By Michael Parker*
[This is Chapter 7 of the book, The Pine Tree Paradox. Links to the previous chapters are at the bottom of this page.]
STANDING ATHWART HISTORY YELLING STOP
Government is an important financial contributor to the university project.
However, because of the long timeframe and the amounts involved, we cannot rely solely on the New Zealand government to fund this project.
The main contributor has to be the private sector and, more specifically, you.
In the first issue of the American conservative magazine National Review, published in November 1955, William F. Buckley Jr., the founder and original editor, wrote that the magazine “stands athwart history yelling Stop”.
Upon reviewing the economic history of New Zealand over the last 50 years, it is surprising that New Zealanders are not filled with precisely that same impulse.
With the cumulative weight of missed economic opportunities so great, the evidence that economic outperformance requires world-class educational institutions so clear, the state of our universities so weak, the long-term path of agriculture-based economies so mediocre, and the cost of compounding poor decisions so profound, it is tempting to throw up one’s arms and simply demand that it all stop.
However, New Zealanders are not a Sidney Lumet-style stick-your-head-out-the-window-and-yell, “I’m mad as hell and I’m not going to take it anymore!” people.
We are essentially optimistic and opportunistic: in the face of declining economic opportunities at home, our strategy for generations has been to move to London for a few years, hope that things get better - and ignore the fact that things are getting worse.
And, in any event, at whom would we be yelling? The government?
The last 25 years of elections in New Zealand have reflected an ongoing preference that government limits its involvement in the commanding heights of our economy. The way forward economically may require creation of an Innovation Cycle, and that Innovation Cycle may require a great research university, but do we reverse almost three decades of political history and put the government in charge of the implementation ... and of paying the bill?
William Buckley’s yell was a plea against precisely this kind of increasing government involvement in the lives of the individual. As one of the fathers of the American post-war conservative movement and the New Right economic movement that came out of it, Buckley argued that it is the job of government “ ... to protect its citizens’ lives, liberty and property. All other activities of government tend to diminish freedom and hamper progress.”
Based in part on this philosophy, New Zealand has maintained a non-intervention approach to economic policy since 1984.
In the last 25 years, developed and developing countries around the world have adopted that same approach. Today, there is certainly no credible political ideology or movement anywhere outside of Venezuela or Cuba to justify spending billions of dollars of public funds to build a research university from the ground up when other similar private universities already exist elsewhere in the world. This is the very definition of the economic concept of “crowding out” or using public funds to achieve a goal that the private sector is itself capable of addressing.
The Washington Consensus leans heavily against any urge to assign such task to government.
In the face of all that, can we make the government pay for the Enterprise?
If William Buckley stands in one corner of this fight on the role of government, in the other corner we could well place another founding editor—this time of the Otago Daily Times—our very own eighth premier, Sir Julius Vogel.
Vogel was New Zealand’s premier from 1873 to 1875 and is best remembered for his public works project to cover the country with a railway network designed to bring New Zealand agricultural goods to port so they could be shipped to foreign markets. By 1879, thanks to Vogel’s plan, over 1,000 miles of railway lines had been laid in New Zealand at a cost of over ten million pounds raised through foreign debt.
Vogel answered critics of his plan who were concerned with the cost of this project with the observation that: “These proposals will entail on posterity an enormous burden. Granted - but they will give to posterity an enormous means out of which to meet it.”62
Vogel represents the antithesis of the libertarian view of the role of government and how markets are supposed to function. He borrowed against the country’s future in order to pay for infrastructure. Financial historians can today justify the investment on the basis that no private investor would have financed the project. Vogel was addressing a “market failure” - the railway was a necessary, strategic asset that no private investor would fund.
This concept of the “market failure” is one of the reasons why Vogel is a hero of New Zealand economic history and Muldoon - the father of Think Big from Chapter 1 - is a villain.
The second reason is, of course, that Vogel’s plan worked.
