The Earthquake Commission, which has an estimated $12 billion of claim liabilities from the Canterbury earthquakes, faces a potential cost spiral if it misses a year-end target to complete all home repairs, says the Auditor General.
The Auditor General's review team for the EQC's management of the Canterbury Home Repair Programme told the finance and expenditure select committee that inflationary pressures in the construction industry will accelerate as the rebuild ramps up, making it harder for the disaster insurance agency to keep costs under control. Delays could include resolving complex claims involving multi-unit repairs.
"It is the nature of the market, there's a limit to labour so if the insurers and other players in the market start offering more money then there's a risk," said Henry Broughton, sector manager of the Auditor General's parliamentary group.
When asked by Green Party committee member Eugenie Sage if there was "potential for a blowout" in costs because of inflation, Broughton said "there is a risk and it's EQC's job to manage that risk."
"It is the nature of the market - there's a limit to labour so if the insurers and other players in the market start offering more money then there's a risk, and the job for EQC is to manage that risk," said Henry Broughton, sector manager of the Auditor General's parliamentary group.
The EQC expects to make cash settlements on about half of the claims and manage repairs for the rest. To date it has paid out $6.9 billion of the estimated $12 billion liability. The Reserve Bank estimates is the full cost of the Canterbury rebuild will be $40 billion.
The 2010 and 2011 Canterbury earthquakes damaged about 180,000 homes, of which 160,000 had claims up to $100,000 and are managed by EQC under the home repairs programme. The remaining 20,000 with claims above $100,000 are managed by private insurers.
According to the EQC's website, it has completed 51,552 repairs in the greater Christchurch region with 21,701 houses still waiting. The government scheme is run through the EQC but managed by Fletcher Building, which won the tender as sole contractor.
In September last year the EQC brought its deadline to complete all home repairs forward a year, to December 2014.
"Now everybody realises that this is a real challenge," EQC chairman Maarten Wevers told the committee. "The board received the proposal from Fletcher, backed by management, that said 'with a stretch we can do this' and we thought we owed it to the people of Canterbury to get this finished as soon as possible to an appropriate standard."
"We are pushing with the people who can really deliver to make sure that we can hit this target," Wevers said.
The repair programme may be delayed by complex claims, such as multi-unit building repairs, where neighbours share a wall, but have different repair needs and insurance cover from different insurers as well as those under the $100,000 cap that are the EQC's responsibility.
"If we have some really gnarly multi-unit buildings with three EQC claims, four over cap private insurer claims, this that and the other, and land repairs and we can't get agreements amongst the multiple tenants on the way forward we are not going to be able to fix it," Wevers said. "We can't force people to agree on a multi-unit building repair plan."
The Auditor General's review team found management costs amounted to 12 percent of repair costs, which was too high. For its part, EQC told the committee it had put a cap on management costs as a ratio to final repair costs. It wasn't specific.
A follow up review of EQC will be held later in the year, with findings reported on the follow up. The Auditor General's review team said it would focus on inflationary costs.