New Zealand has a $20 billion infrastructure deficit in building or upgrading our pipes, roads, ports, broadband, tunnels and bridges. There are 2400 projects in the pipeline. But can we get them done? By Alan Bollard.
We are heading into a fragile economic recovery, as Covid vaccinations reach the community and travel opens up again. Yet we have never seen such a worldwide shutdown before, and consequently we don't quite know how it will open, except that the global recovery will surely surprise and disappoint. After a year of record economic contraction, we are now seeing some record positive growth rates. Generally – both in this country and overseas – the lockdowns and border closures have resulted in less damage than feared. Most economists have revised their forecasts upwards, but it will take a couple of years to restore our country's growth path. We are significantly poorer than we would have been without Covid.
New Zealand moved fast to contain the pandemic and cushion the economic effects. As with many countries, we poured money into job subsidies and business support. Now, many countries are looking to continued ongoing stimulus to support the recovery.
But this will not be straightforward. Paying subsidies during lockdown represents classic Keynesian stabilisation during a downturn. Pumping public money into the economy during some of the strongest growth quarters in our history is procyclical and risks overheating a tight economy. At the moment, with very low inflation, that looks to be a low risk, but it will be some time before we can be sure.
A number of Western governments have selected infrastructure as a target for stimulus. After all, US president Franklin Roosevelt did this successfully with the New Deal during the Great Depression (1929 to the late 30s) and president Dwight Eisenhower used federal spending to build the US interstate highway system during the 1950s Cold War. President Joe Biden is currently asking Congress to approve the world's biggest single infrastructure spending programme. Infrastructure investment is cool again, and many Western countries realise they have not had enough of it in the past.
But when we look closer, it all becomes more complete. The world leaders in infrastructure are East Asian countries. In Japan, infrastructure spending has been tied to the fortunes of the governing Liberal Democratic Party. Following the global financial crisis, China was reported to have used more concrete in two years then the US had used in the whole 20th century. Singapore centralises all its road, water and planning decisions.
When there was not enough room for its incinerated rubbish, it built a new island to contain it. But these initiatives create problems. Japan built up huge public debt from its investments and got little growth stimulus. A very senior Chinese director confided to me that its high-speed train system looks magnificent, but there are simply not enough Chinese ever to make it profitable.
As we now know, the cement and steel used to build the region's infrastructure consumed not only huge amounts of energy to produce, but also created a long, carbon-emitting tail as operating infrastructure. Of course, building infrastructure in East Asia has some advantages over New Zealand: their governments have used strong centralised powers to consent and speed up projects; construction has been cheap and relatively labour-intensive, generating employment; projects have been funded from huge household savings and, until recently, there has been little concern for the environmental or social effects of certain mega-projects such as the Three Gorges Dam in China, which displaced more than a million people.
Dispersed & fragmented
New Zealand infrastructure is different. Very different. For a start, we have an expensive geography – a long, thin country with an inaccessible mountainous backbone, a long eroding coastline and seismic instability. Most regions have small, spread-out populations that are very costly to service.
The main exception is Auckland, where the population sprawls across an isthmus web, which increases connectivity costs. Many parts of our infrastructure network are vulnerable to disruption, such as the Auckland Harbour Bridge or the Cook Strait high-voltage submarine cables. Some infrastructure, such as telecommunications and electricity, are operated mainly through the market. Others, such as the state highways, are operated by central government, and local authorities operate the likes of water infrastructure. Visiting Singaporeans return to tell their friends about our fragmented little country that has 19 teacher-training colleges and almost 70 water authorities – Singapore has one of each.
Building our infrastructure has been particularly problematic. Our construction sector is relatively small and high-cost, needing to import specialist equipment and operators for many jobs. Big projects struggle to find enough large firms to ensure competitive tendering. Small operators struggle with best-practice procurement. Construction companies work to train staff, only to lose them to Australian recruiters offering higher pay.
The just-announced Australian budget contains some big plans for spending on transport, water and health infrastructure and recycling. The downside for us could be more skilled workers being lured to jobs in Australia.
Key construction materials are controlled by a few suppliers and are in limited supply. For example, we have one domestic steel mill rationalising production around a few profitable products, one reinforcing-steel company heavily exposed to electricity prices, one cement manufacturer left after the exit of Holcim, one oil refinery that has stopped production of bitumen, and a concentrated timber industry struggling to meet demand.
People often wonder at the time taken to build major projects. Most of us underestimate the complexities of design, workforce upskilling, the consultation and consenting process, business-case evaluation, political decision-making, tendering, subcontracting, procurement and funding. If any of these components change, there will be costs and delays. Sometimes the bulldozing is the easiest part.
