Tuesday, 22 March 2016

Cities and Built Environment Policies

Why measuring the built environment sector is important

One of the Turnbull Government’s points of difference with its predecessors is the focus on cities and the built environment. When announcing his first ministry Malcolm Turnbull said: “Liveable, vibrant cities are absolutely critical to our prosperity. Historically the Federal Government has had a limited engagement with cities and yet that is where most Australians live, it is where the bulk of our economic growth can be found.” He then identified productive cities, housing affordability and transport diversity and integration as issues.

Cities are at the heart of the emerging digital economy and society, and these days there are a range of different’ big picture’ ideas about what cities can or should be: creative cities, functional cities, nodal cities, compact cities and so on. In Australia the emphasis has come to be on planning and productivity, although this consensus is a fairly recent event, and has yet to extend much past the major public and corporate stakeholders involved.

Cities as economic and social phenomena are also enormously varied and complex. Significantly, there is also an industry, or collection of industries, that creates and maintains cities. The building and construction industry, at around 7 percent of gross domestic product, is the core, but the role of the construction industry linking suppliers of materials, machinery, products, finance, professional and technical services is also important.

These two views have been called broad and narrow, with the narrow industry defined as on-site activities of contractors and subcontractors and the broad industry as the supply chain of materials, products and assemblies, and services. The term that arguably best encompasses the extraordinarily large number and range of participants in the creation and maintenance of the built environment, from suppliers to end users, is the built environment sector.

Based on the studies that have quantified the relationship between the narrow and broad definitions of construction it is reasonable to conclude the wider industry is around twice the size of the narrow industry. The 2003 UK report by David Pearce on The Social and Economic Value of Construction found contractors accounted for around half the total of employment, the number of firms, their turnover and value added, in the five industry groups included in the broad definition. An Australian study in 1999, Mapping the Building and Construction Product System in Australia by the Australian Expert Group on Industry Studies, found the narrow industry is 51 percent of income and 48 percent of employment in the broad industry.

The way to turn this rough estimate into a more credible measure would be through the preparation of what is known as a satellite account, which reclassifies expenditures usually presented in different industry groupings into a single sector. These are used to provide more detail on sectors that are not adequately represented in the national accounts. A previous post discussed these.

At this time the most widely found satellite account is for tourism (nine countries, all irregular, often jointly funded by industry and users), but they have been produced or proposed for a range of other industries such as health, the environment, R&D, information technology, infrastructure, non-profit institutions, human capital and households. Built environment sector is also the obvious choice of a name for a set of satellite accounts.

The reason understanding the extent and of the role of the built environment sector is important is that, despite repeated policy efforts by governments across a wide range of issues, the built environment is often seen as under-performing, based on measures such as housing affordability, traffic congestion and flows, amenity and access to services, energy efficiency and carbon abatement, water capture and so on.

An important part of the explanation for the difficulty in getting significant outcomes through policy interventions is the under-appreciated complexity of the built environment sector, partly due to the fact we don’t adequately measure its role and extent. Getting a better definition and integrated data would allow better monitoring of the effectiveness of future cities and infrastructure policy initiatives.

It is unlikely any single policy would address the complexity of the built environment sector, and why and how the many overlapping layers of users, clients, regulators, creators, providers, maintainers and managers makes effective policy implementation very difficult. In particular, the multiple layers of approval processes and the lack of inspection and enforcement of standards are critical issues that the Commonwealth Government typically affects indirectly. Across Australia there is great diversity in state legislation, and regulation of building and construction is typically distributed across several departments within states.

Clearly, the sector is over-regulated, and therefore it is not surprising it is under-performing. Much of the regulation is inefficient or ineffective, sometimes due to regulatory capture, but really it’s a case of policy accretion over time. The real problem is that much of the regulatory framework is aging badly, some parts are now decades old, and is poorly adapted to the rapid pace of development in construction technologies and products.

The Government also has the Productivity Commission report on Infrastructure to consider. Many of the recommendations in that report are serious and, in some cases, significant reforms to the selection, financing, tendering and contracting of major building and construction projects. Their application extends past engineering infrastructure to the rest of the built environment sector. The recommendations provide an outline of what an industry policy backed by Commonwealth funding for new cities and built environment projects could look like. There are many possibilities. Tax exempt infrastructure bonds targeted at self-funded retirees issued by a statutory authority that decides on the projects might be politically attractive.

Malcolm Turnbull’s agenda for cities set three main policy goals: integrated planning, infrastructure funding and ‘greening’ cities. In the past a set of policies like these would be seen as affecting a diverse number of industries, or industry sectors. Bringing these industries together as the built environment sector, and measuring that sector’s development and performance, could make an important contribution to policy initiatives in related areas such as energy, transport and so on.

With the election campaign now launched there is a general expectation that cities and built environment policy proposals will emphasise planning and productivity issues. There is an opportunity  here to integrate those proposals with the emerging narrative from the Government of lifting Australia’s rate of productivity growth, levels of research and innovation, and facilitating the transition from our recent but now past resources economy to a modern, post-industrial information and services economy.

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