Fran O'Sullivan: Quakes pose an unpalatable question

Key and his cohorts face a rethink on the Government’s fiscal priorities to allow for another significant rebuild.

How many more major earthquakes can New Zealand sustain without crippling the country's ability to maintain current economic growth rates?

It's an unpalatable question.

But away from the cameras, that is exactly the question which John Key and Bill English should be pondering.

Whether they like it or not, they will have to reorder their fiscal priorities so the major infrastructure challenges in Auckland and Christchurch can still be addressed, at the same time as they gear up to fund what will be another very significant rebuild. Not all of the costs will be covered by insurance.

This will reduce the Government's options for next year's election.

The good news is that major businesses have taken steps to become more resilient since the first major earthquakes in 2010 and 2011.

Most also now have excellent backup plans to cope with business disruption.

Boards also have an increased focus on risk and have ensured redundancy is built into their operations where possible.

But this can only take things so far.

The world's reinsurance market players will be reassessing New Zealand risk.

So too, should the political leaders in Auckland and Christchurch; two cities which are after further substantial central government capital injections to accelerate their own new infrastructure.

Given the new funding pressures the Government now faces, it is frankly about time that mayors Phil Goff and Lianne Dalziel also faced up to fiscal realism and extracted some capital by selling down council's stakes in commercial companies to help fund their own patches.

It will be extremely difficult to gauge the expected costs of these latest major earthquakes. Especially since Wellington, in particular, is still rocking.

If the current sequence continues, Wellington will also join Christchurch in experiencing more building and infrastructure failures (if not on the scale of Christchurch).

These issues will be to the fore as the estimated costs of the latest rebuild mount.

Typically, both Key and English are coping well; they have considerable political street cred when it comes to crisis management.

Key's confidence-building abilities are obvious. He has had plenty of experience fronting the disasters that have plagued New Zealand since his prime ministership began: the global financial crisis; the Canterbury earthquake, the Pike River mine disaster and the subsequent Christchurch earthquake.

But having another spate of serious earthquakes within such a sort timeframe will also affect key sectors such as tourism, construction and insurance.

The world's reinsurance market players will be reassessing New Zealand risk.

The Chinese tourism boom will likely be hit; construction costs will continue to inflate. And business insurance costs can be expected to rise in Wellington.

The critical issue is the Government's finances.

After the first 7.2 Canterbury earthquake in September 2010, English warned "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".

Then central Christchurch was reduced to rubble in February 2011. While that earthquake registered only 6.3 on the Richter scale it had huge intensity.

This current series of earthquakes is different. There had already been more than 10 severe earthquakes (since the 7.5 earthquake at 12.02am Monday morning) at the time this column was written.

Even Parliament was rocked by another major aftershock yesterday as the Finance Minister spoke about the Kaikoura earthquake recovery.

Typically, English was sanguine. The economy was in good shape; there were Budget surpluses and relatively the level of debt was low.

There were financing options for the key challenge of restoring the major transport spine that links the two islands and continues to Christchurch.

The problem is these new earthquake disruptions will inevitably affect Christchurch.

The Treasury estimates the capital cost of the Canterbury earthquakes to be about $40 billion. The Government, on behalf of New Zealand taxpayers, made a significant contribution to the rebuild of around $14.9b (including the Earthquake Commission).

But central Christchurch still resembles a doughnut.

It's estimated that the total value of earthquake construction is $32b. But just 59 per cent of the construction was complete by June 30 this year, according to a report on the national state of infrastructure.

Just one-third (31 per cent) of the public-sector rebuild programme expenditure had been delivered by the end of June.

The Stronger Christchurch Infrastructure Rebuild Programme (Scirt) which repaired and built the city's horizontal infrastructure, was valued at $1.4b.

The Government has announced a $1b fund for underwriting Auckland's need for more housing and related infrastructure.

The other major issue New Zealand faces is underinsurance.

A recent Treasury report based on information from insurers, brokers and valuation consultants, concluded that up to 85 per cent of NZ homes could be underinsured by an average 28 per cent, or about $184b.

New Zealand is about to get much more expensive.

- NZ Herald

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Head of Business for NZME

Fran O'Sullivan has written a weekly column for the Business Herald since its inception in April 1997. In her early journalistic career she was a political journalist in Wellington and subsequently an investigative journalist who broke many major business stories including the first articles that led to the Winebox Inquiry in both NBR and the Sydney Morning Herald. She has specific expertise in relation to China where she has been a frequent visitor since the late 1990s. She is a former Editor of the National Business Review; has twice been awarded Qantas Journalist of the Year and is a multiple winner of the Westpac Financial Journalism Supreme Award.

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