Taking our medicine: Facing the infrastructure gap (Part I)

Ever since I began my economics career 17 years ago, and probably for years before, New Zealanders bemoaned the lack of investment in, and maintenance of, infrastructure. Over successive governments, that reality has worsened.

At the same time, public expectations of an acceptable level of service have grown, and central government policy has mandated dramatically improved standards for infrastructure. Add these changes to historically inadequate provision for depreciation of existing assets and cost escalation in the sector pre-dating but exacerbated by disrupted supply chains and closed borders. It should be no surprise that we have reached this juncture.

Whatever one’s thoughts on the water reforms proposed by the previous government, it was helpful to have a starting point for what water improvements over the next 30 or 40 years may cost - $120 to $185 billion was the range provided¹.  That is more detail than has been provided for some of the other areas desperately in need of new or remediated infrastructure albeit limited assessments have been completed for some of them. As regional councils interpret what the National Policy Statement on Freshwater Management means for, say, wastewater treatment plant standards, local government is being confronted with costs many had never dreamed may be required as they head into the next Long-Term Plan (10-year budget) process.

Work done on what fit-for-purpose buildings and other healthcare infrastructure would cost over the next 10 years equates to a cost of $17 billion in 2023 dollars².  With only one major hospital upgrade (Dunedin) announced in the last decade and that one set to be completed in only 2028, New Zealand’s hospitals generally range in age from 30 to over 50 years. Better infrastructure won’t single-handedly solve the healthcare crisis New Zealand faces, but it will certainly help. When some hospitals routinely have buckets catching rainwater, and black mold growing on the walls, it’s well past time for upgrades or even rebuilds³.

There are no silver bullets for overcoming this shortfall. While there are a number of funding options available, including third party upfront funding, the cost of infrastructure will always be overwhelmingly be borne by taxpayers, ratepayers, or users of the infrastructure. These three groups are in most cases the same people.

At the edges, there will always be some cross-subsidy. Larger urban centres in New Zealand tend to have higher incomes and consequently higher tax takes, but a lower-per-capita spend on things like highway lanes than further-flung areas with low population densities. And so urban centres generally help fund services in more remote areas. This pattern will likely continue via the tax system, even as urban centres seek the funding they need for their own infrastructure shortfalls.

But on these small islands with our handful of people, we have been living beyond our means for decades, not putting aside enough for the rainy day of infrastructure replacement, improvement or growth. It is now bucketing down, and feeling around for coins under the couch we’ve come up empty-handed. To have the infrastructure we need, while balancing environmental and social considerations, we are going to feel a bit poorer when it comes to the nice-to-haves. It is inescapable.

If it is true that there’s no such thing as a free lunch – that New Zealand’s taxpayers, ratepayers or utilities customers will ultimately be the ones paying for bulk of the much-needed infrastructure – is there any benefit to getting third-parties involved to fund infrastructure?

Before answering, it’s worth first explaining what we mean by third-party funding, and second, why we’re discussing it at all.

By third-party funding we mean any funding from a source other than a New Zealand government, local government or affiliated agency. It could include our own NZ Super Fund, overseas investment firms, and specialist infrastructure developers and operators. It can even, notwithstanding geopolitical considerations, include overseas governments or sovereign wealth funds.

This third-party funding can be of various kinds, ranging from direct purchase or capacity-adding, to public-private partnerships (PPPs), transit-oriented development (TODs), incentives, developer agreements or asset purchases where money is recycled back into infrastructure. We will explore these investment types in more detail in Part II of this series.

We raise this now as the incoming National Party-led government has clearly expressed a desire to source third-party funding to sate the infrastructure pain, a departure from the previous government.

But is there any validity to this approach? Yes, for several reasons:

• It accesses funds for councils and central government agencies with maxed-out debt: Third-party funding, especially if there is a way for it to be paid for by users of the service directly, or if it can be accommodated by non-monetary (i.e. tax) incentives, provides an alternative to keep debt off a government entity’s balance sheet. An example of this approach could be providing additional development options for an investor who agrees to build a mass rapid transit route (a TOD/incentive amalgam). This latter instance is probably the closest we could get to “cost-less” delivery of infrastructure.
• It accesses skills and expertise. New Zealand is small. How many multi-kilometre tunnels do we bore each year? How many wastewater treatment plants do we build? A willingness to countenance third-party funding opens access to knowledge and experience from those who do this day-in and day-out.
• Owning buildings is not Government’s business. Delivering services is. Many economists would argue that  most services can and should be delivered by the private sector. For better or worse, here in New Zealand we have a social contract that today agrees that by and large, things like healthcare and education should be delivered by the state. But nowhere in the social contract is there an expectation that the state should own the hospital building or even the school. Let government focus on delivering surgeries, emergency care and rocket scientists. Let third-parties change the lightbulbs and water the rugby fields.
• We’ve done this before and it has worked. Many of the approaches set out briefly above have been used in New Zealand. In some ways, we are looking back to move forward. And in a global sense, none of these approaches is revolutionary. Each tool has its strengths and weaknesses (a fact we discuss in Part II). None of them are perfect, but they give us options.
• The money is there. Even with interest rates rising sharply across the world, there is plenty of funding available for infrastructure investment globally. GHD works with many of these

As with any funding tool, third-party funding has its strengths and weaknesses. Its detractors mount good arguments in certain circumstances, and opportunities, while many, are not abundant across all infrastructure categories, points we will examine in Part II of this series.

But what we do know is this: we simply cannot continue to let our infrastructure shortfall go untreated the way we have for decades. That would be terminal.

In Part II of this series, our attention turns to an evaluation of the third-party funding tools available, which sectors are already in play as far as third-party investment goes, and the main opportunities for New Zealand to apply third-party funding.