Six months on: Issues, challenges, and opportunities facing the Christchurch Reconstruction
Date Added: 30th August 2011 from Canterbury Development Corporation
Six months have passed since the 22 February earthquake. Although it will possibly be years before the final costs are known, Treasury's early estimate of the damage to buildings and infrastructure was $15 billion (7-8% of GDP) but this does not take into account the likely economic impact with some commentators estimating an eventual total cost of $20-30 billion.
Yet a commonly held perception by those outside the region is that the reconstruction boom from insurance pay-outs is already underway.The reality could not be further from the truth. Although most of Christchurch’s manufacturing sector and logistics infrastructure is now operating normally, having faced severe disruptions following the February and June earthquakes, reconstruction of the commercial and residential sectors has yet to eventuate. Many companies in the construction sector are scrambling for work.
An increasing consensus is that the reconstruction effort will gather pace slowly from next year with residential construction work picking up later this year but that the commercial construction will take longer to get under way and peak much later. A key challenge for planners is building capacity during the peak periods.
Residential reconstruction
Apart from emergency repairs, there is little residential construction work currently underway in the badly damaged eastern suburbs of Christchurch and the earliest repair work to houses damaged in February in the green zone is not expected until late 2011. Nevertheless, analysts such as Dominick Stephens, Chief Economist at Westpac, forecast activity for the residential sector to follow a typical bell curve, ramping steadily to peak over 18 months through 2012-13 before tailing off. By this stage, insurance issues should have been resolved, design and planning questions will have been addressed and supply chains and labour resources will be working efficiently. At its peak, work associated with the quakes could add about $2 billion to annual work across the three construction sub-sectors of residential, commercial and horizontal infrastructure
So what’s the hold up? The main obstacle until now have been the continued seismic activity — more than 8400 quakes and aftershocks since September and an 80% likelihood of a 5-5.5 Richter aftershock in the region within the next 12 months. Understandably the insurance sector is reluctant to approve repair work until this seismic activity has abated substantially — before February the rule of thumb appeared to be a stand down period of one month after the last 4.0 Richter aftershock
Westpac forecasts of quake-related construction activities.
Further delays have resulted from Cera’s residential zoning in late June. Although the Government’s offer to buy the 6000 houses in the residential “red zones” in Christchurch and Kaipoi at their 2007 QV valuation has created certainty for homeowners, the process won’t be as simple as homeowners moving from the red zone to new subdivisions. Once owners have signed-up to the Government offer, they have a further year before they need to vacate their properties. The estimate for the earliest lift in new dwelling consents and construction is late 2012-2013
For the more than 60,000 affected properties in the green zone, mainly to the west and north of the city, repair work will be administered by Fletcher Construction, EQC’s project director for repairing damage to houses under the $100,000 EQC cap.
Fletcher will be one of the biggest beneficiaries from the quakes, and analysts such as Rob Mercer from Forsyth Barr estimate the company will make $250-$376 million from its Christchurch work between 2012-19, assuming it manages 20% of the work and the rebuild cost ends up in the higher range of cost estimates. Fletcher does not carry out the residential repair or building work — it is manages the process on EQC’s behalf. The work itself is done by independent contractors who have completed an accreditation process with preference currently being given to local companies. Fletcher subsidiaries such as Placemakers also stand to benefit hugely. Although the supply chain is fully contestable with contractors maintaining their own procurement relationships with suppliers, Placemakers is one of the two dominant players in the local market.
The logistical challenge of managing the workload is daunting. As of mid-August Fletcher has:
- Established 18 hubs in Christchurch, Selwyn, Waimakariri, Hurunui, and Ashburton with one more in the process of being established
- Accredited 795 contracting firms
- Inducted more than 6450 contractors and tradespeople into its system
- Completed 21,905 emergency repairs with a further 1234 in progress
- Undertaken more than full-scope repairs
- Made payments of about $119M paid to contractors with payments currently tracking at $500M annualised.