Following the Kaikōura earthquake, which triggered massive landslides and a tsunami, the speed with which the North Canterbury Transport Infrastructure Recovery alliance designed and delivered a colossal $1.2 billion project to reopen State Highway 1 in just over a year was a surprise, but the construction industry knows how to build once the political will, community alignment and approvals are in place.
However, for most infrastructure projects, it is costly and time-consuming to get consents as a result of our complex regulations, legalistic approach, long consenting timelines and the wide rights given to lodge objections. Anecdotally, consent costs spent on councils, planners, lawyers and landscape architects often dwarf the fees and margins paid to the engineers, architects and contractors who actually build the project.
Sometimes, socially or environmentally desirable projects cannot go ahead at all. In some cases, subjective "amenity" tastes of objectors can defeat otherwise compelling projects. The aggregates industry is a case in point. We are particularly well endowed with the rock, gravel and sand that is used in large quantities in roading and heavy construction. But it is expensive and risky to get resource consent for new quarries, and conditions for the operation of existing quarries are very restrictive as to permitted hours of work, daily vehicle movements, noise and dust emissions. If it meets the very broad definition of a "wetland", consented quarry land may not be used at all.
Between 2014 and 2019, no new quarries were consented in the Auckland region and only three district sites allowed to expand operations, despite the city's growth. The construction sector is full of anecdotes about the distortions this brings; these low-value, high-bulk building materials are being trucked long distances with big costs in energy and emissions.
It seems we do not like making hard trade-offs. Australia has just consented a huge hydro project, Snowy 2.0, in a national park in less than a year – a process that would probably take many years here, if it were possible at all. Faced with a choice between modern infrastructure and pristine environment, most Kiwis say they want both.
We are traditionally reticent about charging the users of infrastructure its true cost, preferring to hide this in general taxation and overall rates. Most New Zealanders do not know how their various facilities are funded. We have very little congestion pricing, and therefore limited incentives to wash clothes or drive cars at a cheaper time of day, nor do we attempt to capture value such as the windfall to property owners from new access roads or new public-transport facilities. We also often prefer new infrastructure to much cheaper maintenance of what we have. We want local democracy, but this tends to protect homeowners and the status quo at the cost of renters and younger generations wanting to move into a district.
With these disadvantages, both natural and self-inflicted, it should be no surprise that we have not invested enough in infrastructure in the past. The G20, a forum for international economic co-operation, recently estimated that this country has an infrastructure deficit of about $20 billion. This follows several decades of underinvestment; a failure to maintain and renew existing infrastructure at the necessary rate, especially out-of-sight facilities such as underground pipes in Wellington; and not recognising the needs of migrant-fuelled population increases, particularly in the Auckland region. The World Economic Forum recently rated New Zealand as having the best macroeconomic policy in the world, but ranked it a very poor 46th in infrastructure. In 2018, an International Monetary Fund study identified poor infrastructure investment as one of the enduring causes of our low productivity.
These data suggest that although infrastructure may not be a classic countercyclical tool for economic stimulus, it certainly should be a target for structural improvement. Our pipes, roads, ports, airports, drains, tunnels and bridges can be contributing more to our economic growth. And modern definitions of infrastructure go much wider, including ultra-fast broadband, new hospitals, modern schools and many specialist public facilities.
Lessons of Covid
When Covid struck and we went into lockdown, the infrastructure base of essential services was severely tested. However, personal protective equipment and key supplies continued to be available, ports and warehouses kept operating and essential services continued. But construction sites were closed (although they continued in Australia), triggering disruption, layoffs and disputes about who should pay the mounting bills, often triggering "force majeure" clauses.
The closure of international borders contracted the travel and hospitality sectors but expanded border-protection infrastructure, particularly at managed-isolation and quarantine (MIQ) hotels and testing and vaccine stations. Auckland Airport had to shelve one of the biggest private-sector investment plans in the country. The cut-down America's Cup and the virtualised Asia-Pacific Economic Co-operation meetings meant huge visitor expectations could not be realised. About a quarter of our high-skilled construction workforce are foreigners and the MIQ process has made it difficult to get key workers into the country. As a result, some of our largest infrastructure projects, such as Auckland's City Rail Link and Pūhoi-to-Warkworth motorway and Wellington's Transmission Gully project, were heavily affected.
