Shaking up our thinking on Infrastructure Funding

We have varying levels of understanding of the scale of the infrastructure challenge across categories. Here are just some examples:

• Three waters: The previous government estimated this would require spending of $120 to $185 billion over the next 30 or 40 years.
• Healthcare: Fit-for-purpose buildings and other healthcare infrastructure would cost $17 billion in 2023 dollars.
• Transport: The National Land Transport Fund simply cannot keep up with the ever-growing number of roading, public transport and cycleway projects it needs to maintain, let alone growth. Over $4 billion was spent each year on transport average between 2011 and 2021, but this was not enough. Add in cyclone and flood recovery in the Hawkes Bay and Auckland, and the scale of the transport challenge becomes apparent.
• Electricity: An estimated increase in capacity of 170% is required over 30 years, at a potential cost of over $50 billion.

In summary, 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.

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?

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.

Third-party funding:

• Accesses funds for councils and central government agencies with maxed-out debt.
• Accesses skills and expertise.
• Allows governments to focus on service delivery, not asset ownership and management.
• Has been used before in New Zealand so is a known quantity.
• Accesses pots of money globally looking for investment opportunities.

Direct investment by third parties is the most common and well-known mechanism. It is already possible for private investors from here or abroad 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. All of these have already been used successfully in New Zealand.

• 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 and proceeds directed back into more infrastructure.
• Developer agreements are signed between developers and a council and/or central government for directly providing infrastructure or land for infrastructure by the developer.
• Public-Private Partnerships (PPPs) allow government agencies direct access to private capital for investment in infrastructure. 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.
• Incentives are a catch-all term for subsidies or concessions to attract investment.
  
  Political appetite may vary for each of these tools, but they have all been implemented here and have worked. We should be pursuing them more regularly.

Approaches to inward investment vary across the world. A pragmatic approach will suit New Zealand best.

Inward investment in Australia is brokered by the states through state-level deals, or through private firms such as GHD, investment banks, and consulting companies. Austrade is the official federal government body for inward investment, and brokers business-to-business deals.

Singapore’s Economic Development Board facilitates inward investment. The approach to attracting inward investment relies heavily on incentives, via the regulatory environment and tax breaks.

The United Kingdom takes a more decentralised approach to managing inward investment, opting for central government trade offices that are operated in the regions.

The United States has multiple agencies responsible for attracting investment, including the local, state and federal governments, statewide economic development agencies and private investors.

Inward investment in the United Arab Emirates is facilitated by agencies like the Abu Dhabi Investment Office, which is responsible for the regulation and incentives that enable and attract investment.

We know what the options are, and it’s time to get on and do this. Investors want certainty, as do constructors, of a clear pipeline of work.

Explore more on this topic in David’s three-part series on third-party funding:

• Part I tackles the infrastructure shortfall, exploring the scale of the problem and strategies to address it.
• Part II delves into the various third-party investment tools available, examining opportunities for increased third-party investment across different infrastructure categories.
• Part III shifts the focus to how inward investment is attracted and managed overseas, and the potential for similar investment in New Zealand.