Meanwhile residents in the orange and white zones in the eastern suburbs and Port Hills, where the most extensive damage occurred, can expect long delays. Owners of about 9000 properties in the orange zone are waiting to hear if they can rebuild on their land until land damage assessments have been made, and it could be another four months before a final decision is made. Similarly, CERA has zoned the Port Hills area white and decisions on which areas may become green or red will not be made until technical reports are finalised in coming months. Christchurch City Council and CERA have formed the Port Hills Earthquake Remediation and Recovery Project, which is supported by a consortium of geotechnical engineers, EQC and Tonkin and Taylor. The project team is working to assess damage in the hills and map the areas currently zoned white. Technical reports are expected to be completed by the end of September, before being presented to the Council and CERA in October
The logistical challenges that Fletcher has already encountered will be repeated when the more expensive rebuild work that will be handled by the insurance companies for residential properties over the $100,000 EQC cap. Replicating the same type of relationship as EQC has with Fletcher, AMI have appointed Arrow and IAG Hawkins Construction as their designated project managers. Arrow, for example, has already accredited approximately 80 contractors with work flow managed out of pods or hubs that will mirror AMI’s pods with each pod managing 350-500 claims. Simply to manage the assessment process before work can commence Arrow and AMI have devised a complex, multi-stage process involving the property owner, the Arrow project manager, the AMI client manager, and a quantity surveyor to develop a Detailed Repair/rebuild Analysis (DRA) that the property owner needs to sign off before the claim can be settled. It is unlikely that these more extensive repairs will commence until mid- 2012
Insurance remains the biggest stumbling block, posing as it does many seemingly intractable issues that need to be resolved before claims can be settled. This is after all the world’s fourth-largest pay-out for earthquake claims. About 387,000 claims for damage have been made to EQC, which has already paid out $1.3 billion but over 326,000 claims still wait to be processed. A complicating factor is that usually there are multiple claims for each property, leading to issues between EQC and insurance companies which the industry did not foresee despite a 2009 review of EQC’s operational capability, which highlighted among other things the minimal collaboration between EQC and private sector insurers and in which planning scenarios envisaged processing times for events of only 30,000 claims and above
AA Insurance, for example, has identified 45 different insurance scenarios that its customers are looking at, many caused by overlaps between EQC and the insurance company — whether, for example, the insurance policy is renewed between the dates when different EQC claims have been submitted.
Profound differences have also emerged between insurance companies in their approach to the disaster. Although some have been proactive, setting up hubs in communities to address policy holders’ questions, others have taken a wait-and-see attitude and have yet to assign case managers to handle individual claims. Significant differences exist between insurers and between insurers and re-insurers over the standard to which houses are to be repaired, while issues are emerging over guarantees and indemnities. IAG’s project management agreement with Christchurch-based Hawkins Construction covers Hawkins' responsibilities as project manager, rather than specific building work. Hawkins needs to provide only a two-year warranty with contractors providing a guarantee under the Consumer Guarantees Act. Potentially, this could open a slew of costly litigation in the future as home owners pursue contractors, project managers, and insurers over sub-standard work to their properties.
Meanwhile the elephant in the room is the reluctance of insurers to issue new policies for new builds in both the residential and commercial sectors. This has already affected the real estate market in affected suburbs with insurers either refusing or reluctant to reassign existing policies from vendors to buyers even when the damaged property is under the $100,000 EQC cap.
Infrastructural repair and commercial reconstruction
The same insurance issues bedevil repairs to the region’s horizontal infrastructure and rebuilding the city’s commercial sector.The total bill for the region’s infrastructural assets is estimated to be $2.5 billion, which Cera’s CEO Roger Sutton expects will take five years to repair. This includes damage to not only local and district council assets such as roads, water supply, storm water and sewerage but also utility assets owned by telecom providers, electricity networks and distributors, gas and petroleum suppliers and distributors, and the Lyttelton Port. Although the electricity network company Orion faces a repair of $70 million to its assets, it expects to spend an average of $65 million p.a. for the next five years to restore, strengthen and expand its network.
