07 April 2016

Politicians Running Ports

Auckland Mayor Len Brown found himself in a spot of bother when he was caught between the competing interests of the Auckland port company, that needs to expand to meet growing demand, and parts of his political constituency, that would rather have the port closed. The Mayor did what some politicians tend to do in these cases: he set up a committee.

The committee was duly formed and given the rather hopeful name of "Consensus Working Group", the hope being that some form of consensus would emerge to save politicians the trouble of actually exercising leadership. The committee was duly equipped with a chair who is a professional management consultant with degrees in psychology and sociology and a PhD in environmental management. The committee was supported by council planners as well as a consortium of external consultants led by EY.

The writer was invited to attend the first meeting of the committee, but was unable to, as he was in Europe at the time. Our apology met with this reply from a Council Planner: "unfortunately for your case, stakeholders must be present at the initial plenary meeting in order to be involved in this process". We decided at that point that we would be happy not to be involved in that process.

It now looks like we have missed out on some first-rate comical entertainment. Six months of deliberations have given rise to an interim report that lists 12 possible alternative locations for a major port, including Muriwai. Had we bothered to spend a few hours sitting in these stakeholders’ confabs, we would have supported the Muriwai proposal wholeheartedly. The transit time for ships carrying import containers would be reduced, as their approach to the port would be assisted by powerful surf waves.

Councillor Mike Lee told Radio New Zealand some of the sites should never have made the list of areas to be considered and some of the suggestions were batty. We totally agree. Some of the suggestions are as batty as his earlier decisions. Back in 2005, Ports of Auckland was majority-owned by the Auckland Regional Council. The elected chairman of that body at the time, Mike Lee, justified a decision to buy out the private shareholders by saying, "The Ports of Auckland will be a prized legacy for future generations and the wealth generated will be vital for funding Auckland's infrastructure for years to come."

This is what actually happened: the cost of buying out the 20% then owned by other shareholders was $170 million; that transaction effectively valued the whole company at $850 million; but the book value of the company shown in the Auckland Council transition documents in 2010 was just $394 million. Even after allowing for inflation and differences in valuation methods, $456 million is an awful lot of money to disappear in just five years.

The worst part of Mr Lee's legacy, however, was to remove share market accountability and hand over total control of the port to local body politicians and planners. The expensive consultants employed by Council are doing very well out of this process, but their gain is the city's and the country's loss. The port company, somehow, has managed to continue to run an efficient operation, no thanks to their political 'owners'.

The obvious solution is to incentivise the port to optimise and rationalise its operation in cooperation with other ports, unencumbered by petty parochialisms. The alternatives amount to grandiose schemes to relocate the port, totally ignoring the reality that in New Zealand, these days, we just don’t do massive infrastructure. It is simply not possible to undertake major public works without upsetting the habitat of some snails, kauri saplings or taniwhas. Besides, all the money Auckland has (and doesn’t have) has already been committed to the rail loop.

Vesting the total ownership of the ports on the Auckland Council was a particularly bad idea. The Council is deeply dysfunctional, run by a swollen bureaucracy whose primary aim seems to be to provide more highly paid jobs for more officials A veritable den of spivvery.

(This article was first published in The Exporter Magazine)

09 October 2015

TPPA and Politics

"Welcome news for dairy farmers – deal falls over" was the absurd headline used by a newspaper reporting on the failure to reach agreement on the TPP talks in Hawaii. This is really rather revealing of the weird mind-set of some of our anti-trade activists.

Even if the deal had collapsed (they did not need to worry; people like Minister Tim Grosser just love the theatre of dramatically rescuing their 'deals' at the last moment and so it has come to pass), it is hard to see how the collapse of a global agreement, maybe not so great for dairy interests, could somehow become "welcome news" for dairy farmers. Unless one's main motivation is raw envy.

