Taking our medicine: Facing the infrastructure gap (Part 2)
At a glance
It is inescapable that third party investment will need to be part of the solution to New Zealand’s huge infrastructure shortfall. Third party funding tools, where appropriate, offer many advantages. Each major infrastructure category in New Zealand presents opportunities to overcome the gap accessing funds desperately seeking good investments.
In Part I of this series on the infrastructure shortfall and ways to overcome it, we considered the scale of the problem. We also discussed how putting less into infrastructure than we should have for decades is coming home to roost. Finally, we considered some of the advantages of third-party funding, acknowledging that no silver bullet exists.
Our attention now 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.
Open wide: the range of third party funding tools
There are two main types of third-party investment – direct investment into existing privately-owned infrastructure or publicly traded infrastructure businesses; or via some agreement with government agencies. We touched briefly on these in the earlier paper but will look at them in more detail here.
Direct investment by third parties is the most common and well-known mechanism, whether for infrastructure or some other purpose. It is already possible for private parties, including from overseas, to invest in new-build housing in New Zealand, to purchase shares in publicly-traded infrastructure such as Auckland International Airport or energy generators, or to buy infrastructure that has already been privatised, such as some of New Zealand’s lines companies.
There are at least five further types of investment by arrangement with local or central government:
- Asset recycling is where assets owned by central or local government and with an established financial value are sold are sold to a private third party. But a key difference to direct investment described above is that the proceeds from the sale are directly invested back into more infrastructure by the government agency. An example was the sale of the old Auckland City Council works depot to help fund Britomart train station. Asset sales can be politically contentious; more support is likely if the government agency can demonstrate how those funds will be directed into much needed infrastructure.
- Developer agreements are signed between developers and a council and/or central government. They allow for the direct provision of infrastructure or land for infrastructure by the developer. The developer agreement can, in these instances, replace other funding options that would otherwise have been applied, such as Development Contributions. They typically run along the lines of the land developer directly providing certain infrastructure at a certain standard as a prerequisite to approval for development of their land.
- Public-Private Partnerships (PPPs) allow government agencies direct access to private capital for investment in infrastructure. The various sub-types of PPP may be suitable for different scenarios. Toll roads, for instance, may use a Build-Own-Operate-Transfer model of PPP, where the private investor covers the full cost of the infrastructure, benefits from the revenue, and then transfers the asset to a government agency at a future date for a nominal figure. Examples in New Zealand include Transmission Gully and the prison at Wiri.
- Transit-Oriented Developments (TODs) can access private funding by offering improved land zoning to a private land owner in exchange for delivering transport infrastructure, typically along a corridor. The private investor can apply the increased yields from the zoning uplift along the corridor to building the infrastructure. This option requires local government, and potentially central government, to work with the private investor to ensure zoning rules and infrastructure requirements align. One example of a TOD in New Zealand was the New Lynn/Lynn Mall transition (train/bus interchange) and level crossing removal.
- Incentives are a catch-all term for subsidies or concessions to attract investment. Examples include concessions to SkyCity in exchange for building Auckland’s International Convention Centre. Other tools used internationally include tax incentives to encourage businesses to invest in a particular region. One challenge with these incentives is that they typically have to be separately legislated when new categories are introduced, which can be a complex and lengthy process. They can also be politically fraught.
Incentives via subsidy or concession may have to be separately legislated and can also be politically fraught.”
Does this feel better?
In an earlier paper on funding tools available to local government, we talked about several criteria that need to be considered in selecting the right funding tool for an infrastructure investment. Third-party funding of investments will be evaluated against the set of tools already routinely used in New Zealand. They will not always be the best option.
Housing infrastructure
The vast majority of housing in New Zealand is privately owned and funded, while more than 67,000 social houses are provided by Kainga Ora, funded by central government.
As house prices have risen faster than incomes, Community Housing Providers (CHPs) have entered the market to provide alternative pathways to home ownership, including shared equity and rent-to-buy schemes. Several iwi have used land owned in common among many Māori people within an iwi or hapu to develop papakāinga housing for Māori, effectively providing “free” land to the potential occupants of the home.
