An important cost benefit analysis

March 4th, 2013 at 10:00 am by David Farrar

Catherine Harris at Stuff reports:

A former adviser to the Reserve Bank and World Bank says the cost of bringing in tougher tests for -prone buildings would far outweigh the benefits.

Economic consultant Ian Harrison said he had analysed proposals put forward by the Ministry of Business, Innovation and Employment on building standards, and it showed the cost of the tougher regime would be 50 times the benefits.

In Auckland the cost was 1762 times the benefit.

Harrison said his research was based on the ministry’s own expert analysis.

“The proposals will save only 0.25 lives a year at a cost of over $4 billion,” he said.

This speaks volumes.

Risk must always be balance against cost. Far from clear that the Government has it right in this case.

UPDATE: Have just had clarified that the Government has made no decisions on building standards, so ipso facto don’t have it wrong or right.

The proposals are from the Royal Commission on the Canterbury Earthquakes. MOBIE are consulting on those recommendations, but the Government itself has made no decision on any changes. They are just doing what a Government should – consulting on what the Royal Commission has recommended.

Incidentally submissions close this week on 8 March on them.

While I think a lot of deference should be given to the Royal Commissions, I don’t think that means what they recommend should automatically be accepted. I think the balance of cost and risk has to be carefully considered, and at this stage it doesn’t appear the Commission has got that balance quite right. We’ll see in time what the Government itself actually proposes.

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21 Responses to “An important cost benefit analysis”

  1. fooman (38 comments) says:

    So, are we likely to see you driving around in Ford Pinto then David? Cost-benefit analysis on the cost of design change vs death of customers didn’t work for Ford, in the end.

    Ref: http://www.motherjones.com/politics/1977/09/pinto-madness?page=1

    FM

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  2. krazykiwi (9,188 comments) says:

    I’m sure most governments – well, the variety that we’re subjected to – factor in the increase in staffing and general bureaucracy as one of the ‘benefits’ of tougher regulation.

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  3. barry (1,317 comments) says:

    I agree with him – but stupid government will think thats it willcreate jobs – so theyll go ahead. Idiots. Sending the country broke.

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  4. rouppe (852 comments) says:

    Has anyone done an analysis of what all the glass panels will do in an earthquake? Lampton Quay seems like a street-long guillotine waiting for a shake

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  5. krazykiwi (9,188 comments) says:

    fooman – I remember that story. And the one about the Pinto which was targeted at young males selling really, really well rigth around South America.. except Brazil where they sold a handful. It was only then Ford were informed that ‘Pinto’ was apparently Portuguese slang for ‘tiny male genetals’ :D

    Back to the cost benefit thing. If I told you that AirNZ could spend ten billion dollars reducing the risk of a passenger fatality, and that all their airfares would increase by 500% to compensate … but they’d decided not to do that, would you refrain from flying with them today.. on the basis that they don’t value your life?

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  6. swan (651 comments) says:

    The ALARP (as low as reasonably practical) principle from the UK, which seems to be seeping into NZ, says to use a cost benefit ratio of between 3 and 10 when assessing risk to loss of life. That is – the money should be spent unless the CBR is greater than 3 to 10. I dont know where the 3 to 10 comes from, but certainly at 50 it appears to be over the top.

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  7. Silly Will Bunions (143 comments) says:

    Is this for new buildings? Or is it for strengthening of existing buildings. The costings are different.

    Also, figures are not quite genuine, not quite the right question is asked.

    Not right in that the lives save per year is not the proper factor. Lives saved over remaining life of building is.

    Nevertheless, the cost benefit would seem to not be there for existing buildings, but surely would be for new buildings.

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  8. RRM (8,994 comments) says:

    Fooman – A 2013 Rolls-Royce Phantom is undoubtedly very much safer than a 1993 Toyota Corolla. (Particularly as JNCAP didn’t begin until 2001.)

    Should we legislate to ban 1993 Toyota Corollas from the roads unless they’ve been strengthened to the same standard as a Rolls-Royce Phantom?

    If not, why not?

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  9. BeaB (1,958 comments) says:

    Far more people would have died in Christchurch if so many buildings hadn’t been attended to or roped off after the first earthquake.

    Many of our old buildings are death traps. They were rubbish, many of them, when they were built and they are rubbish now. Heritage? Nonsense. When did we ever build anything if not on the cheap? Why are people so in love with ugly old Victorian and Edwardian brick buildings?

    I think the market will decide. Insurers, employers and tenants will force building owners to make their building safe. Who will live or work in a potential tomb? Who will insure them knowing the costs faced in Christchurch?

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  10. RRM (8,994 comments) says:

    Beab –

    An admirable sentiment – but all that market forces appear to do in NZ is lead to people building the cheapest possible structures that will meet the govt-imposed code requirements.

