When broken forecasting means billions wasted

This line records use of a certain item by New Zealand population since 2000. Where do you think it will be in say 20 years time?

The statistic went up, and then down, and so the best estimate to me would be a flat or downward trend. But rather strangely the authors of this chart determined that all of their estimates would be up, and that the lowest change would be a substantial increase. Here it is, with my added red line eyeball trend:

The chart, of course, is estimated vehicle use in New Zealand, expressed in millions of kilometres travelled. It’s sourced from the ” National Long-Term Land Transport Demand Model, NZIER and NZTA (2013)”, and that’s a critical model as it feeds into all sorts of cost-benefit analysis and policy for transport in New Zealand.

International and local evidence is that vehicle use is declining, driven by a new generation that cares about global warming, and prioritises iGadgets, internet use and public transport over cars and other structural shifts. So seeing a forecast like the below is completely unreasonable (the red is my straight line projection again):

It’s a basic mistake that is and will cost the country billions – in over-spent costs to build more roads, and, worse, in the opportunity cost of not applying that investment to more productive areas of the economy.

The bias towards cars is also reflected in this chart of forecast public transport statistics – which doesn’t pass the giggle test either. Witness the trend and the projections below (the red is my version of the trend-line):

So for some unfathomable reason the growth in the use of public transport is forecast to immediately and dramatically fall, while the growth in the use of cars will immediately and dramatically rise. It’s ludicrous.

I plucked those charts from the Treasury Paper “Infrastructure Evidence Base: Transport Sector“, published today. It’s wonderful to see papers like that published, but not when the underlying assumptions are flawed.

The executive summary acknowledges this flaw, stating:

“Historic assumptions about future revenue growth from fuel taxes are being re-evaluated in light of international trends such as driving less, increasing fuel prices, e-commerce, increasing fuel efficiency and alternate fuels.”

That’s repeated elsewhere – and I wonder what the authors really think.

While the report covers road, rail, marine and air modes of transport, it ignores the most popular transport method – walking, and ignores cycling as an alternative which takes thousands of cars off the road each day.

But it does state that congestion in Auckland has been decreasing:

There has been notable progress in Auckland since 2009, which shows evidence of improvement in travel times during the morning peak period, despite population increases.

And that’s backed up by a chart – I’ve added the census data for Auckland population from 2006 and 2013. The trend from 2009 is unmistakeable, and not coincidentally the liveability of Auckland has skyrocketed during that time:

There is no mention of why congestion has lowered in Auckland, and I suspect that the considerable rise in medium and high density housing, the major improvements in the bus and train systems in Auckland along with the rise in cycling and walking are deemed out of scope. That’s a shame, as it contributed towards Auckland being a far more liveable city, and that in turn is driving the economy here.

The narrow scope, along with laughable forecasting of lower growth in public and higher growth in private transport collectively mean that the report is fundamentally broken.  

A broken report means that we cannot yet even fairly communicate in New Zealand about the quality of our transport infrastructure and the future investment required. That’s really not acceptable in an election year.

Posted in NZ Business | 4 Comments

Our new US ambassador has a tough act to follow

The nominee for the USA’s Ambassador to New Zealand is one Mark David Gilbert.

Here’s the text from the Whitehouse.gov press release, 4 months ago:

Mark D. Gilbert, Nominee for Ambassador to New Zealand, Department of State

Mark D. Gilbert is a Director at Barclays Wealth (formerly Lehman Brothers) in West Palm Beach, Florida.

Mr. Gilbert was the Senior Vice President of Goldman Sachs in Miami from 1989 to 1996 and

the Senior Vice President Sales Manager of Drexel Burnham Lambert in Boca Raton from 1986 to 1989.

Mr. Gilbert was the Democratic National Committee’s Deputy National Finance Chair from 2009 to 2013.  He served on the Obama for America National Finance Committee from 2007 to 2008 and 2011 to 2012, and was a member of the Presidential Inaugural Finance Committee in 2009.  Mr. Gilbert was Finance Chairman and Advisor to the Klein for Congress Campaign from 2005 to 2006 and was a Trustee on the National Finance Committee for Kerry for President in 2004.

