is in chaos.

To round the policy story off – alas not for those owning earthquake buildings – it was intended to review the NBS in 2022. However, the review was delayed until 2027, but the incoming minister is bringing the review forward. Any revision is unlikely to resolve the difficulties that owners of earthquake-prone buildings face. These are not solely engineering matters but also involve economics and regulation and a bit more gumption from Parliament.

* I simplified by ignoring that the strengthening will also save lives in earthquakes occurring after 15 years. (I used a 10% p.a. discount rate.)

Brian Easton is an economist and historian from New Zealand. He was the economics columnist for the New Zealand Listener magazine for 37 years. This article was first published HERE


CXH said...

Moving out of Wellington, it is also helping destroy small towns. Old buildings need millions spent to comply, however the return makes it uneconomic to complete. So they are shuttered, all while the owners lose whatever capital they had.

MBIE is a department that should shut down immediately. They cost us millions as their tentacles speed ever further, reaching deep into other realms. Their numbers bloating as they chomp away at the taxpayer filled trough.

Basil Walker said...

An important factor in the calculation of possible earthquake deaths relating to commercial buildings is timing which is "an act of god". Schools, industrial and and commercial buildings are vacant more than they are occupied . Larger residential apartment blocks and hotels have greater occupancy risk of deaths which I acknowledge and should have greater emphasis of earthquake strengthening requirements, however that is mitigated by generally smaller rooms and more supporting walls.