Michelle McCormick. Photo / Provided
We don’t often think about the infrastructure that supports our daily lives until we run into a problem – water shortages, power outages, hospitals reaching capacity limits and traffic jams that many people face. among us face daily.
With these problems becoming more prevalent in our cities and towns, how prepared or unwilling are we to provide for future generations of Aotearoa?
In 50 years, 1.5 million more people will live in Aotearoa.
It’s almost equivalent to another Auckland.
We are also beginning to feel the significant impact of climate change, affecting communities across the country through severe storms, floods, rising sea levels and droughts.
Decades of underinvestment in infrastructure have left us with a large infrastructure deficit — about $210 billion.
How will we cope with these additional people and the pressures that climate change will place on our infrastructure?
Aotearoa needs sustainable funding and infrastructure funding
Fundamentally, our current approach to funding and infrastructure funding is not working. Today, we spend about 5.5% of New Zealand’s GDP on building public infrastructure.
To close the identified infrastructure gap, this would need to increase to almost 10% of GDP or $31 billion per year. So what’s holding us back?
When we invest, too often our critical infrastructure projects or major work programs are identified without a solid financing plan. It’s hard to argue the strong need for infrastructure, but who pays is often left unanswered as a quest for more government funding from one of the many capital funds is explored.
Boards themselves also often struggle with unaffordable debt ceilings and rates.
The very nature of some infrastructure problems is also tied to political ideology.
Transformational infrastructure projects, such as Auckland’s light rail or the proposed new public transport system for Wellington, risk seeing the funding artery cut off due to lack of bipartisan support. Short-term investment decisions tied to political conditions do nothing for New Zealanders. They have an impact on the international credibility of our industry as well as public confidence.
The lack of a sustainable and certain pipeline of infrastructure projects is also holding back the growth of our construction and development sector. Without this pipeline, the sector is unable to equip itself with the talent, capacity and equipment necessary to provide the infrastructure this country desperately needs.
We need to better consider innovative solutions and approaches to ensure a sustainable pipeline. This sustained investment in infrastructure is essential to improving our quality of life and allowing us to remain internationally competitive as a country. We must ensure that we make the most of our existing infrastructure and resiliently future-proof our new projects.
We have made progress with Te Waihanga/New Zealand Infrastructure Commission playing an important coordinating role in establishing and publishing our first national infrastructure pipeline. But this is just the beginning, and we have a long way to go.
We have the tools, so why don’t we use them?
Part of solving this problem is to finally use the wide range of funding and funding tools available today.
Legislation gathers dust
In August 2020, two pieces of legislation were passed: the Infrastructure Funding and Finance (IFF) Act and the Urban Development Act. It’s been over two years now, and what’s there to show for it?
The Infrastructure Funding and Financing Act sets out pathways for local authorities to fund infrastructure projects in a way that does not affect municipal balance sheets. It allows debt financing to be raised from the private sector and isolated from a board’s balance sheet.
The law was passed with the support of all political parties in parliament at the time.
Interviewed in April this year, Dr Megan Woods, the minister responsible for legislation, said: “Infrastructure projects are complex and require significant upfront work before IFF Finance is engaged. She explained that “this initial work includes things like planning, design, consent and land acquisition, which can take anywhere from 12 to 24 months, so it takes a while.”
Woods went on to say she was expecting three proposals this year from Wellington and Tauranga.
However, as we move towards the end of the year, only one proposal for the use of a levy has been submitted. Others are still in the development phase, or the approach has been parked.
Even the Infrastructure Commission’s strategy recommended that the central government explore the possibilities of using the Infrastructure Finance and Finance Act 2020 and explore other special purpose vehicles as a mechanism for new infrastructure investment.
It has now been more than two years since the law was passed. Will we ever see this act used? What is the obstacle to using this innovative legislation?
Is it the complexity of the legislation or the risk aversion of being the first to start? Is it just easier to follow our existing funding constraints and continue to expect a magic pot of gold from central government instead of being masters of our own destiny?
Private capital is waiting in the wings
As a country, we also avoid the use of private capital, underutilizing the skills and capacity of the private sector to provide infrastructure.
A greater partnership approach between the government and the private sector would improve delivery capacity and help transfer appropriate key delivery risks to the private sector as well as the ability to implement multiple infrastructure projects simultaneously.
New Zealand runs the real risk of being left behind.
Other countries are already facilitating investment and having more certainty in their planning system that allows for a flow of expertise needed for the complex infrastructure projects that our modern societies need to function.
A prevailing fear in Aotearoa, that the government (and you and me as taxpayers) will be ripped off by for-profit multinationals can be addressed by employing the international best practices of transparently accepting ROI from the start.
But again, what’s stopping us? What prevents us, as a country, from taking advantage of this capital?
Our risk aversion is costing us as a country
Not committing and not taking risks doesn’t save us money. The infrastructure projects we desperately need to support our communities will never be cheaper. By delaying, the company is already paying a substantial cost every year without showing anything for it.
As noted in Infrastructure New Zealand’s recently released report, Great Decisions are Timely, there is a quantifiable cost of delay. As a country, we don’t save money by being cautious and constantly delaying and reworking business cases.
The report found that delays on the Waikato Freeway resulted in a seven-year minimum revenue shortfall of approximately $2.3 billion or $334 million per year. For context, this figure is almost equal to the total of the Climate Emergency Response Fund for Transport, Energy and Industry in Budget 2022. The lost benefits from earlier completion would have been 1. 2 times the total capital cost of the project, which was $1.9 billion.
In other words, our decision-making costs us more infrastructure investment.
A step change is needed
Now is the time to be really daring and try new things. We know our approach in the past has not worked and we need to do things differently.
Part of this is to stimulate innovation and diversity of thought. We have new funding and funding tools, and we know there are opportunities with private capital, so let’s start moving forward and put Aotearoa on the path to a much brighter 2050.
- Michelle McCormick is Director of Policy at Infrastructure New Zealand. Infrastructure New Zealand is an advertising sponsor of the Herald’s Infrastructure Report.