Mark Peterson. Photo / Greg Bowker
Mark Peterson is chief executive of the NZX. The NZX is an advertising sponsor of the Herald’s Capital Markets and Investment report.
OPINION
“How are we going to pay for that?”
That’s the big question. We all know our country is facing significant funding challenges.
We have a nationwide infrastructure deficit – ASB has estimated it at $1 trillion over the next 30 years – thanks to ageing water, roading, schools and social housing assets. Alongside this, we have ballooning operating costs for health, education, and social services. As Cyclone Gabrielle and the Auckland Anniversary floods demonstrated, significant sums are also needed to fortify and adapt our communities to the impacts of climate change.
Recent research from Infometrics shows that homeowners are staring down average rate rises of 15 per cent, according to data in draft long-term plans across 48 councils. This would be the largest nationwide increase since 1990. In the past three years, the cost of building bridges shot up 38 per cent, sewage systems jumped 30 per cent and roads and water supplies lifted 27 per cent.
Councils are also seeing increased costs for maintaining existing assets and services, due to inflation, debt servicing and increasing insurance and audit costs. These councils are using phrases such as “making tough decisions together”, “getting back to basics” and even “something has to change”.
To top things off, we are in middle of a cost-of-living crisis and our productivity is one of the lowest among developed countries. This makes it even harder to pay for the essentials.
While some of these issues are decades in the making, they have been magnified due to the lingering impacts of Covid-19, natural disasters and high interest rates and inflation. It’s tough out there.
One suggested solution is to return GST to councils. However, that would impact the amount of money central government would collect that would be earmarked towards other public services. It’s moving money around and not solving the fundamental funding issues.
As a country, we can’t keep running to the piggy bank or increasing taxes and rates. There is a limit on how much you can slap on credit and keep borrowing. These options don’t make our funding challenges go away. If we are serious about not wanting to saddle our children and grandchildren with more debt, then we’re running out of road to kick the can down.
Looking ahead, these challenges are only going to become harder. The Government has prioritised the electrification of the economy – focusing on transport and industrial heating – to help New Zealand deliver its Paris Accord commitments. Significant investment will be required for the New Zealand electricity system to achieve these goals. The Boston Consulting Group recently estimated $42 billion of investment will be needed in this decade alone into electricity generation, transmission and distribution.
So, what’s a country to do?
There is no single silver bullet. However, part of the solution requires unlocking access to capital and focusing on the inputs required for economic growth. New Zealand’s capital markets can help with that.
The report Growing New Zealand’s Capital Markets 2029, released in 2019, outlines a vision of how we, as a country, can ensure efficient allocation of capital to the highest-value projects. It was a comprehensive piece of work, generating 42 ideas and recommendations that would see more capital flowing, more efficiently, to New Zealand enterprises and initiatives that would provide more investment opportunities for more New Zealand investors.
It had input from 210 New Zealanders and organisations (investors, issuers, intermediaries, advisers, industry bodies, institutions, iwi, banks, and central and local government). The recommendations required delivery from both industry and the Government.
With this in mind, the capital markets community is engaging with ministers and government officials using the report as our basis for discussions. We are passionate New Zealanders who can see an opportunity to utilise public markets to the benefit of our country.
We note that public markets can help reach the broadest range of investors, efficiently price capital, ease the pressure on the Government balance sheet and help fund the infrastructure required to assist in improving our country’s productivity.
It’s about ensuring the settings and the capital markets environment are internationally competitive and encouraging of investment. I outlined many of those initiatives last year in this publication.
The signals coming from the Beehive are positive. Commerce Minister Andrew Bayly has said that later this year, he will be exploring changes to capital market settings to help New Zealand businesses and investors thrive. As part of this, he has said he is looking to change KiwiSaver settings to help New Zealanders save more for their retirement.
In looking at funding for our infrastructure, we don’t always need to look offshore for capital or private investors. We have money here in our country. We have some obvious options. One of those is better utilising KiwiSaver for New Zealand’s own benefit. It’s our money and it’s earmarked to help pay for our retirements – so why isn’t more invested directly in our country and its assets?
I agree wholeheartedly with commentators who say that KiwiSaver is the biggest pot of new money in a generation and will only grow exponentially in coming years. KiwiSaver is 20 years behind Australia’s compulsory superannuation and we are in the early stages of our accumulation phase.
KiwiSaver members are generally investing for the long term, mirroring the duration of infrastructure investments. Those commentators rightly note KiwiSaver managers are yet to provide meaningful funding options for infrastructure. They should be.
KiwiSaver funds investing in New Zealand assets would be similar to what the ACC does: it invests in New Zealand assets that provide a steady financial return to the corporation, matching its long-term injury claims liability. Likewise, KiwiSaver funds could invest in a range of assets, including hospitals, schools, roading, housing and water infrastructure – if the products were structured right. Those assets would be built, Kiwis would still receive a steady flow of returns into their KiwiSaver accounts, and the country and its people would benefit not only from the assets being delivered, but through jobs and growth. That’s essential to improving productivity.
KiwiSaver must become part of the discussion about helping to fund Kiwi infrastructure. It’s New Zealanders investing in New Zealand. What New Zealand KiwiSaver managers and fund managers require is a range of high-quality investible assets provided by both central and local government. The balance has to be right for those products to be attractive for investment.
The Government and local government have a range of investible products they don’t need to own outright or at all. When tough choices need to be made, shouldn’t we closely consider where our priorities lie?
There is an opportunity to redeploy capital out of some assets into higher priority needs. Publicly listing ports, airports and electricity lines companies would be attractive options for capital market investors.
Allowing the gentailers (Mercury, Meridian and Genesis) to raise further equity without Crown participation would assist in the goals related to electrification of the economy. Further, when the time is right, consideration of allowing external capital into Kiwibank may further meet some of New Zealand’s broader economic objectives. We saw the success of this with the mixed ownership model floats and with Napier Port.
In addition, the Government and councils also have the option to allow these businesses to raise money through the market to fund further growth and opportunities. Under this option, the Government or councils wouldn’t have to sell any of their existing equity.
A 2018 independent analysis of the mixed ownership model programme from 2011 to 2014 compared the gentailers in the three years post-partial privatisation compared to the three years preceding it. The findings showed significant improvements in dividend distribution, a reduction in capital expenditure and a lowering of debt to earnings and debt to equity ratios.
This is capital recycling: efficiently moving capital from assets the Government or councils no longer need to own outright – or at all – to other public assets that need development and a cash injection. That recycled capital needs to be earmarked to public assets. Many councils are looking at this approach.
It would also free up Government and local government money that would otherwise be spent on maintaining or upgrading assets to core public services New Zealand needs: health, education and social services, or at a community level, paying for maintenance of local roads, pipes, libraries and swimming pools.
As a country we need to be open to innovative ideas that help fund our infrastructure, stimulate market activity and liquidity, and better contribute to New Zealand’s economic prosperity and productivity. Doing so will ensure Kiwis win on every level and we can help answer the key question: “how are we going to pay for that?”
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