The absurdities of TPPA opponents don't end there. The Greens are in a fury about the deal not being optimal for our dairy sector. That would be the same sector that they rant against, calling it "dirty dairying" and going so far as to demand a reduction of the national herd. That's right, the Greens want to cull cows to reduce CO2 emissions, but complain that the TPPA is not good enough for our growth in dairy exports. Hypocrites.

They are not the only ones. The Labour Party's 'creative types' from Grey Lynn are in a froth about the intellectual property rights of authors receiving increased protections. Perhaps they prefer the Kim Dotcom business model of ripping off artists to enrich pirates. Or, they just support anything, anything at all, as long as it is opposed to the current government. Numpties.

The last category are ideologues, like Law Professor Jane Kelsey, who seems to have all the time in the world to build a career as an anti-trade activist. These people deny the evidence that international trade has, in only a few decades, lifted hundreds of millions of people from abject poverty. They prefer the self-sufficient North Korean route, where peasants continue to look cute in their rice paddies, eat tree bark produced locally and remain unpolluted by things like an education, decent housing and enjoyment of things made by evil multinational corporations based in (spit!) the United States.

Marxists and fascists who are opposed to 'free trade' never quite manage to articulate an argument against trade per se. What they really dislike is freedom, full stop.

07 May 2015

No Port In Our Backyard

The port of Auckland is having a hard time trying to keep up with growth. They need to make the wharves longer and to reclaim some land for port operations. It is perhaps unfortunate that the port is located in the centre of a city run by people who would rather enjoy their lattes on waterfront promenades, instead of having them cluttered with cranes and containers.

The Grey Lynn aesthetes may be just indulging in their favourite sport, which is to remind the rest of us of their refined sensitivities and moral superiority. Or, they may well be on to something. Perhaps, the best solution would be to move the port to Whangarei, Tauranga or somewhere in the Firth of Thames. Anywhere, in fact, as long as it is as far away as possible from their backyards.

The only problem is that a move to Whangarei would require massive investments in rail and road harbour bridges or tunnels to Auckland, a move to Tauranga would need new tunnels in the Kaimai ranges and a whole new port would require a massive investment in new facilities, in addition to the new road and rail links. And the problem is that in New Zealand, these days, we just don’t do massive infrastructure. It simply not possible to undertake any of those public works without upsetting the habitat of some snails, kauri saplings or taniwhas. So, it is not going to happen.

The alternative to allowing the port to keep up with growth is to condemn it – and the city – to a graceful decline. The bigger container and cruise ships would sail by and Auckland would gradually become a commercial and industrial backwater. Like Wellington.

(This article was first published in the Exporter Magazine)

17 February 2015

The Customs Computer $30 Million Blowout

Yet another major IT project has gone off the rails. This time it is something called the Joint Border Management System (JBMS), a system designed to upgrade and link systems currently operated by Customs and the Ministry of Primary Industries (MPI). It was supposed to be finished by the end of 2012 at a cost of $75.9 million. Three years later, the development is still not complete and the budget has ballooned to $104.1 million.

This is merely the latest in a series of similar debacles. They are practically unavoidable, given the model used by government for IT procurement. It has been described as the "waterfall" model. Mike Bracken of the UK's Government Digital Services described it as "writing most when you know least". A group of public servants write massive tender documents attempting to guess the needs of end users years in advance. The scope of the projects is such that only a few large consultancies can qualify to tender. The selected consultancy then gets on with over-running budgets and missing delivery deadlines.

When it all becomes public, everyone runs for cover and the hapless Minister nominally in charge is left to take the flak. In the JBMS project, Customs, MPI, the Department of the Prime Minister and Cabinet and the State Services Commission were all called to put out the fire. Official Information requests were declined (on the usual grounds of 'commercial confidentiality') and an embarrassing law suit with IBM was avoided, but not before a few more millions were spent getting legal advice from Crown Law and Chapman Tripp. Those suits don't come cheap.