New Zealand has been a late adopter of build-to-rent programmes, with the private sector providing medium to high density developments purpose-built for renting. With longer lease-terms, tenants and owners have greater certainty.
Opportunities: There are few barriers to investment in new housing in New Zealand, subject to Overseas Investment Office approval. With an existing national shortfall of perhaps 20,000 dwellings, and a sharply growing population, there is huge potential for more involvement.
Transport infrastructure
State highways are funded 100% by central government through Waka Kotahi, the New Zealand Transport Agency. Local roads are funded roughly 50:50 between central and local government. Cycling and walking lanes are also funded by a mix of central and local government funding.
Rail infrastructure is typically funded directly via the state-owned enterprise KiwiRail. KiwiRail has required top-ups from central government in recent years as it has been loss-making. It faces major investments accompanied by a desire to shift more of the freight task onto rail from road.
Opportunities: Only three toll roads exist in New Zealand; however, the last two have both been added in the last decade under the previous National-led government, suggesting appetite exists for PPPs. Rail and bus commuter service contracts are typically privately operated. TODs for major infrastructure such as rapid-bus routes would be game-changers for city-shaping and congestion reduction but will require local councils to provide the zoning changes needed along transport corridors.
TODs provide the opportunity to deliver great transport and water infrastructure, increase density and reduce congestion and emissions. But it takes on-the-ground political stamina to look past the NIMBYs."
Social infrastructure
Hospitals and schools are overwhelmingly funded by central government in New Zealand. But the government’s role is to provide health and education services, not to own hospital buildings or schools.
At the local level, libraries, museums, swimming pools, community centres and in many cases stadiums and sports parks are owned or significantly subsidised by local councils.
Opportunities: The new governing Coalition’s commitment to investigate building and lease-back of hospitals suggests a strong appetite for better health facilities. With the long wait lists in public healthcare, there has also been an increase in private health insurance. This may support the growth of more privately-provided healthcare facilities in New Zealand. GP services especially in towns of 10,000 to 50,000 are underprovided from both a service and infrastructure perspective.
At the local level, historical under-investment in community infrastructure is a major challenge to councils, who simply do not have the finances for major newbuilds of all their local amenities. As a result, many councils are developing community hub type models, where multiple sites for different amenities are consolidated, allowing land to be sold to fund a new development on a single site.
Tourism infrastructure
Approximately 93% of tax revenues are collected by central government in New Zealand and only 7% by local councils. Yet impacts on infrastructure from a seasonal influx of tourists are felt locally and funded locally. Some towns experience a doubling or more in their populations during high-season.
Opportunities: One model receiving increasing interest is the delivery of integrated conference and event facilities with hotels and other tourism-oriented amenities. Councils are more open to partnering with the private sector to deliver these precinct-style outcomes, where they directly negotiate a precinct development with a private developer.
Energy infrastructure
All of New Zealand’s four major electricity generators have private investment. Transpower owns the national power transmission grid for bulk distribution of electricity and enables competition in the energy market. Local distribution lines companies were set up in the 1990s, allowing for mixed ownership. Some lines companies are privately owned outright, including by overseas-based firms.
Opportunities: The energy sector is ripe for disruption as new technologies emerge. Decarbonisation of the vehicle fleet will lead to much more demand on the electricity network. Significant international investment is likely to be welcomed. Close work between government and overseas investors would be needed to accommodate change.
Water infrastructure
Water storage and treatment, as well as stormwater management, are currently the responsibility of local government in New Zealand. The incoming government intends to continue to implement a water quality regulator and an economic regulator. If the regulators have the enforcement powers to significantly accelerate water improvements, it will create challenges for councils given the costs of improvement. This may lead to a more organic process of amalgamation or shared services.
Opportunities: It is unlikely that many of the smaller, less financially capable councils will be able to afford the upgrades being proposed. This will likely lead to a combination of a slower pace of change and more direct investment by central government or other third parties. Fresh or wastewater treatment plants are one stand-out example where third-party investment may be welcomed via PPP.
There is little time for re-litigation if we are to reduce the massive infrastructure shortfall. In 10 years, we won’t remember what we chatted about yet again, but what we delivered."