Before beginning his business career, Mr. Gilbert was a professional baseball player for several years and played in the major leagues with the Chicago White Sox in 1985.  Mr. Gilbert received a B.S. in Finance from Florida State University.

Let’s start at the bottom, as NZHerald led with the White Sox connection in their article on February 14th. While Gilbert was indeed a former Chicago White-Sox player, his career with mercilessly short, lasting, says Wikipedia, the 7 days from July 21 1985 to July 27 1985 and paid, says baseball-alamac.com, $60,000 for the year (the minimum). Amazingly enough he played 7 games in those 7 days – making 6 hits and 3 runs in 22 at-bats. The White-Sox played 162 games in the regular season in 1985 and are Obama’s favourite team. 

The largest chunk of text from the press release is reserved for Gilbert’s work as a fundraiser for the Democratic Party and Obama/Kerry, and this is why he has been tapped as an ambassador. The WSJ reports that he raised at least $500,000 for Obama’s reelection in an article that somewhat unnecessarily points out that he was not implicated in Barclay’s Libor rate-fixing scandal. (A scandal that even today is on the front page of the WSJ). But the NYTimes shows Mark Gilbert has in fact bundled over $3.3 million for Obama since 2007 – just out of the top ten bundlers for Obama.

While it’s ok in the USA to be rewarded like this for fund-raising efforts (and indeed it’s sadly ok for fund raising efforts like this), it’s not activity that helps with credentials for an ambassador to New Zealand, although it does show a certain loyalty to the President. Evidence of that influence is small article that mentions that his daughter, Dani, was a DNC (Democratic National Committee – the Democratic Party) employee, and that Mark and Nancy Gilbert had visited the White House “several times.”

So we need to look beyond baseball and fundraising for his credentials.

Gilbert is described as a banking executive by NZHerald, which is incorrect I believe, as while he works for a bank, he is qualified and is an investment adviser and broker.

Gilbert started his career, an unknown time after a degree in Finance from Florida State University in Tallahassee, at junk bond dealer Drexel Burnham Lambert  from 1986 to May 1989. Drexel famously collapsed in Feb 1990. He got out before then to Smith Barney from May 1989 to August 1989, and then Goldman Sachs from August 1989 to October 1996. He moved to Lehman Brothers in October 1996, and stayed after they were taken over by Barclays in September 2008. Lehman’s collapse was a signature event near the start of the GFC.

Gilbert’s roles were, in my opinion, far too junior and removed from New York and London to be tainted with any of the Drexel, Lehman or Barclays scandals. As a broker, which is a relationship sales role, he is someone who helps land, advise and retain wealthy individuals from Florida with his employing institution. While he is a Director at Barclays, the Herald writer may not have known that Director is a common role in banking, and it appears from Barclays own job ads one that is picked up when staff are around 30 years old (i.e. 7-10 years after entering as a new graduate.) Barclays itself has several CEOs, Group Heads, and so on, down to hundreds of Managing Directors and Directors.

He discloses some volunteer work with the Boca Raton Festival and the Sundance Institute on his FINRA Brokercheck report. These seem to be low key and fund-raising based. I found a reference to a one-off fund raising event for the Sundance Institute for example, and it seems he is a regular donator to their efforts, and he and his wife donated at least once to the Boca Raton Festival.

So I see little in Gilbert’s bio that gives indication that he understands either New Zealand  or the issues that are likely to be dealt with over his term.

What makes this hard is that Gilbert has a very very tough act to follow, with the departure of Ambassador David Heubner, a Princeton undergraduate and Yale educated lawyer (as was his dotted line boss Hillary Clinton) who was a superb representative here for his country. I suspect we were lucky with Heubner as he was also the USA’s first openly gay ambassador, and perhaps had to have impeccable credentials to pass throughout the US Senate confirmation process. Certainly he was perhaps more highly qualified than many other ambassadors we have received here.

