Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Economy in danger and Govt must act

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The major rebuilding of Christchurch cannot start until the shaking stops. Photo / Greg Bowker
The major rebuilding of Christchurch cannot start until the shaking stops. Photo / Greg Bowker

Why hasn't the National Government urgently launched a three-point action programme to deal with the serious risks to the economy resulting from the major earthquakes in Canterbury?

The Canterbury quakes are proving to have a much more significant impact on this country than the global financial crisis which sparked the Key Government's launch of a "rolling maul" of initiatives.

How hard would it be for the Government to:

* Immediately impose a special tax aimed at higher income earners to start replenishing the Natural Disaster Fund which has been exhausted by the impact of the Christchurch quakes.

* Commandeer large amounts of stable land on the outskirts of Christchurch and launch a big state-led building programme to get people safely rehoused quickly. Do this instead of allowing developers to book obscene profits at the expense of fellow citizens who have already lost enough of their equity through the quakes.

* Tell New Zealanders - including the business community - the truth about just what it will cost in future to insure residential and commercial buildings in this seismically challenged land.

Gerry Brownlee's announcement that he will lead a mission to Europe to try to placate the international reinsurers and school them up on the steps the Canterbury Earthquake Recovery Authority (Cera) is undertaking to "de-risk" Christchurch (and for that matter the rest of New Zealand) is rather surreal.

For months now private insurers based here have been quietly warning that New Zealand faced a big problem on the reinsurance score.

There have been suggestions that one reinsurer has been preparing to sue the Christchurch City Council for allowing major developments to go ahead on areas which the geotechnical reports said wouldn't stand up to significant earthquakes.

Since the February 22 quake there has been considerable - if intermittent - focus on previous geotechnical reports that indicated that far from being a "quake safe" area as many of the public had thought, Christchurch was in fact vulnerable.

That was because of the underlying seismicity, the result of the many hidden faultlines, and also because the soft soil was prone to liquefaction. No suit has emerged. But it is instructive that some major reinsurers are not yet issuing new cover for Christchurch.

Marsh NZ's Nathan Richmond estimates the "estimated insured losses" from these quakes sits at around $25.5 billion. The EQC's exposure was yesterday put at $7.07 billion.

The $25.5 billion estimated figure for insured losses from the Canterbury quakes compares to the US$8.5 billion from the January 2010 Chilean earthquake and the US$35 billion estimated insured losses for the Japan tsunami.

The relative size of the exposures indicates just why the insurance industry is taking a very hard look - not just at Christchurch - but the rest of the country.

Brownlee's challenge will be to convince the reinsurers to deploy additional capital to Christchurch. As Richmond told the infrastructure industry recently, the "New Zealand insurance market has taken a step change".

Businesses had to be prepared for increases in premiums and deductibles to provide a return on capital to ensure continued operation, and a longer lead in time for insurance marketing and placement.

Examples provided by Marsh NZ suggest a building owner in Wellington might face having to stump up the first 5 per cent of the site value.

Thus if a building on a site that was insured for $5 million suffered $1 million of damage, the owner would have to stump up $250,000 towards repairs. For a Christchurch building the relative percentage might be 2.5 of the loss value. Where a building was built before 1936, the relative percentage could be as high as 10 per cent.

These are sobering figures which indicate why the Government, local authorities and building owners need to get on with ensuring New Zealand's buildings are strengthened to higher resilience standards.

For months also, private construction leaders have been quietly warning that estimates made by the EQC and the Treasury over how much it will cost to rebuild Christchurch's residential and commercial buildings and its underlying infrastructure were lamentably on the low side.

Look back to April, when Wayne Brown - the well-known businessman and engineer who went to Christchurch as a member of Operation Suburb - made an urgent plea that the Government review the extent to which the taxpayer might end up footing the bill for unnecessary costs in repairing quake-damaged Christchurch suburban residences.

Brown's warnings were panned by the politicians.

Fletcher Building's Mark Binns has repeatedly pointed out that the EQC's estimates have consistently been on the low side. Fletcher Building - which was appointed EQC's Christchurch-based project manager after the September 4 earthquake - will not be in a position to start the major rebuild until the shaking stops.

Binns this year also questioned the Treasury's earthquake damage estimates, arguing that the repairs could hit $20 billion in costs, outstripping the Government's $15 billion figure. He subsequently upped the estimate.

But it's taken till now for the Government to get its act together.

So it's hardly a surprise that the EQC's $6 billion fund will be wiped out through the escalating costs of meeting claims resulting from the major series of earthquakes that have seriously damaged New Zealand's second major city.

As the fund's guarantor the Government will have to write a cheque for the estimated shortfall of $829 million (the timing of claims assessments and payments are expected to reduce the final figure to no more than $500 million).

But even though Bill English said the Natural Disaster Fund (which is administered by the EQC) has reinsurance for another two events the size of the September 4 earthquake, it stands to reason the Government will be writing some very big cheques indeed if New Zealand has more large disasters before the fund's equity is rebuilt.

In fact, the Government is also 'tailend Charlie' for the costs of repairing Christchurch's underlying infrastructure. Local body cover does not meet the full cost of this.

After the February 22 earthquake I reprised English's December 14 warning that "we've got to be in a position where we can handle another recession and another earthquake and frankly we won't be there until 2020".

With what's happening on the global front - and the EQC's relative insolvency - let's all hope that we don't get another "big one" for years to come. We just can't afford it.

- NZ Herald

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