    The cost of Insurance SHOULD be one of the main driving forces behind building modernization and strengthening.

    But insurers simply don’t appear to understand what they are taking money for “covering”… even when the buildings are modern structures designed mathematically to the current design codes – hence all the quelle suprise when modern ductile buildings rode out the quakes without collapsing but afterwards were write-offs – just as the design principles intended.

    [Your comments about old buildings are spot on IMHO. In a hundred years, high-minded people may be saying big ugly corrugated iron warehouses I've designed are "heritage buildings" - what a joke!]

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  11. PaulL (5,776 comments) says:

    Beab, RRM: to me it’s one of the great fallacies of our time. People always say “they don’t build things like they used to.” You can go to ancient Rome and see massive marble buildings, you can go to Sydney and see huge sandstone buildings, in the US lots of glorious stone buildings. Of course, the 98% of buildings that they built like they used to have all fallen down, so the buildings that are left are a self selecting set of buildings that were durable.

    So it should be in our time. Some people choose to build something that will last a millenium. It’s damn expensive, and now that you can’t tax thousands of peasants to pay for it, it’s pretty hard to build something at that quality level. But you can still do it. Other people choose to build something that’s fit for purpose today, and maybe in 100 years it’ll still be here, maybe it won’t.

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  12. UrbanNeocolonialist (135 comments) says:

    There is a colossal storm brewing with regard to earthquake strengthening of old buildings. I’ve seen Govt massaged low ball estimates of only a few billion but a couple of engineers I’ve talked to in the industry are guessing it is going to be many 10′s of billions as 10′s of thousands of buildings nationwide are about to be turned from assets into un-rentable and un-sellable liabilities.

    In particular it’s going to wipe out the majority of commercial property in many smaller centres that haven’t grown in the last 50 years and that have lots of old commercial building stock (like oamaru, dunedin, timaru, greymouth, invercargill, … probably similar throughout much of the north island), because these buildings are in many case not worth fixing or replacing due to the low returns they attract. But because the requirements are being driven by bureaucrats in big cities with relatively modern building stock and high rental returns they are just not as aware of just how big an issue it really is.

    This is going to have a big impact on the cost of doing business as commercial property in NZ becomes scarce – pushing inflation up and ultimately even chasing some industry out of the country.

    The cost will be many times higher than the whole leaky homes issue.

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  13. davidp (3,325 comments) says:

    RRM>In a hundred years, high-minded people may be saying big ugly corrugated iron warehouses I’ve designed are “heritage buildings” – what a joke!

    So you’re the one to blame! ;-)

    Actually, I quite like large industrial and retail buildings. The lack of decoration doesn’t worry me. Warehouses are part of the enormous globalised supply chain that NZ is a part of. They help NZ butter make its way to Europe, and huge Chinese-made plasma televisions to my living room. This sort of logistical efficiency is one of the reasons hundreds of millions of people have moved from poverty to the middle class over the past fifty years.

    And who can resist a Mitre 10 the size of a city block?

    As for listing heritage buildings… As a child I loved the old Wellington Airport terminal. The one that had been “temporarily” converted from an aircraft hanger. My dad used to do a bit of business flying and I’d go there with my mum and sister to see him depart or to welcome him home. Which always involved presents and plastic tikis. It is where I left for my OE in 1989. If any building deserved to be listed, it was this one. Instead they bulldozed it and replaced it with the current bland structure.

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  14. Ed Snack (1,539 comments) says:

    Is there some proposed weighting for perceived risk level by area ? Some places surely have a lower risk profile for earthquakes although no doubt some risk remains. I can recall but a single noticeable earthquake in Auckland for example (around 2007 I think), and in Whangarei, none. Hawke’s Bay and Wellington on the other hand, pretty significant risk. I would have put Invercargill in the low risk category. But a quick Google search puts Northland (down to Auckland roughly) in the lowest risk, and the strip of coast from Invercargill up to around Timaru also relatively low, with the rest at at least a medium risk level. The higher cost suggestions may well be valid.

    At a broad level, I would have put the Christchurch experience as showing two particular issues; unreinforced parapets and similar structures in relatively old (and relatively protected by heritage designation) buildings and modern multi-story building badly designed and badly built. Some targeting could reduce risk levels at a relatively low cost.

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  15. RRM (8,994 comments) says:

    Ed –

    Strengthening existing buildings is a matter of

    (a) deciding what %age of the strength of an equivalent new building designed to the current design codes, that old buildings should possess or should be strengthened to possess, and then

    (b) going around looking at all the old buildings and trying to figure out what %age of the current design code strength they already possess.