To manage the reconstruction to the region’s infrastructure, an alliance has been formed between Christchurch City Council, Cera, New Zealand Transport Agency, Downer EDI, Fulton Hogan, Fletcher Building, McConnell Dowell Constructors and City Care.
To give but one example of the scale of the task ahead: it currently takes a Fulton Hogan crew of nine 13 weeks to lay one kilometre of roading from the sub base once services have been laid. Estimates range from 200 kilometres of roads that will need to be built and a further 400 kilometres that will require some level of remediation. Similarly, there is an estimated 800 kilometres of pipes that need to be either replaced or repaired.
Yet following the June earthquake the Christchurch City Council, along with district councils in Canterbury, was unable to secure continued insurance cover for its $4.2 billion assets from its previous provider Civic Assurance. (Earthquake damage to the Council’s assets to date is fully covered by insurance or Government contributions.) Although the Council has secured fire cover for assets such as its housing units and the CBS Arena, its brokers have as yet been unable to place the remainder of its assets in the London market, which has little appetite for earthquake risk.
Ground zero is the CBD. According to Warwick Isaacs, Cera’s deconstruction manager, the demolition of the CBD is expected to continue for the next eight months with some 250 trucks leaving the CBD each day with almost 600 buildings approved for demolition and only 200 demolished already. In all, some 1200 buildings will be either demolished or require significant remediation. The City Council has recently launched its draft Central City Plan, after an unprecedented consultative process that involved 106,000 submissions. It envisages a more compact, low-rise CBD with distinct precincts for different retail developments, business sectors, and housing interspersed by small neighbourhood parks. Public-sector funded redevelopment projects totalling approximately $2 billion are anticipated with major projects including the $400 million light rail link between the University and the CBD, a new central library, a metropolitan sports facility, a new convention centre and a covered market place to be implemented over a 20-year time frame.
Only once the city plan has been approved by Government in January will individual owners know their zoning and be able to design and obtain consent for an appropriate building, let alone start construction work. Historically, ownership within the CBD has been dominated by an overwhelming percentage of investors compared to developers; consequently mechanisms such a development corporations are being investigated to amalgamate titles to accelerate or facilitate priority land development where market forces fail. Given the complexity of such issues, it will probably be another five years before the nascent city begins to take shape, and in the meantime a transitional phase is being planned using pre-fab, re-locatable temporary structures, which the public will be exposed to for the first time when the Cashel Mall shopping precinct is reopened in time for Canterbury’s Cup Week in early October.
A growing confidence
It is not all gloom however. Despite the complexity and scale of the challenge, there is a growing confidence. The aftershocks will die away, the insurance issues will be resolved, the construction boom will happen. In the meantime, the delay has meant that the necessary processes have been developed to manage the appropriate resources to ensure that the job can be done. For example, with the Alliance in place, the Council’s Infrastructure Rebuild Management Office (IRMO), which oversees planning, can now fast-track progress – repairing more than 100 kilometres of sewers in a few years whereas normally the city would have taken a year to repair three kilometres of sewer.Similarly, within the residential construction sector, the model adopted by Fletcher, Hawkins and Arrow of accredited providers mean that repair and reconstruction work can rapidly scale up. If until now they have used local companies, that is simply a matter of pragmatism: an assured, known quantity in the market. The next challenge is planning capacity to meet peak demand.
Within Canterbury there is a broad consensus that local industry must be part of the solution. A spectre that commentators such as Dominick Stephens have warned is a boom/bust scenario: a glistening, celestial city some 5-10 years in the making but a depressed local economy.Consequently, organisations such as the Canterbury Development Corporation, the economic development arm of the Christchurch City Council, and business associations such as the Canterbury Employers’ Chamber of Commerce (CECC) and NZMEA are looking at way to ensure that the local manufacturing sector fully participates in the rebuild.