Does it have to be this way? After all, banks do on-line banking, Amazon sells books, clothing retailers of all sizes sell clothing, Trademe manages an auction site and airlines sell tickets on-line. None of these well-functioning systems were developed using the waterfall model. They were not the product of any grand design and all started as relatively small projects, run by in-house teams or small-scale contractors. Unlike public servants, the owners of those businesses did not have access to lavish amounts of other people's money. Many of the early versions of these successful applications failed miserably, but were soon replaced by others that did not.

Matt Ridley, a member of the British House of Lords, said in an article published in The Times, "[The systems that] succeed allow for plenty of low-cost trial and error and incremental change. It's the mechanism Charles Darwin discovered that Mother Nature uses. Rather than a grand 'creationist' plan or a big leap, natural selection incrementally discovers success through trial and failure. From the English language to an airliner, everything successful has emerged by small steps."

The current Customs system, Cusmod, was developed around the same time as trackstock, the Warehouse Management System that we use at DSL Logistics. We like to say that trackstock is very good indeed, because it incorporates fifteen years of mistakes. Every time something goes wrong, our small in-house team of developers comes up with solutions which improve the functionality of the product. Cusmod, on the other hand, looks substantially the same that it did fifteen years ago. Of course it is outdated and no longer fit for purpose. Instead of breaking the system up into smaller units and developing the capability to maintain them in-house or by using local developers, the departments went for another big bang approach and propose to replace the whole thing by spending over $100 million of taxpayers money.

The idea that a group of public servants can specify the myriad requirements of users, years in advance, is nothing short of arrogance. Yet, New Zealand is awash with very smart developers that deliver solutions to businesses of all sizes, day in and day out. Unlike massive projects like Novopay or JBMS, those systems actually work, in a way that no public sector IT system has ever done.

The rationale for JBMS was never very clear. At one stage, it was trumpeted as making it easier for businesses to register with the bureaucracies, a step that every business must undertake exactly once in its life time. The need for a 'single window' arose from the decision to keep two separate agencies working on border control, contrary to what every commission of inquiry convened on that topic over the years recommended. A single border control agency is the norm in comparable countries. It soon became apparent that the real purpose of the exercise was to upgrade the control systems of both agencies, while keeping two chief executives and their coteries of deputies.

Customs already records details of every transaction in a modern relational database. That provides the mechanism for the collection of statistics and the management of the revenue collection functions. The same data can also be used for intelligence purposes. There is no discernible need to create a new mega system to improve intelligence gathering. If the data being collected is not sufficient, new fields need to be mandated. Customs officers need to receive better training on how to query their databases and produce better analytics. If the tools that they have at their disposal are not good enough, then any of the many local software developers can provide them with query/reporting tools by lunch-time, at a fraction of the IBM costs.

Does such an approach work? It does. According to Matt Ridley, British minister for the Cabinet Office Francis Maude "began by centralising controls so that he had to sign off any IT contracts of more than one million pounds (now raised to five million), then built up an in-house capability to offer cheaper and better design, and opened procurement to smaller companies. Government contracts with outside IT suppliers are now shorter and smaller. Some of the savings on offer were so vast that civil servants refused to believe them. In one case, 98.5 per cent of the cost of an existing contract was saved by letting a contract to a small British business rather than an incumbent multinational IT firm, and it worked better."

Internal Affairs Minister Peter Dunne represented New Zealand at the inaugural meeting of the D5 Digital Leaders' Summit in London in December 2014. The D5 is a grouping of fine nations – United Kingdom, New Zealand, South Korea, Estonia and Israel – considered amongst the most advanced in the provision of on-line government services. Its establishment was a British government initiative. We hope that Mr Dunne learned something at that meeting.

30 March 2014

Pretending to Solve Housing Affordability

The government is finding it difficult to have a real impact on the affordability of houses. It has now come up with some pretend solutions.