We should not lose sight of the fact that we are a tiny country as far as the USA is concerned, and placement of ambassadors here would likely be regarded as a job for the boys. That’s said, Heubner has shown what a professional can do for relations, and I suspect there are  hundreds of career professionals inside the Department of State who would be very frustrated that the Ambassador to New Zealand role is not ever available.

Of course while New Zealand is an afterthought for the USA, the USA is of critical importance to us, and every other country in the world. This is reflected in the quality of our own representative to the USA, ex Prime Minister and ex-Director General of the WTO Mike Moore.

Gilbert does, it seems, have a reputation for hard work, and clearly and his wife get along with a lot of people, so I really hope they immerse themselves in NZ once they arrive.

Posted in NZ Business | 1 Comment

The end of Kiwibank?

<updated to clarify this is for Kiwibank’s Core Banking System>

Fairfax Media report that Kiwibank is signing up to SAP as their “principal computer platform” provider for their core banking system. The core banking system runs the business of the bank – including real time transactions, interest calculations and payments., and it is unclear where the line is drawn between this and the other systems in the bank. 

If the reports are true, then that’s arguably very problematic.

SAP, and I’ve been through a few cycles of SAP rollouts, is a vast, complex and barely usable system for managing complex businesses. It has a history of failure, but I also sense that much of the failure is unreported.

SAP and other ERP systems are sold, as I understand, on making it easy for the most senior managers to manage their sprawling businesses. But SAP and other systems like it generally make it very very difficult for the huge numbers of end users inside the company to actually do business. The recurring joke is that  SAP promises to save tens of millions, costs hundreds of millions and causes billions of dollars in lost productivity and opportunity.

I can’t back that up, as I have never done a study on it, and I could never talk about anything I have seen, but I can refer to the AU$1.3 billion and six years that Commonwealth Bank reportedly spent on upgrading <update – it was a new install for core banking, and they run Peoplesoft/Oracle for their ERP> their SAP system to be able to do live transactions and for compliance with new laws. Note that ASB, which CommBank owns, coded and delivered their own live transactions banking system themselves back in 1969 – and it still works. And also note that in September last year Tom Groenfeldt reported only two SAP core banking replacements – CommBank and Nationwide Building Society in the UK.

CommBank is huge, and arguably needed the complexity of something like SAP. While the project was a big risk, they were able to throw vast resources at it and no doubt customise it to better fit their business. It looks like they got away with it.

Moving to a system like SAP (or installing any large IT project) is a very risky endeavour, and generally means changing the way you do business. The waterfall-like approach to these projects means that requirements are set years before delivery, and the rigidity and complexity of software like SAP almost always means failure to deliver on promised costs or benefits.

For Kiwibank I worry that they are too small, with only 850,000 customers, and with little money to invest, they will have to use the out of the box solution. And to quote Groenfeldt on smaller banks “When they do a core replacement, they make a fundamental decision to adopt the structures and procedures defined in the vendor’s package with minimal customisation.

So I worry not just that the cost of implementation will be high and the result may be poor, but that the very nature of what Kiwibank is will irreversibly change.

But then again I know very little about SAP for Banking, and I hope for their customer’s sake that I am wrong.

The ideal solution is, of course, for Kiwibank to wake up to the very strong  local development talent, hire them in and give them true power and air cover to reinvent banking, piece by piece and digital-first.  It’s that approach is good enough for the entire UK government, it’s good enough for a tiny antipodean retail bank. 

Posted in NZ Business | 41 Comments

UFB progress at 1.5% – who wants other 98.5%?

It’s great to see the UFB project continue, with the Quarterly Broadband Deployment Update for December 2013 showing over 27% of premises passed to date.

The real question is how we can increase the pace of actual connections, currently at 1.5%. I’m trying to connect myself and can confirm that the anecdotes I’ve heard to date about the complexity and time are true. There is plenty of money to be made by private sector businesses who accelerate this adoption, and I look forward to seeing who the winners are.

Posted in NZ Business | 3 Comments

What Board Skills and Experience do you need?

BHP Billiton created this deceptively simple chart on the skills and experience of their Board of Directors in their excellent 2013 Summary Review.

I challenge all boards to do the same.