Vogel picked the right piece of infrastructure to construct at the right time. Vogel’s railroad was the foundation for New Zealand economic development for a hundred years. Muldoon just spent a big pile of other people’s money.
As entertaining as the prospect of a political “smack-down” between William F. Buckley and Sir Julius Vogel might be, we are, at this point, forced to intercede. We must jump into the ring and wave the contest off. The blood sport is unnecessary.
There is a lively debate to be had about the appropriate role of government in shaping New Zealand economic policy in the 21st century. But we do not need to engage in that debate here.
That debate is unnecessary for current purposes because, left and right wing political philosophies aside, the New Zealand government - or any government - would be unsuitable as the primary benefactor of the Enterprise. The New Zealand government can certainly make an important financial contribution, but the Enterprise has to proceed primarily through private funding. We can therefore proceed with building the Enterprise without coming to any final judgment on the political philosophies of either Buckley or Vogel.
The reason for this has nothing to do with political orientation.
It is far more prosaic: governments are simply too unreliable to make good partners in large-scale, long-term projects.
And to understand why, we must return to Greenwich Village in New York, head a couple of blocks east to Second Ave and jump on the subway.
Why Duke Ellington Never Took the ‘T’ Train
The Interborough Rapid Transit Company opened the first underground subway line in New York City in October 1904. Fifteen years later, a Second Avenue subway line was proposed in a New York Public Service Commission study into the city’s future transportation needs. The proposal prescribed an 8.5 mile line running along the east side of Manhattan from the Financial District at the southern end to East Harlem at the northern end with spurs across the East River to Brooklyn and Queens and connections with subway lines running to the west side of Manhattan.
A groundbreaking ceremony for the Second Avenue Subway line was held in 1925 at a park in Harlem. Mayor John Hylan plunged a ceremonial pickaxe into the dirt to signal the start of construction. A second groundbreaking ceremony was held in October 1972 where, prophetically, none of the four politicians swinging the pickaxes that day were able to break the pavement and a pneumatic drill had to be brought in. A third groundbreaking ceremony was held in April 2007.
This trio of groundbreaking ceremonies should provide some clue as to why governments are unreliable partners for long-term, large-scale projects. The four financial sponsors of the Second Avenue Subway are all governmental: the Metropolitan Transport Authority, New York City, New York state and the Federal government. And, even with that deep-pocketed financial support, almost a century after it was first proposed, the Second Avenue Subway still does not exist.
For the last 90 years, progress on the Second Avenue Subway line has been suspended with almost every downturn in the fortunes of New York City. With each revival in the city’s economic prospects, pressure to resume construction begins anew.
Construction was originally suspended due to spending cutbacks in the early 1930s as a result of the onset of the Great Depression. Activity has also been suspended due to America’s entry into the Second World War, the start of the Korean War and the city’s budget crisis in 1975. And, as if on cue, in June 2008 plans for the latest version of the subway line were scaled back due to rising costs.
The dynamics at play are transparent: most New York politicians come up for re-election every four years. The Second Avenue Subway will take 15 years to complete.
Therefore, the politicians who make the decision to fund the project, in preference to their other shorter-term financial priorities, will not get credit as the originators of the project (that was Mayor Hylan in 1925), nor are they likely to be the “ribbon-cutting” politicians who celebrate the subway’s first ride.
There is simply no personal or political upside for a politician to demand this project be completed. For periods, the stars align and funding is revived. But the nature of the economic cycle means that a fiscal crisis is likely to surface every decade or so providing plenty of opportunities to reduce and re-direct the cash.
As a result, wags in New York City long ago concluded that the Second Avenue Subway is fifteen years away from completion—and always will be. Or, as New York Magazine put it in 2004, the subway is “the greatest New York project never built.”63
Don’t Hate the Player ...
And those same dynamics are present in New Zealand: combining a local and national government that faces re-election every three years with a large-scale project requiring perhaps $200 million or more annually for decades is a recipe for delay and disappointment.
