Category: Economics

Turning Water Into ….What?

I am having to use up my backlog of work here. This was written mid 2016 (so some people and situations have moved on) as an entry to become an intern at the Economist. Once again, alas no.

Those familiar with the Economist will probably recognise the style. The trick was to cover as much ground with the least number of words while coming to, or at least alluding to, some sort of recommendation. 

For the record, I gave this to a local MP who I see every now and then at my local cafe (only in NZ!). They confirmed that my rationale about why water is not priced is almost certainly correct.

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Initially writted May, 2016


As recently as 2011 the Economist was lauding the benefit of high milk prices to the New Zealand economy (Creaming Along, June 16th, 2011). Alas, milk has not escaped the worldwide fall in commodity prices and the country’s reliance on it is starting to hurt. Farmers are receiving 55% less for whole milk powder than what they were in 2014, below the breakeven point for most.  As profits have evaporated the wider environmental costs to producing this stream of white gold have become harder to ignore.


Inevitably the the flashpoint is water. A steady stream of newspaper articles highlighting the reduced quality and size of local waterways keeps the public aware that being able to swim in your local river, long thought a virtual cultural right, is no longer a given.  Although dairy farmers protest that they are being singled out, most see a direct correlation between this and the number of cows increasing by 30% in the last 10 years.


Milk is essentially a higher value export product than water and grass, areas where New Zealand has a competitive advantage. However, cows are a pretty inefficient intermediary in this process with some estimating that it takes 250 litres of water to produce 1 litre of milk. On the other hand, cows are magnificent at producing effluent and methane, both polluting (methane is NZ largest contribution to greenhouse gas emissions). Significant investment has been made in keeping stock directly out of waterways but urea born nitrates tend to build up in the soil and in some areas have compromised drinking water supplies. New irrigation schemes have also allowed dairy farms to operate in previously marginal areas, some of which are on major tourist routes. As tourism has now overtaken dairy as the main export, and is promoted using the country’s “clean, green”  image, some ask if it is time to sacrifice the sacred cow.


On a worldwide scale New Zealand’s water quality is still high and in some areas unbelievably so. Some have decided that it is far simpler to avoid what economist Eric Crampton terms the “middle cow”, and export bottled water directly. Tensions erupted recently when a local council was found to be selling land with water rights for 1.4 Billion Litres/year to be used for this very purpose. Although less than used on a farm with 450 cows (half the average herd size), and potentially more lucrative than milk, this has outraged those who think water rights are already over allocated in the area.


Mr Crampton points out that a market for water would help here, reinforcing Parliamentary Commissioner for the Environment, Jan Wright’s, previous call for one to be established.  However, the public generally see water as a public good so promoting water markets is like pushing the proverbial uphill. In the end water is priced indirectly, and inefficiently,  via higher property prices for those with existing water rights.


John Key, both the Prime Minister and minister for tourism,  has previously taken the stance that “nobody owns the water” although maintaining this position must be a struggle. With a background in finance, he almost certainly knows it is a fiction, and the liberal wing in his party would probably support water pricing. However, it is politically expedient. Buying and selling water rights implies ownership, inevitably leading to Treaty of Waitangi claims by indigenous Maori. The previous leader of the National party, Don Brash, almost defeated the sitting Labour party by stirring up antagonism toward Maori treaty claims. As current leader of the National Party, Key, a close watcher of the polls, would lose significant support by acknowledging the legitimacy of these claims if they arose, but at times requires the Maori party’s support in parliament to pass legislation.  Although unsatisfactory, the stance keeps both sides at bay but does little to solve the problem of deteriorating water and sensible ways to determine who gets to use it.

Reducing Peak Loads

A potential argument for cycle-ways and buses

Every morning Jess (my dog) and I walk to our local coffee shop, read the paper (she is very bright), and watch the world go by. This routine happens to coincide with peak morning traffic which has its own amusements.