The categories in the table are interesting as they show what BHP Billiton sees as important. They want deep experience across the table in the business itself (Mining, Oil & Gas, Capital Projects, Marketing and Global Experience), with working with major stakeholders (Public Policy), as well as all of the things that companies do (Health Safety and Environment, Strategy, Executive Leadership, Finance, Renumeration).

But most importantly experience in “Governance” is only one of the 12 items on the list, and arguably for me the least important, as it is not possible to successfully govern a business that you are not equipped to understand.

I’d like to see on the table two more lines.

The first would be something about experience in investment or portfolio management at a global macro level (beyond Financial Acumen). BHP Billiton is a hybrid of an operating company running huge mines and plants, a marketing company dealing in commodities and an investment company that manages long term positions in commodities. The major decisions about which areas to invest in or divest drive long term profitability, and need a strong collective grasp of the global macroeconomic situation. The director bios does show some evidence for this experience.

But I’d also like to see a little experience in IT on the list, as even a mining giant relies heavily on IT, and they can and do spend billions on SAP implementations. Those major IT projects can have a disastrous impacts if done poorly, and the board should be able to understand how they work, or not. The director bios show no evidence of this experience.

But I’m nitpicking – BHP Billiton have done an excellent job here, and it’s what every board should do.

It’s what every board should do

However most boards will struggle to show the high numbers of directors that have close to the complete set of key skills and experiences required, as that BHP Billiton’s have. And while most companies are not delivering US$65 billion in revenue and US$11 billion in EBIT, they do need to get close enough. At the very least every CEO/management team should write down the areas that they believe the board should be skilled in, and work with the board to plugs the gaps.

But even the discussion about which categories to include in the checklist will be difficult for many firms, and the evidence today is that many boards of large companies in New Zealand have huge gaps, especially with IT and the internet implications, but we also see  people with little relevant experience in any areas of the business that they are governing.

What about your business?

Rather than give examples, instead here is my quick take on the sorts of skills I’d want to see in boards for three types of companies. Let me know what you think – what’s missing? What don’t they need?

NZ Retail Bank

For a bank you want a people who have a prudent approach to business, and who are not going to advocate short term profits at the expense of unbalanced and increased risk. However they will also need to understand customer needs across the sectors (corporate, business, small business, retail) and lead the industry transition from retail stores to digital banking. IT systems are incredibly important, as Ralph Norris’ career showed, and banks have a mix of legacy ones and new websites and mobile apps. I would expect a mix of ages on a retail bank board – the wisdom and steady hands required for a trusted bank along with the youth that associates closely with the younger ages that are the battlegrounds for attracting customers. A first draft for me (done without looking at any NZ bank boards) would include:

  • Executive leadership
  • Risk management, esp with banking
  • Finance
  • Legal
  • Banking (including investment banking)
  • Strategy
  • IT – Security and big projects
  • Internet business and IT – Web, mobile and media
  • Retail and customer service
  • Farming, Housing, corporate and SME finance
  • Real estate
  • Governance and regulation
  • Design thinking (or similar)

Early stage SAAS Company
A very early stage company needs a small board, but one that is very strong on strategy and getting things done with the founders. As they grow they need to understand the end users and customers, and always they need to be comfortable and experienced with the pace, change and techniques of start-ups. They should also collectively bring strong connections with funders and other industry players, and patience and sage advice for the CEO and other founders. While it’s tempting to choose the directors from CEOs of companies that have succeeded, make sure they earned lessons, and consider also  founders who have failed if they understand the lessons learned.

This is likely to be a younger board as the number of seasoned directors that truly understand internet businesses and can operate at speed are distressingly few. I would also, especially after reading the Twitter book and some recent conversations, be very active in churning the board, quickly swapping out members who don’t agree with the core strategy or are essentially negative for the company, and moving on people whose contributions relate to stages of growth that are either too early or too mature to be required at a particular time. High growth companies change quickly, and there is no shame in passing the baton to another group, or waiting until the company grows up.

I’ve deliberately written this draft list without looking at the board members of any particular company, so treat it as simply a provocation as you make your own list.