The issue is actually quite simple. Some City Councils are run by people who believe that we should all be living in high rises near train lines, so we can ride a bicycle to the closest lentil-and-soy-latte shop. To achieve this vision of life in East Berlin circa 1975, they prohibit people from building houses where they want. Then, the cost of the remaining land goes up, astronomically. As it would.

The government does not seem to have the stomach to stem the ideological onslaught from the central planners, so something else is needed to try to convince people that they are doing something. Minister Nick Smith put out a consultation paper that suggested exempting building products from anti-dumping laws. Apparently, plaster-board from Thailand and nails from China were found to have been sold too cheaply in New Zealand, so the local manufacturers persuaded an earlier government to protect their profits by slapping a large protective tariff against competition from imports, using the arcane anti-dumping laws.

The Minister is right when he says “I worry that high duties on some imported building products, combined with limited competition in New Zealand is allowing excessive margins by building product manufacturers”. That is just as true when the same tariffs are applied to canned peaches, diaries and hog bristle paint brushes which are all subject to anti-dumping duties.

The Ministry said, “there is no intention to reform the fundamentals of [the anti-dumping] regime, such as by introducing a full public benefit test which would measure the impact of anti-dumping duties on New Zealand consumers”. So, they propose to change it just for building products, presumably because housing affordability is always in the news.

The Minister also proposed to corrupt the duty concession system, which exempts duty on goods without locally manufactured equivalents, again just for building components, again just to be seen to be doing something (other than the obvious). This principles-free approach to public policy reminds me of Muldoon who, when confronted with the problems caused to our exporters by the high costs of protecting local manufacturers, offered to eliminate duties on agricultural tractors.

12 October 2013

Importers Profit From Exchange Rate?

When the NZ dollar goes up a notch, two things happen: (1) some exporters complain and (2) importers are accused of profiteering. That is understandable, as a higher dollar makes exports more expensive and imports cheaper. Understandable, but not necessarily right. Importers who see their costs reduced when the currency goes up, would love to increase their profits by keeping their prices at the same level. In that respect, they are no different from school teachers, firemen, stevedores and all the other folk who would like to have higher incomes. The problem is that, when their costs go down, so do their competitors’. If they fail to meet the competition’s price reductions, they lose sales, pure and simple. So, when their costs go down, so do their prices, much as they would love them to stay the same. The final consumer is the winner, both directly in the form of lower prices and indirectly in the form of lower inflation. Without the downwards pressure of import prices, the Reserve Bank would have to increase interest rates.

Things are not that simple either, when it comes to exports. Many exporters of manufactured goods import components and raw materials denominated in US dollars but export most of their wares to Australia. When the NZ dollar rises against the US dollar but stays down against the Australian dollar (as happened in recent times), those manufacturers get a double dose of good news: their inputs are cheaper and their finished products remain competitive in the Australian market. Other exporters, such as primary producers, are not so fortunate, as they have a relatively lower level of imported inputs and sell their produce in US dollar markets.

International traders, be they importers, exporters or both, operate in a regime of perennial volatility. In a small country like New Zealand, the currency bobs up and down like a cork in the ocean. It is little more than a waste of effort to complain. It is an even bigger waste of time to pretend that a country like New Zealand can do anything useful about the value of its currency. To attempt to do so would be much like trying to soak up the incoming tide with a beach towel.

Every time some wise guy intones gravely “the New Zealand dollar is over-valued”, we wonder where that superior wisdom comes from. The dollar is always valued at the exact amount that someone is prepared to pay for it, from one minute to the next. No country has ever devalued its currency to prosperity, otherwise Zimbabwe would be richer than Switzerland. When people clamour for a lower dollar, they are in effect asking for a reduction in other people’s salaries, as most of what we consume in New Zealand is imported.

Australians Miss Out on China Free Trade Agreement

New Zealand and China have a free trade agreement (FTA). For most items of clothing imported from China to New Zealand, the current duty rate is 6.3%, reducing to 4.2% in January 2014, 2.1% in 2015 and zero in 2016. However, if those items are imported from a third country – even if made in China – then the duty rate that applies is 10%.