This is not the fault of the politicians - the system is designed this way. Priorities change. Finances change. Building a university complex on the Waitemata with an endowment measured in the billions will require hundreds of millions of dollars each year for decades. And that flow of funds is required regardless of economic conditions and priorities, regardless of the current account deficit or budget deficit or other fiscal crises. Forsaking the endowment altogether and simply relying on an annual stipend from the government each year places the fortunes of the university in even greater peril.
The temptation for a future government, once the job is halfway done, to declare victory at the first sign of an economic downturn and walk away is too great.
As Irish Finance Minister Charlie McCreevy once observed of his fiscal policy: “When I have the money, I spend it. When I don’t, I don’t”64. These are not the hands that we want controlling the flow of funds to an institution that is at the centre of our economic revival.
That funding will therefore have to come, in large part, from the private sector. The public sector is simply too unreliable.
In fact, the problem is even more corrosive than that. Reversing the economic decline of an entire country takes decades. New Zealand prime ministers have - at the most, based on the experience of Clark, Bolger and Muldoon - nine years. The issues that a prime minister faces are certainly varied, but the results may generally be measured within the election cycle. A problem that takes decades to resolve does not truly exist from a political perspective. Politicians do not see this problem in any real sense because they cannot address it meaningfully in the time available to them.
The private sector has to act
Why we need - and how we raise - roughly $2 million a week for thirty years is the subject of Chapter 8. What is of current interest is the question of what the government can provide, once we accept that the New Zealand government will not be the key benefactor of the Enterprise.
There are six primary actions that the New Zealand government and Auckland local government can take to drive the Enterprise and the Innovation Cycle. These are each significant and important steps, but none of them place the local or national government in the position of being the primary contributor. That is our job.
1. Government funding of $220 million for the Waterfront Complex
The New Zealand government has a 50:50 share with the New Zealand Rugby Union in the operating entity for RWC 2011. The government also has agreed to indemnify RWC 2011 for two-thirds of any losses - currently estimated to be $30 million. Said more plainly, the government has negotiated on behalf of the New Zealand taxpayer half of the upside and two-thirds of the downside from hosting the Rugby World Cup.
The government has also underwritten $190 million for the redevelopment of Eden Park, provided $6.5 million to the official RWC volunteer program and offered annual funding of $690,000 to the RWC co-ordination office65. In total, the government commitment to the Rugby World Cup is approximately $220 million. This is a great deal of money by any measure. But, for a national priority like the Rugby World Cup, that level of public funding has been deemed appropriate.
Creating an Innovation Cycle in New Zealand is an important national priority too. And if $220 million is what national priorities are worth, then our hands should be firmly stuck out too.
Careful readers will no doubt ask how we went from announcing that the university was a private enterprise a few pages ago to now asking for a government hand-out of over $200 million. There are three reasons.
First, there is a powerful historical parallel.
Government investment in the waterfront complex is the equivalent of Vogel’s railroad: a strategic, national asset that no private investor would fund and that forms the foundation of New Zealand economic development for a 100 years - the first link in the chain bridging the US$1 trillion gap between New Zealand as an agriculture-based economy and New Zealand as an innovation-based economy.
Second, there is a practical reason.
Extracting a one-time payment from the government of $220 million for a popular and worthy cause is possible. Guaranteeing a thirty-year annuity to build up an endowment and construct a world-class university is not. Therefore, we should simply be grateful for what is possible.
Third, it is necessary.
The government is the only entity in New Zealand that can get this particular ball rolling. For want of a better term, the sum of $220 million is table stakes. It buys credibility. We can talk about Harvard and Santiago Calatrava and Nirvana all we want. To credibly assert that we are building a great research university on the Waitemata in a complex designed by a world-famous architect that will sit at the centre of a global innovation hub, we will require a significant level of initial funding. And that initial funding - $220 million - will almost certainly have to come from the New Zealand government for construction of the waterfront complex.