Unsurprisingly, the vast majority of drivers appear unhappy stuck in traffic. But on a more technical front, I have also been struck by:

  1. How few cars get through on a single traffic light change (around 6-10 in this area)
  2. The large amount of road space that cars take up.  
  3. Consequently, how a small reduction in cars during peak times would considerably improve traffic flow.  

The space inefficiency of cars vs bikes and buses is quite nicely shown in the following image.

Space for car bike bus

No wonder there are efforts to encourage people to cycle.

In Christchurch, the latest push rests heavily on the relatively controversial development of dedicated cycle-ways. The public acceptance of their benefits has not been helped by some bad design and extremely extravagant and intrusive installations. Some wonder if the significant cost is worth it.

To add to the debate I wondered if I could estimate the impact cycling has on traffic levels by taking a rough survey from my coffee shop window.

I will be the first to admit that this is highly unscientific study. In particular, my coffee shop is on a major car, bike, and bus route vs one primarily used by cars. However, in a 30 minute window during rush hour there was an average of 15 cyclists for every 100 cars (primarily carrying a single passenger). At this time traffic is already bumper to bumper. I would suggest that if all these cyclists decided to drive significantly larger traffic problems would ensue.

I would also suggest that if this number could be increased even a small amount, say 25 bikes to every 100 cars, this would result in a significant improvement to car travel time during peak time.

While the $150million budgeted to be spent on cycle-ways over the next 5 years seems like a large figure, if it improves peak loads it may be a comparatively good use of money. Given that the council already spends around $150 million every year on roads and footpaths, building cycle-ways may be a better use of money than building more roads to cope with the peak load.

In this same 30 minute window, 3 buses went past. It is easy to be skeptical about buses in Christchurch as for large amounts of the day they appear to only carry one person,  the driver!  However, at peak time these three buses carried around 100 people (roughly, I had to count quickly). Okay, some of the passengers will be too young to drive, but it would appear that buses currently halve the peak traffic load on this route. That is very significant.  Currently, bus usage in Christchurch is subsidised to the tune of $65 million a year, or $150 per resident. Compared to the figure spent on roads that does seem a lot. However, perhaps this is worth it just to reduce this peak?

The complicating factor is that cycle-ways, buses, and bus lanes usually appear empty so are easy to see as a waste of space and resources. However, this ignores the fact that even at their busiest they will always appear empty because buses and bikes take far less room than a comparable number of cars. It also forgets that their big benefit only occurs at peak traffic points, which is not a very long time.

Now clearly a fuller cost/benefit analysis needs to be done here. However, this analysis is enough for me to restrain my initial distaste at the seeming waste involved with empty bus and cycle lanes. I need to remind myself of basic economics and consider whether they may be the most cost-effective option despite not appearing like it. Looks can indeed be deceiving.

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On a side note – the costs of peaks is a pretty common engineering issue. Most notably in electricity generation. In New Zealand we have plenty of capacity if only power was used steadily during the day (and year). Alas, it is not, so significant costs ensue trying to smooth it out. Variable power pricing is one technique used. It is also why big electricity users are encouraged to stop production as this can be cheaper than building more generation. It is also the reason that engineers tend to be enthused by the potential for energy storage (batteries, lakes etc) as the best way to create a “greener” energy network. Better to make optimal use of what we have rather than have to build new things like windmills.  

If asset sales are no longer an option, how about asset allocation?

A different perspective on how to use public assets

For those used to a diet of Camino related blogs this one might come as a bit of a shock. For those that know me and my interest in governance, economics, and business – not so much. 

This was intended as an opinion piece for the the local paper in Christchurch, The Press. Alas, no word was heard :-). 

I am very interested in responses to this piece as the line of reasoning has far wider application than the example it has been applied to. I for one think that the way society wastes its resources is a scandal, particularly when done in the name of good intentions. So many people are missing out on help that we could be delivering if we were a little more sensible.  

