This paper provides a broad assessment of productivity issues facing the New Zealand construction sector.
The Building & Construction Productivity Partnership has asked NZIER for a broad assessment of productivity issues facing the New Zealand construction sector and testable hypotheses for its future work programme. The partnership has an aim to deliver a 20% increase in productivity by 2020.
The analysis is broad and canvasses a range of macroeconomic data, some novel, to look at productivity issues. The key outcomes are a high level assessment of current performance and and a number of hypotheses that require further attention.
Construction sector productivity has grown at half the pace of Australia over recent decades. The widening wedge supports productivity concerns and the Productivity Partnership’s goal to raise productivity.
Some of the key findings of our analysis are:
Not all sub-sectors are the same: Across a number of productivity and competition measures, Construction Services and Heavy & Civil, compare unfavourably to other sub-sectors. The key sectors that stand out negatively are: structural steel erection; painting and decoration; tiling and carpeting; bricklaying carpentry; and plastering and ceiling. House construction performance is middle of the road and non-residential building typically appears at the more favourable end of most performance indicators.
Competition may be an issue: There are signs that competition and conduct may be an issue. Geographically, small and remote regions like Gisborne appear highly concentrated. By sector, Heavy and Civil and Non-residential Building are more concentrated.
Size matters: There is no consistent pattern of productivity differences across firm sizes, but there are large differences in practices related to productivity. For example, small firms tend to use assets inefficiently, perhaps indicating scale inefficiencies. Large firms use their assets more efficiently, but tend to have lazy balance-sheets. The issues and solutions to lift productivity across different firm sizes and sub-sectors may vary.
We build differently: We find typical construction costs are similar across New Zealand and Australia. But our construction sector is structured differently. For example, we use a lot more aggregate (in Civil & Heavy), forest products and architectural services (consistent with industry feedback of more customised homes) and there are much stronger linkages into retail and wholesale. This could mean that there are opportunities to change the building process and industry practices to mimic other more productive countries, or that the policies and processes in New Zealand need to be customised to local conditions.
Costs are not that different: We find little variation in construction costs between New Zealand and Australia. This is in contrast to findings by the Productivity Commission and requires further careful analysis. However, given hourly wages in New Zealand are around 30% lower than in Australia, it is unclear why construction costs are so similar across the two countries and whether this is due to productivity issues with labour or issues of conduct in the supply chain. This requires additional careful analysis.
Labour skills & mobility: Construction sector workers typically earn higher wages than other sectors with similar skills. This could mean low incentive to acquire skills, which may be productivity enhancing. Labour mobility across regions is also relatively low compared to other sectors like retail. This could mean that technological advances in one region are not readily adopted and diffused.
Technology apathy: Survey data hint at apathy over technology, efficiency and change.