  • Start-up and fast growing company experience (including handling failure)
  • Strategy for early stage companies (Design Thinking, Lean start-up etc.)
  • Leadership and culture/staff development
  • Web and mobile IT
  • Targeted customer sector experience (e.g. “accounting” for Xero)
  • Selling and marketing in target markets (i.e. USA, NZ etc.)
  • Fund raising experience & connections & investor relations
  • Finance and capital markets experience (when nearing IPO)
  • Governance and financial discipline
  • Legal (lots of contracts)

Internet  NZ
Internet NZ is a not for profit incorporated society, and councillors are elected, not selected. (I am one). It’s tricky as InternetNZ has both commercial and non-commercial goals, with the first enabling the second. It needs to be run professionally, and aims to research, engage stakeholders and spread the world on the open and uncapturable Internet for all. The membership base is in transition from being dominated by the people who got the Internet going in NZ to those who are passionate about issues like privacy, copyright and accessibility.
Internet NZ derives income from its mandate to administer the .NZ domain space, has some of those funds invested and has very conservative policy around looking after payments in advance. That’s a long term focus, which will build capacity of the organisation over time. The Council is responsible for two subsidiaries, and has delegated much of this responsibility to their professional boards.

Without recourse to the Councillor role description, again here is my first impression of what we would desire around the table. Remember this is my own take and even I won’t stand behind it, as I’d want to get a lot more input, but it’s a interesting exercise nonetheless.

  • CE-level experience – the primary role is to select and support the CE
  • Governance (we do train councillors, but knowing how to behave is important)
  • Public sector – working with Government is critical
  • Policy creation and engagement
  • Knowledge of our focus areas
  • Internet technology (some very deep knowledge required)
  • Internet-related business
  • Media/ PR
  • Private sector (we were a business)
  • Finance and legal
  • Investment management
  • Event/ facilitation experience (NetHui)
  • Political
  • Community relations and collective diversity of communities represented

Surprisingly enough the Council has pretty decent coverage in most these areas at the moment, though the recent resignation of Nat Torkington meant that we lost one tick from most of those categories. The last point, representation from different communities is traditionally a tough one, with council dominated by white males. We now have two women councillors and several strong non-white-male candidates for the bye-election.

NZ Based Oil Company

I’m assuming the company has a stake in Marsden Point refinery, and operates a chain of petroleum dispensing service stations. The business can win or lose on fuel hedging and purchasing decisions, while the retail strategy and execution is also critical, as are IT systems and the internet. But above all this is a safety-first business, as dealing with flammable liquids safety needs to be designed in to everything.

  • Executive experience
  • Downstream oil industry
  • Upstream oil (or similar for the refining)
  • Logistics
  • Strategy and pricing
  • Finance
  • Retail and customer service
  • Health, Safety and Environment
  • Large and small IT business, including retail and EFTPOS
  • Fuel trading and hedging
  • Government and community relations
  • Governance

I am guessing that Z Energy, who are doing a huge amount well, have most of this covered. Again I didn’t cheat and look.

Amusingly enough my own experience covers almost all of the items listed on this page. But that’s also clearly my own experience coming to play, and the board will need a list  formulated by several people with dissimilar perspectives. One suggestion is that the CEO firstly drafts it, but then test it with managers and more junior staff before working on it with the Chair or board. Another is for the board to do this themselves.

Posted in NZ Business | 3 Comments

Picking stocks and housing bubbles

Professor Robert J Shiller won the Nobel prize this year (with Eugene Fama and Lars Peter Hansen) for his work on the analysis of prices of various assets. He repeated his Nobel lecture at the Yale School of Management today, and I grabbed a couple of screenshots from the livecast.

His early work tested whether the value of shares is equal to their future dividend streams, and it did. Later he observed that the volatility of share prices (against his model) was mainly due to “innovation” from the companies and the market.

Picking Stocks

For me this means investors should hold stocks in companies which have secure dividend streams for regular portfolio growth (e.g. Meridian), pick stocks in companies that will deliver disruptive innovation to get outsize returns (e.g. Xero), and avoid stocks where the companies are subject to being disrupted by innovators and are unable to respond (e.g. Yellow).