Initially written: 13/2/2017

All appearances suggest that asset sales are no longer being considered by the Christchurch City Council (CCC). This will please many people as there are good reasons for keeping publicly owned assets.  However, supporting this should not prevent sensible discussions about asset allocation.

Simply put, are the assets the CCC has performing well, or should they swap them for something else? If we are going to keep the family silver, shouldn’t we make sure what we have is in fact silver!

For example, consider Red Bus. Is it worth the CCC owning this asset, or could it do better?

The annual report for Red Bus is freely available so we can get significant insight into this company’s performance. So what does this reveal?

First, with publicly owned companies it is inadequate to just focus on financial performance. Care needs to be taken to consider important, but more intangible, reasons for public ownership. They may be a monopoly provider, or they may provide some form of public good that the private sector would not deliver.

When considering businesses like this it is worth performing a thought experiment and ask, “what would happen if this company ceased to exist?” What would be lost that the numbers do not show?

With Red Bus the answer is pretty clear, not much! Despite appearances, Red Bus is not responsible for providing public transport in Christchurch. ECAN is. Red Bus simply tenders to provide bus routes along with other companies.  And they often lose. Currently only 30% of routes are performed by Red Bus with private firms like Go Bus delivering the rest.

If Red Bus stopped providing bus services your average bus user wouldn’t notice the slightest difference.

So why does Red Bus exist? It exists because the CCC believes it can operate a bus company profitably and receive a healthy dividend. Therefore, we can largely ignore any intangible benefits and focus primarily on its financial performance.

So how did they do?

Last year Red Bus declared an operational profit of $132,000 on turnover of just over $19 million. Better than last year but still a very skinny margin of 0.7%. Probably the simplest way to describe this is “running to stand still”.

Of more concern is that a lot of resources were used to get this small profit. The accounts list net assets at a shade under $38 million, implying a return on assets of 0.3%.

If Red Bus was sold, and different assets purchased, what return could we expect from $38 million? As a comparison we could:

  1. Put the money into a bank deposit. With interest rates currently around 3.6% this is worth $1.4 million per year.
  2. Buy some industrial property. A 7% return should be possible so this is worth $2.6 million per year.
  3. Attempt to mimic the performance of Ngai Tahu’s commercial arm which made around 15% a year since settlement. This is around $5.5 million a year.

None of these options would compromise the provision of a public bus service. ECAN would simply contract to another company. In each case we would get the bus service PLUS the extra money.

A 7% return via option 2 is not an unreasonable expectation. What does Red Bus aim for? According to its report it has a profit target of $400k, or a 1% return on assets. This is hardly a heroic goal and they have failed to achieve even that. With far less effort they should be able to achieve 7 times this!

So what do I conclude?

  • Red Bus is operationally inefficient as even with its thin margin it can’t keep other private providers (who tend to be very rational about profit) at bay.
  • Red Bus is very asset rich but makes virtually no return on those assets.
  • If the council wishes to receive a dividend from its assets there are far easier options than owning this bus service.
  • By owning this company the council is effectively wasting around $10 per ratepayer annually.

My response? Sell the assets in this company, let others provide the bus service, and buy other assets which will deliver a decent return.    

Red Bus is a tiny component of the CCC asset portfolio. However, even reallocating these resources could significantly improve the life of ratepayers. Even if only used for transport in the city an extra $2.6 million per year could be used to:

  • Give away 1 million free bus tickets to encourage more users.
  • Give 7000 bikes away.
  • Give 1500 E-bikes away.
  • Provide 86,000, $30 taxi trips.
  • An additional 3% more bus routes could be provided

These are just some options available, and they would be additional to the existing bus system.

Get creative. What would you do?

It is not unreasonably that all the companies owned by the CCC should receive the same attention. As ratepayers we should ensure that they are achieving even a basic level of performance so we are able to enjoy the benefits. As demonstrated with Red Bus, not doing so could be leaving our community significantly worse off than it could be.