Gavin R. Putland,  BE PhD

Friday, January 06, 2012 (Comment)

If Anna Bligh ran a body corporate (U.S. ed.)

Once upon a time, there was a huge condo building called Brisbane. It had been built in stages. The ground floor, commonly called the “central business floor”, was the oldest (but was always being renovated). The higher floors had been added more or less haphazardly over the last century and a half.

Use of the internal space was highly diverse and lumpy. For historical reasons, commercial activity was heavily concentrated on or near the central business floor (hence its name), while residential use was spread more evenly but skewed towards the upper floors. Consequently most of the population had to commute over many floors between their homes and their workplaces, and a large minority had to commute from high floors to the ground floor and back.

Properties on higher floors, in spite of their cleaner air and superior views, were less valuable than properties on lower floors because the residents of higher floors faced longer commuting distances. Moreover, the body corporate charged fares for use of the elevators, and the fares were higher for longer journeys.

Elevator passengers, especially those who lived on high floors, considered the fares exorbitant, although in fact the fares were not enough to cover operation and maintenance costs, let alone the capital costs of upgrades and extensions to the elevator network. So the elevators were old, slow, dirty, dangerous and unreliable, giving the passengers all the more reason to consider the fares exorbitant.

And they were the lucky ones. Large sections of the building had no elevator service at all, forcing the residents to navigate the stairs under their own power. Proposals to extend the elevator network were rejected as unviable. One notorious plan, concerning an elevator to the Redcliffe annexe, had existed for more than a century. It was periodically dusted off before body-corporate elections, only to be shelved again because it was allegedly unviable, although the necessary shaft already existed and was already a common area held by the body corporate.

Any attempt to reduce losses by raising fares was futile because it drove commuters out of the elevators and onto the stairs. Higher fares meant fewer patrons, and there was no combination of fares and patronage that would make the elevators profitable. But that inescapable logic didn't stop the body corporate from raising fares in real terms.

Meanwhile a little-known eccentric named Gavin R. Putland, representing a shoestring outfit called the Land Values Research Group, wrote a steady stream of letters, submissions and articles advocating a radical alternative method of paying for elevators.

First make the body-corporate fees proportional to site values,” said Putland; “that is, let the owner of each property pay a fixed percentage of its site value per year. Or, if you don't want any losers when you reform the fees, make the year-on-year change in the fee proportional to the year-on-year change in the site value. Then make the elevators free (except for such token peak-time charges as may be necessary to avoid congestion). The removal of fares will cause an uplift in site values, hence a rise in body-corporate fee receipts, which will pay for operation and maintenance of the elevators. Similarly, upgrades and extensions to the elevator network will pay for themselves out of the uplifts in site values that they cause.

By way of example he added: “Why do owners of properties in the Redcliffe annexe keep agitating for an elevator? Because they know it will increase their site values! Let them pay for it by giving back some of their windfall through their body-corporate fees. They'll keep the rest of the windfall, so they'll still come out in front. Why should other property owners contribute to the cost when they get none of the benefit?

Nevertheless, it was eventually announced that the Redcliffe elevator would be built with the aid of federal funding. So, while the benefit would be concentrated on owners of properties in the Redcliffe annexe, most of the cost would be met by people who not only didn't own property in the annexe, but didn't even live in Brisbane.

Putland bristled at suggestions that a clawback of uplifts in site values through body-corporate fees amounted to confiscation or an attack on property rights. “When the new fee structure is in place,” he said, “your fee doesn't rise unless your site value does, and your site value doesn't rise unless, in the judgment of the market, you are better off in spite of the implication for fees. And because improvements to the elevators become self-funding and are therefore able to proceed, you get uplifts in site values that you wouldn't otherwise get. A reform that increases your net worth is not confiscation. A reform that increases the value of your property is not an attack on your property rights. But if other people pay for your windfall while getting none of the benefit, that's an attack on their property rights!

In answer to the criticism that a higher site value did not imply a higher cash flow with which to pay a higher fee, Putland proposed that part of the fee could be deferred until the property was next sold. “Hence, if the property is inherited, deferred fees don't become payable until the first sale after the inheritance, so no one can portray them as a death tax,” he said. These suggestions, especially the last, tended to provoke silent rage.

Mainstream economists, if they didn't ignore Putland altogether, questioned whether site values would rise by a sufficient margin, or at all. Putland was adamant: “There are only two places where the benefit of an elevator can show up as a price, namely in the price of actual use of the elevator (that is, fares) and in the price of access to locations served by the elevator (that is, site values). The benefit net of fares shows up as an increase in site values. The cost to the body corporate is also net of fares. So if an elevator, or an improvement thereto, passes a cost/benefit test, the uplift in site values will exceed the cost. If fares are removed, rental values of sites will rise by the amount of the fares plus a growth dividend caused by greater economies of scale and specialization, due to the removal of a barrier to trade. This is the same mechanism by which benefits can exceed costs when the elevator network is upgraded or extended.

The economists found the “growth dividend” argument particularly irritating, because it was the same argument by which the same economists extolled the virtues of free trade. Such orthodoxy, coming from such a heretic, was infuriating.

Matters came to a head when the body corporate, chaired by Anna Bligh (the first woman to hold the post), increased fares three times in three consecutive years, giving Brisbane the third-highest elevator fares in the world. Fares were scheduled to rise for a fourth consecutive year when Bligh was replaced by Campbell “Can-Do” Newman, who soon became known as “Can't-Do” because he had no better system for financing the elevators than Bligh had.

The only person offering an alternative system was Putland, who was obviously a nutter. Transport consultants hired by the body corporate, if they didn't ignore Putland altogether, dismissed him with a wave of the hand. “Who ever heard of free elevators?” they said. “If it were more efficient to fund the elevators from body-corporate fees than from ‘user-pays’ fares, every body corporate in the world would have been doing it for decades!

So the consultants rose to ever greater heights of academic respectability, while Brisbane degenerated into a giant slum, and Putland degenerated into a grumpy old man, and they all lived unhappily ever after.

[The original (Australian) edition of this piece was published at the LVRG Blog. The present edition uses American terminology. At the time of writing, Bligh's replacement by Newman is speculation, not history.]

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