Later in his career Shiller came up with the definitive house price index for the USA, which tracks prices for repeat sales:

I raise this because he then put up a slide of Los Angeles house prices versus personal income, relating a story about how extreme ratios a few years ago made it hard for people to choose move there.

So how are we doing in New Zealand? Even I, a housing price cynic, was shocked by the result when I crudely replicated the analysis.

Our latest median house price, states REINZ, was $425,000 in November last year. The latest statistic for median income in New Zealand from NZ Statistics is $29,900, from the June Quarter last year. That gives a ratio of $425,000/ $29,900 = 14.21.

That wouldn’t even fit on the chart above, so here’s how it would need to be amended to show New Zealand.

A bit more searching and I found the 2004 paper where Case and Shiller asked “Is there are bubble in the housing market?“, and showed that while for most US States the housing prices were directly related to income, but a few (about eight) states were well out of whack, showing more volatility along with higher average ratios.

Picking Bubbles

The chart that Shiller showed above shows that the LA prices dropped by over 50% versus income from 2006 until now. My own take is that there is clearly also room in New Zealand for a very very steep plunge in house prices. It would need a catalyst, but let’s remember to not blame whatever that catalyst is, but the system of incentives that has delivered us this ridiculous and very dangerous situation.

And remember – if you are selling your house, then its smart to do so using the latest tools, real estate agent experience and low commissions at 200Square.

 

Update:

I forgot to add into housing index that Shiller put together. How I would love to invest (short) on this for NZ.

Posted in NZ Business | 6 Comments

What if you knew how to stop cycling deaths. Would you do anything?

Last April Auckland Transport received a report they had commissioned on Why do Cyclists run red lights?

A decommissioning the report was an excellent move by Auckland Transport.

Sadly the report is only available as a powerpoint presentation, but what we can see is excellent. They observed over 22,000 vehicle, pedestrian and cyclist movements across five key Auckland intersections and also interviewed cyclists.

What they found is that cyclists run red lights largely due to safety reasons, and most infractions are during the pedestrian phase of the lights (they call this the Barnes dance).

The yellow part of the charts below are cyclists crossing with pedestrians – an activity which I classify as safe if done with consideration and at the speed of the pedestrians. I, like it seems the cyclists surveyed, see this as often a lot safer than crossing with the cars, and it also helps motorists as it gets the people on bicycles out of the way.

Unfortunately this is not legal under current NZ law, and nor is it legal to ride on the footpath. The only legal thing to do is to walk the bike across.

The cyclists’ comments shown in the report are all about safety.

The report concluded that road conditions were such that cyclists have to choose between safety and being legal, and often (and correctly) chose safety. They authors suggested that we must fix this, and came up with four simple, cheap and effective recommendations.

So how have we done with those recommendations in the 9 months since the report was received? Sadly from what I can see – very little or nothing has changed. I stand to be corrected on this, and would welcome any evidence to the contrary. Let’s not be too hasty in pointing the finger at Auckland Transport either, as they have done some great work here, but most likely need more political clout and resolve to make this happen quickly.

Number 1: Sadly I don’t know of any cyclist-first intersections in downtown Auckland.

Number 2: The law still prevents safely turning left on a red light for cyclists.

Number 3: The law still prevents cyclists from legally crossing with pedestrians.

Number 4: I know of no changes to sensor locations or sensitivity. This is the hardest to evaluate and may well have happened, to be fair. It’s under Auckland Transport’s direct control and is the most likely to have changed. But I’m not seeing it so:

Two of the four, lights to clear cyclists and improve cyclist detection, are under the control of Auckland Transport (as far as I can tell).

The other two will likely require changes to national road rules, to allow cyclists to turn left, and to allow cyclists to cross with pedestrians at lights.  That’s up to the Ministry of Transport and NZTA and the national Government.

The proposed solutions are clear, cheap and high impact. Let’s do what we can to help Auckland Council, Auckland Transport and the government to prioritise these.

Posted in NZ Business | 18 Comments