To put $220 million in context, that is approximately the construction cost of the Bilbao Guggenheim or Daniel Libeskind’s Denver Art Museum- which cost US$110 million to construct and was completed in 2006. Of course, Renzo Piano’s Modern Wing addition to the Art Institute in Chicago is estimated to cost US$370 million and Santiago Calatrava’s extraordinary, original design for the Fulton Street transit hub at the World Trade Center in New York would have cost over US$2 billion. We can certainly spend more - and fundraising efforts to match the government’s contribution with private funds will be made.
But fundamentally, we can build something significant with $220 million. Turning the waterfront complex from an idea into a physical manifestation of our aspirations is the first step in the Enterprise. We need the New Zealand government to make the investment in that aspiration in a way that no private investor would. Once the government acts, private investors will follow.
2. Auckland local government to contribute waterfront site
With $220 million, we can build something significant - but not if we have to pay for the land. We need the Auckland local government to donate land on the waterfront for the complex. Donating the land to the Enterprise resolves a variety of problems in terms of Auckland’s long-term urban design.
Development of the waterfront is an ongoing problem for Auckland. The ownership structure of the waterfront remains dynamic between the Ports of Auckland, Auckland Regional Holdings, Auckland Regional Council and various other local government bodies. But there is one fact that we should keep clearly in our minds when we discuss the politics of the various organisations. They are all ultimately statutory creations that hold public assets. In other words, the land belongs to the people of Auckland.
Currently, the “best-case” scenario proposed for Auckland’s publicly-owned waterfront is to get the used cars off the finger wharves and turn those wharves into bars, restaurants, cafes, entertainment venues and moorings for international cruise ships. In other words, the best-case scenario is to turn Queens Wharf, Captain Cook Wharf and Marsden Wharf into extensions of the Viaduct Basin.
The university complex on the waterfront is a solution for the Auckland waterfront that does not involve bars, cafes and restaurants. It creates an international tourist attraction for the city thanks to construction of a structure designed by a world-famous architect in the centre of Auckland. More significantly, it offers a long-term base for regional economic growth as the waterfront becomes the geographical centre of the planned innovation hub.
3. Auckland local government to approve the waterfront complex design as presented
No one complains that the Sydney Opera House blocks the view. An undertaking from local government to deal with deviations from the District Plan in the proposed design of the waterfront complex on a good-faith basis is required. The complex will almost certainly be larger and more prominent than the buildings around it: that is the idea. We are not enlisting a world-famous architect to build a complex that “fits in”.
4. Government to stream-line visa programme
Northern California became a global centre of innovation, in part, because in 1967 the only entry requirement was that you wore a flower in your hair. We need a similar approach here.
The Innovation Cycle requires engineers, software designers, lawyers, bankers, accountants, academics, architects and researchers to staff the university, start-up companies, research centres, venture-capital funds, law firms, accounting firms, banks, advertising agencies, consulting firms and architecture firms that will emerge in the Innovation Cycle. Many of these people will be moving to New Zealand and may require visas and work permits. This process should be made as simple as possible by expanding the scope and scale of the existing immigration process for applicants of this type based on age, income, wealth and qualifications.
But the Innovation Cycle will also need a creative class. We will need ski instructors, interior designers, artists, musicians, yoga instructors, skydivers, snake charmers and a range of other artisans with non-traditional skills who have little income, no wealth, no formal qualifications and may be of varying ages. We need a mechanism to welcome these people to New Zealand.
5. Tax reform on status of donations and endowment gains
Donations to the university’s endowment should be tax-deductible for New Zealand taxpayers. The simplest way to gauge New Zealanders’ desire for a world-class university is to see if they will contribute money to build it. The government should not thwart the aspiration of the New Zealand taxpayer by taxing money donated to the Enterprise.
Further, gains of any kind on university endowment funds should be exempt from New Zealand tax. The university should be granted charitable or tax-exempt status for income tax purposes.