    Govt was happy with 33% for a long time, NZSEE has pushed for 67%. I find that the higher off the ground I go in an old building, the more I favour 67% current code over 33%!

    [The design codes DO reflect the statistical likelihood of having earthquakes of strength XX in different areas of the country.]

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  16. PaulL (5,776 comments) says:

    RRM: my current thinking is that the higher I go the better, what really worries me is being on the ground floor of a multi-story building. :-)

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  17. fooman (38 comments) says:

    RRM, two comments:

    1: I was not commenting on the crashworthiness of the Ford Pinto, but rather the well known cost-benefit study undertaken by Ford which concluded it was cheaper to pay out on the injuries and deaths directly related to a particular design flaw, which Ford was well aware of, rather than change the design and tooling for the car. The study, obviously, did not include the intangible costs of proceeding with such a cost reduction strategy i.e. the consumer backlash and resultant rather large payouts when it was found that Ford knew about the defects and inherent risk involved. I suspect the conclusion of Ian Harrison, as reported, is similarly lacking in an understanding of the intangible costs (not just a book value on the loss of life – “Cost of everything, value of nothing”)

    2: Bit of a strawman arguement there. A 2013 RR Phantom is not officially safer than anything – It has no NCAP rating as yet. But it doesn’t need to be a $400k Roller to be safer. Could be a Hyundai i30 or Volvo V40 – both far safer and at a far lower cost than the (unproven) Phantom.

    In the reported cost benefit analysis, I think the consequences have been greatly underestimated: Otherwise the cost of the Christchurch earthquakes would be valued at a few hundred million (the “book” value of the lives lost), not the 10′s of billions it has been judged at.

    FM

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  18. fooman (38 comments) says:

    Swan,

    The other guidlines from ALARP state that for a multiple fatality risk (generally the highest severity considered in risk analysis), the “tolerable” frequency of occurance in years is something like 1/N where N is the number of deaths. If something has the risk of causing, say 10 deaths once every 10 years, then that is the _upper_ limit of acceptance. Anything more than that requires mitigation of the risk.

    In NZ, there has been ~ 440 deaths from earthquakes in ~ 80 years (average of 5 per year, since 1931). When something like the 1855 earthquake happens again in Wellington, or the Alpine fault finally ruptures again (both will happen at some point), it is sound engineering (not economics, obviously) to try and minimise the consequences of engineering failure of structures, and the risks to those people in and around those structures. If an assessment shows that the risk levels will be intolerable, then money needs to be spent on reducing those risks.

    FM

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  19. Joseph Carpenter (210 comments) says:

    It’s as UrbanNeocolonialist says, the $4 billion cost is way too low – and thats for upgrading to just 33% of current NBC for commercial type buildings only, already provincial commercial landlords with EQ prone buildings are in the crap just trying to insure. Also consider that the DBH is considering whether housing should also be included – most pre-1976 houses would need strengthening. We do need to think logically & dispassionately about the cost:benefit and risk assessment and priorities.

    For example: approx. 23 people die a year in property fires, of those about 20 die (from smoke inhalation mainly) in domestic house fires and are largely preventable. Thus as many have died from structure fires in the last eight years alone as the CHCH earthquakes (and more injured as well) – and most could have been prevented with simple fire safety precautions. For example to fit every house & accommodation in NZ with a NZBC Type-1 smoke detection alarm system would cost approx. $150 million as a one off, it’s piss easy work and probably save approx. 16-17 lives a year, every year. And we already spend approx. $7 million per year just on advertising/education for this.

    Another issue – the NATIONAL Government disallowed depreciation on buildings to punish the satanically evil residential landlords – but it also includes commercial property and the IRD is very clear that includes strengthening. What this does is make CAPEX on upgrading much harder to afford, more unintended consequences from kneejerk pandering law.

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  20. Reid (15,585 comments) says:

    What interests me in this is that the actual risk of a destructive quake in the rest of country ex-ChCh hasn’t changed, it’s the perception of risk that has changed. But it’s being foisted on the so-called “free” market as an actual risk.

    It’s also worth noting that for decades virtually no claims were made throughout the whole country, so what have the insurance companies been doing with all those billions in premiums sweeping into their coffers for year after year, until “the big one?”

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  21. swan (651 comments) says:

    Fm. I don’t really agree with the ALARP concept in any case, but none the less I don’t think the “multiple fatalities” risk would apply to all earthquakes. It is more about risk from a single structure. Otherwise you would apply ALARP and decide you need to shut down the state highway network.

    RRM:

    “[The design codes DO reflect the statistical likelihood of having earthquakes of strength XX in different areas of the country.]”

    This is true to an extent, however north of Hamilton it is no longer the case. North of Hamilton the scenario event of an M6.5 at 20kms on an unidentified fault kicks in.

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