From October NZTE’s Industry Capability Network (ICN) will be based in Christchurch working with local manufacturing and engineering companies to ensure they are fully integrated into the supply chain and procurement processes of the construction sector, many of which extend offshore. ICN’s role is to connect local suppliers of components and materials with buyers and those in charge of design and purchasing for major projects — be they architects, quantity surveyors, procurement managers, developers or owners. The ICN provides a free local sourcing service for project owners which often saves them both time and money – as seen in energy projects and many defence and health projects, and often uncovers new innovative local products and services. Key areas of its focus will central and local government assets and the commercial sector. ICN’s previous projects include the Kupe Gas Project where it brokered relationships between New Zealand companies and the project managers that eventually won $200 million of the $620 million worth of orders placed in New Zealand.
In Australia, where ICN began, local contribution typically accounts for 30-50% of major infrastructural projects with a “local” component included in procurement policies and tendering processes. Although such policies are common in Australia, they are not generally practiced in New Zealand. Nevertheless, the arguments for import substitution are well understood. A 2009 Berl report concluded that every $1 million spent in domestic manufacturing activity in New Zealand substituting imports results in an additional $0.93m in value added and 8.87 FTEs. Using multiplier values, that same $1 million results in $2.05 million of initial and downstream value added, rising to $2.56 million of value added if induced outputs are included.
Although ICN will be working proactively with local Canterbury companies, its mandate embraces all New Zealand and Australian companies. In this respect, the most significant threats from imports to supply the Canterbury reconstruction (and their potential impact on jobs) is for such components as reinforcing steel, steel track and studs, long-run roofing, colour tile roofing, interior wall linings, and HVAC systems. Many of these components are manufactured in Auckland, processed in either Auckland or Christchurch and distributed in Christchurch. What happens in Christchurch has a direct impact on the national economy.
As it is, the battle line over imports is more likely to be won with components and materials that are Building Code complaint and resilient to seismic events and with pricing based not so much on the output cost but on the through-life and servicing cost. In this, New Zealand companies have shown themselves to be competitive.
In the meantime, building capacity to match future demand at peak activity remains a challenge. There is simply more work than the region can handle. Depending on the time line scenarios planners use, there could be an additional 10,000 to 30,000 FTEs required to service the construction sector during peak activity. At the same time there is a growing tide of companies outside Canterbury trying to break into the local market. National and multi-national companies that already have branch offices or agencies in Christchurch can scale up rapidly from their present sites. Yet regional companies without a branch in Christchurch will be constrained by logistical problems that will hinder their entry into the Christchurch market. Commercial properties are now at a premium and in short supply. Similarly, one of the biggest constraints will be the availability of housing. As Dominick Stephens has observed, “reconstruction would actually swell Christchurch’s population at the very time when housing is scarce, exacerbating the problem rather than alleviating it.” Beyond that is the time-consuming effort of building a presence in any market — determining who the decision-makers are in an organisation, making contacts, and turning those contacts into relationships in what is already a competitive market.
As it is, an emerging trend is of companies working through their industry and business associations to establish joint ventures and partnerships with local companies. In this way, a local roofing company has formed JVs with North Island companies to supply work gangs to meet peak demand; a local plastics company is scoping a JV with national companies to invest in plant to produce seismic-resilient pipes. Such partnerships in their own way mirror the types of supply arrangements demonstrated by the Alliance, Fletcher, Hawkins and Arrow that have already proven themselves in Christchurch.
The Canterbury Development Corporation is the economic development arm of the Christchurch City Council.
The information contained in this article exists in the public domain. Although all care has been made in assuring the accuracy and balance of this article if, however, there is any factual error it is unintended, and the writer apologies unreservedly.