6. Tax reforms to attract venture capital
An important part of the Innovation Cycle is attracting investment to New Zealand to fund the innovative and creative activities of the innovators-turned-entrepreneurs being turned out by the university. While there is no capital gains tax in New Zealand, gains on investments from venture-capital firms are still taxed as business income. Providing some form of tax holiday or exemption to investors in the Innovation Cycle would certainly spur its development.
To be clear, the government contribution to the enterprise will be significant. The initial contribution for the waterfront complex is $220 million. In addition, if private donations to the enterprise are tax-deductible, the government will be foregoing the marginal tax rate on each dollar donated. If a person on a marginal income tax rate of 38% donates $100, the government effectively loses out on $38 of tax revenues. Finally, any capital gains and withholding tax concessions and tax exemption will have a cash cost to the government. However, this revenue is only truly “lost” to the extent that the capital gain or interest, royalty or dividend would have been made even if the Enterprise had not existed.
Said differently, there is an existential twist in the calculation of cost. The government’s decision to waive the imposition of certain taxes on entities that emerge from the Innovation Cycle is not truly a cost to the government because, without that tax relief, the Innovation Cycle and the entities that generated the interest, royalties, dividends or gains that the government is not taxing may not have existed.
Back to the Future on the Waterfront
Stepping away from policy statements and six-point plans, it is useful to remember what is at stake.
Remember that currently the “best-case” scenario that anyone is proposing for Auckland’s waterfront is to get the used cars off the finger wharves and turn those wharves into public spaces with bars, restaurants, cafes, entertainment venues and moorings for international cruise ships. In other words, the best-case scenario is an extension of the Viaduct Basin.
Therefore, go down to the Viaduct Basin at 11:30 on a Friday night. Walk into any of the pubs down there and take a look around. As you stand there amongst the drunks, with the smell of spilt beer, vomit and tomato sauce in your nostrils, remember that our economic standing has declined from 5th to 27th in the OECD in the last 50 years.
Remember that this decline has translated into our infant mortality rate moving from 10th in the OECD to 20th over that period. And, finally, remember that the inebriated fools surrounding you - who remain unsure “why... love [does] this to [them]” - are the “best-case” scenario that Auckland’s city elders can come up with for what to do with the most valuable and prominent land in New Zealand. And remember that the Auckland local government owns this land - it’s our land.
And, if you are still not ready for your Sidney Lumet-style stick-your-head-out-the-window-and-yell, “I’m mad as hell and I’m not going to take it anymore!” moment, I understand that. We are a stoic lot, us Kiwis. But give yourself a moment of clear-headed introspection and ask yourself a simple question: is this good enough for your children?
You and I have some work to do. And the first thing you are going to have to do is get out your wallet.
62. Carden, Steve with Murray, Campbell, "New Zealand Unleashed", Random House, 2007, page 169
63. New York Magazine, "The Line That Time Forgot" by Greg Sargent, 29 March 2004
64. Economist, 21-27 March 2009, "The party is definitely over", page 48
65. New Zealand Herald, 13 December 2008 "Rugby World Cup: Government in, boots and all"
This is the eighth part of a serialisation of the book, The Pine Tree Paradox. It will be published online here in eleven parts.
The Introduction is here »
Chapter 1 is here »
Chapter 2 is here »
Chapter 3 is here »
Chapter 4 is here »
Chapter 5 is here »
Chapter 6 is here »
If you would like to buy a copy of the full book, you can do so by credit card here » (Visa or Mastercard only.)
Michael Parker is an equity analyst living in Hong Kong. Originally from Wellington, he has spent the last decade in San Francisco, New York and - on good days - Waiheke. He has a law degree and bachelor of commerce from the University of Otago and an MBA from NYU. You can contact him here »
Used with permission. © Michael Parker. This book was originally published in 2010.
To subscribe to our weekly business newsletter, enter your email address here.