It was recently
reported that the government sponsored ‘Breathe’ residential development
project, which aimed to provide an example of how the Christchurch central city
should be rebuilt post-quake, has been abandoned. The project started as a design competition with the likes
of Kevin McLeod (Grand Designs TV fame) being one of the judges. A winning consortium was announced by
the CCDU with great fanfare in 2013, but the developers have failed to obtain
the backing of financiers, and after 2 years of waiting the government has
finally called it quits. Rival
bidders for the project are naturally feeling aggrieved, given the time and
money they put into their proposal; only to lose to a bid that was presumably not
commercially viable.
This provides a
perfect example of the folly of mixing business with government, and how a
government that tries to ‘pick winners’ and back commercial projects leads to
inefficiency and distortions. In
the real commercial world without government interference, price signals provide
a discipline that must be adhered to, and you have real competition at every
step of the process. For example:
- Firstly land prices fall or rise to their natural level. One of the
stated aims of the gov’t acquisition of so much land after the quake was to
reduce the effective size of the CBD and maintain the values of the areas left
open to development. In other
words create an artificial shortage of land to prop up prices. In terms of their stated aims they have
certainly succeeded, to the point where sale prices of land seem to be higher
than they were pre-quake. But this
is a bizarre situation given the huge expanse of bare and dusty land left in
the city, that there is no longer any strong demand for office space, and the relative
unattractiveness of this location compared to pre-quake. There’s an oversupply of land but still
the prices are high, and that can only happen where there’s gov’t interference. Without that interference land prices
would have dropped to their natural level, offsetting the rise in construction
costs that has made post-quake development in the CBD so costly.
- A variety of competing developers engage different architects and
designers, each with different ideas and outlooks.
- Those who can deliver a good result AND get the costs down
sufficiently tend to get the work. Those who can't do both tend to not get the
work.
- The developer then risks his (and the bank's) money to build
something he thinks the market wants and can afford. If his judgment is good he
makes money, and does another similar development, giving more work to his
architects and designers. If his judgement is out he loses money and the
mistake is not repeated.
At every step there are price signals that tell the market what is
and isn’t viable. Government by
its nature however is immune to these price signals. Private developers can fail of course too, but they can't do
it at taxpayer expense, and they're less likely to spend a lot of money up
front on somethings that not commercially viable.