This affects mainly Australian retailers with stores in this country, who source their goods from China for both countries and then sort them for distribution in their Australian DC. Chinese garments shipped from Melbourne to Auckland end up paying a duty of 10%, losing the benefit of the FTA preferential rates. The only solution to this problem is to have the New Zealand requirements shipped here direct from China.

Customs Fees Increased

Customs have increased their ‘transaction fees’ from $38.07 to $46.89 (+23.17%) for imports and from $14.56 to $17.94 (+23.21%) for exports. The department clips this ticket for most shipments with a value of over $1,000 that come in to or out of this country. The Customs fees were introduced by former Minister Jim Anderton. Until then, the costs of operating what is basically a law enforcement service were met from general taxation. Paying Customs a transaction fee makes as much sense as paying the Police a fee when you report a theft. It now costs importers about the same to file an entry as it costs them to produce it in the first place. Customs are providing a service to the community at large, not to the individual importers and exporters who are obliged to file entries with that department.

09 October 2013

Reshoring: Buzzword or Reality?

Reshoring is jargon for bringing manufacturing back from China. It is happening in the US, driven by a combination of higher labour costs in China and lower domestic energy costs from fracking. Intangibles, like the efficiencies from having design and production in the same facility and lower costs of automation, also have a bearing. IKEA has recently opened a factory in North America, to cut its delivery costs to that market.

In our own area of third-party logistics (3PL), we are finding that doing pick-and-pack in Auckland is now costing not much more than doing it in Shanghai. We expect the Chinese cost advantage to disappear altogether before long, as their labour costs continue to increase in double digit annual percentages. The transit time from our distribution centre (DC) in Shanghai to retail stores in New Zealand is counted in weeks, while that from the Auckland DC is counted in hours. The best solution is to operate a mixed service, where some base lines are packed in China while others, more time-sensitive, are stored at destination for rapid fulfilment.

Speed to market is becoming increasingly important. Zara, a giant Spanish clothing retailer, spent a lot of time and money setting up a system to attach security tags in the DC, as the normal practise of having that task done by employees in the stores added a few intolerable hours to final availability. Their garments are, in the main, put through a steam tunnel and shipped in hanging bags, ready for retail on arrival. This method is now used by most large European retailers, as the mall rents are too high to waste precious floor space preparing garments for sale. This trend is also developing in New Zealand.

09 August 2013

100% Bullshit

A mouthpiece of the Chinese government, said it was time to ask the government of New Zealand about quality control. It called New Zealand's 100 per cent Pure campaign to boost tourism, a "festering sore". The editorial was commenting on Fonterra’s shipments of milk products infected with botulism.

The manager of Sanford was reported as saying that although there had been no direct impact on the firm so far, he was concerned about the "public ridiculing" in the Chinese media of the "Pure New Zealand idea".

The late Owen McShane saw this coming back in 2001. He posted this in a chat room at the time: “The fault lies with our tourism board for promoting our country as 100% pure, because purity in this context defies definition and leaves us open to this sort of response. Purity is a dangerous concept in political or commercial life. Gold is not sold as pure but 99.99% pure. Of course we are not 100% pure because nothing is. And compared to what? Even if we locked up all our streams from cattle and sheep does this mean we have restored "nature" and hence 100% pure - not unless someone can persuade me that no Moa ever crapped in a stream. And birds don't process their shit as well as mammals. I am suggesting that Federated Farmers take the Tourism Board to the Advertising Standards Authority for false advertising and raising expectations to impossible levels. Repeat, purity is a dangerous concept. Ask the German Jews or the survivors of the Taliban.”

The usual suspects said, then and now, that the claim is just innocent puffery. Tourism New Zealand spokeswoman Deborah Gray said last year that some people were confusing the campaign with an environmental issue. "The 100 per cent Pure New Zealand campaign is a marketing campaign not an environmental promise," she said. Fools.