Natural disaster horror stories and similar breakfast reading

Dr Bryce Wilkinson
The National Business Review
12 May, 2017

The past fortnight has seen more local news stories about scary sea-level rise and earthquake building risks.

It seems these days the public is being constantly urged by scientists, engineers and others to take costly action to reduce the potential for loss from natural disasters.

Perhaps more accurately, scientists, engineers and others are lobbying government to force costly action on the public.

One point of concern is many advocates are not disinterested spectators. Considerable sums are being spent on professional consultancy fees and research.

Why the need to force rather than inform the public?

Two warning signs are failures to adequately distinguish likelihoods from remote possibilities and to balance benefits against costs.  Good intentions, such as ‘avoiding loss,’ don’t cut it.

Sea-level rise is a slow and transparently evolving risk. There is plenty of time to monitor it for evidence of a scary acceleration. There is time to adapt as evidence emerges.

Loss in value

Properties increasingly prone to inundation will progressively lose value, reducing home owner, insurance and mortgage lender risks. Progressive losses do not need to be disastrous. Home owners sell and move. At a 6% annual rate of turnover, the average owner sells after about 16 years.

New owners, mortgage lenders and insurance companies can assess the evolving situation for themselves year in and year out. They will adjust their exposures along the way. Some will own other non-seaside properties.

Independent statisticians should be asked to regularly and publicly assess whether observed local sea level rise is accelerating in accordance with the highly accelerating projections being advocated by government agencies. Has the Government Statistician been asked to do this? If not, why not?

In contrast, tsunamis, earthquakes and volcanoes are sudden unexpected events with potentially catastrophic effects. It is even easier to create scary visions to alarm the public.

The current debate over earthquake building code standards illustrates the concern.

Costs analysed

Wellington-based economist Ian Harrison has analysed the government’s earthquake strengthening proposals for buildings. (He is founder of Tail-Risk Economics and chairman of EBSS, a society established to raise the quality of public debate about seismic risk in New Zealand.)

In a paper published earlier this year, he points out that if it costs $500,000 on average to strengthen each of the Ministry for Business, Innovation and Employment's assessed 20,000 earthquake-prone buildings in New Zealand, the total cost would be $10 billion. The costs of paying engineers and professionals merely to assess those buildings could be $1 billion.

Yet, he reports, the cost of remedying unreinforced masonry facades would be only $9 million for Wellington and Blenheim, and $100 million nationwide.

What benefits would the community get from spending that $10 billion? Harrison thinks it is likely to be less than $300 million.  Apparently, MBIE’s estimate is $24 million.

One factor is that the buildings designated as earthquake prone seem to be safer than thought. He reports that only two of the 700 buildings in Wellington so designated had material structural damage in its ‘moderate level’ November 2016 earthquake.

None collapsed. Apparently, the Wellington City Council’s website had told the public that designated prone buildings could be expected to collapse in a moderate earthquake.

Of course, more would fail in a more serious quake; the issue here is to take cost-benefit assessments seriously, it is not to advocate complacency.

Auckland's lower risk

Auckland’s seismic risks are so much lower than in Wellington that he assesses occupants of such designated prone buildings are probably safer there than in an aeroplane. A one-size-fits-all mandatory building earthquake code does not make much sense.

So what mechanisms do balance the benefits and costs of increasing occupant safety? The market test is whether the value of the property rises by more than the amount spent on strengthening it.

Last week I attended a presentation in an old two-storey commercial building in central Wellington. A firm had bought it for $600,000, reflecting its unsafe designation. It had spent not much more than that strengthening it up to 100% of code, using a new technique.

Market demand for buildings at 100% of code is so strong that the firm sold it for over $2 million. That represented an exceptional profit. Good for it and the new technique. Three cheers for the engineers. Investing in safer buildings can make commercial sense.

The presentation also pointed out that a yet higher code standard would, if mandatory, ensure the building survived a code-level earthquake, eliminating rebuild costs and reducing lost income from disruption to normal commerce. Indeed, it should but would the property’s market value rise by more than the costs? 

If not, why impose that additional cost on the community? Who, apart from the government, would spend, say, $5 million strengthening a building if its market value rose by only $4.5 million? This is the market test: Are the building’s future occupants prepared to pay the higher rents needed to strengthen the building? There are limits to what firms will pay as tenants to reduce the risks of dislocation and business disruption.

The bottom line is that experts and officials don’t help the public make well-informed decisions by failing to address likelihoods or to balance benefits and costs. The same point applies to health and safety regulation generally.

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