The lockdown brought a sudden increase in home-based work, a reduction in office occupancy and reliance on virtual-meeting technologies and broadband infrastructure. This was not highly disruptive because our lockdowns were so short. For a true measure of office-workplace balance, commuting behaviours and public-transport usage, we will need to look at the US and Europe. More work from home means less demand for office space, and some major tenants have already announced significant reductions in floor space. The surge in online purchasing has meant new supply chains, new warehouse distribution patterns and reduced face-to-face shopping, further hurting traditional brick-and-mortar retailing. Street-level retail closures and high-rise office contraction will have a visible effect on our cities: we are already seeing boarding up in some high streets.
Office contraction is being balanced by home expansion. The experience of lockdown triggered a strong surge in house renovations, home-office refits, bach building and new home purchases. Many of these are in outer suburbs, exacerbating the problem of urban sprawl and costly infrastructure. This comes on top of a housing shortage and a strong increase in house prices – the housing part of the construction sector is now heavily overcommitted and spilling into cost increases. The wave of recent Covid returnees has probably contributed to this housing pressure. There has been particularly strong demand for some personal services, domestic travel and home-based entertainment as overseas travel budgets are recycled.
The Government had announced a major upgrade programme of infrastructure spending immediately before the arrival of Covid. During the outbreak, it increased spending on provincial-growth ventures and called for suggestions for "shovel-ready" projects. In total, these programmes have been valued at about $15 billion and represent a significant call on construction capacity. The initial response to the call for new projects was very enthusiastic, but so far there has been a disappointingly slow start rate, with projects held up in design, financing or consenting stages. In practice, the term "shovel-ready" usually proves a sad misnomer.
What to do?
Previous governments have accepted that we have an infrastructure problem, and, two years ago, there was unanimous agreement to establish the New Zealand Infrastructure Commission/Te Waihanga (lnfracom). It gives advice to central government on better infrastructure policy and is focused on lifting procurement practices. Central government has business-case guidelines to ensure that new investment goes to the most urgent uses at the best price, but there are risks. The proposed "Northern Pathway" Auckland Harbour Bridge cycleway project has been forecast to cost many times its initial capital cost estimate of $67 million. It will move less than 1% of the existing bridge traffic while subsidising some of the wealthiest suburbs in the country. The arithmetic does not stack up. For local government, the challenges vary, but in many cases our small, decentralised councils with tiny numbers of ratepayers struggle to follow best practice in infrastructure procurement and management.
We strike these problems every day. For the medium term, lnfracom has assembled a three- to five-year pipeline of infrastructure projects being proposed by a large number of public- and private-sector infrastructure providers. The aim is to present the upcoming work to allow companies to plan for the medium term and avoid the boom-bust cycle of the past. Currently, there are about 2400 projects in the pipeline, totalling nearly $60 billion worth of work. This tells us that the construction sector will likely be overburdened for the next few years and that some proposed projects will not actually happen.
Looking further out, a 30-year strategy is under way and will be presented to the public shortly for their responses. This will generate intense interest. Infrastructure requirements during this period are going to change considerably and we need to understand these changes now. This is about filling gaps, meeting new demand, improving quality and adapting to new conditions. The big drivers will be demographic developments, climate change and technological disruption.
Our changing demography means we need to invest for an ageing population, which doesn't just mean more rest homes. There will be demands on Auckland's infrastructure, with the population forecast to keep growing at very high rates. We need to understand how to spread migration more evenly around the country, working out how to contract services in depopulating regions. Perhaps most importantly, we need to spread the burden of infrastructure fairly between the generations.
Pathways for change
Climate-change adaptation is looking more urgent and will mean investment to mitigate our eroding coastlines and our overloaded watercourses, especially exploiting green technologies such as water-sensitive urban design, permeable pavements and rainwater harvesting. It also means investment to decrease fossil-fuel use, especially by increasing electricity generation through renewables such as wind, solar and geothermal.
The Climate Change Commission has laid out a pathway. From an infrastructure viewpoint, this means mass electrification of vehicles, networks of charging stations, conversion of industrial process heat plants (the main fuel source of process heat at the moment is from burning coal and other fossil fuels) and greater investment in relocating climate-exposed infrastructure.
Much technology innovation will be positive: new transport options, such as autonomous vehicles requiring street-control systems; new monitoring technologies to understand usage rates; and new control mechanisms to smooth out congestion, whether on roads, electrical wires or other bottleneck facilities.
New technology offers a range of ways to price facilities, manage demand and avoid unnecessary extra investment. The Government appears willing to consider new ways to price infrastructure and manage demand, provided everyone retains access. All this will require continuing broadband investment to exploit the emerging "internet of things": wearable health monitors, autonomous farming equipment, wireless inventory trackers and devices to improve learning opportunities, especially in rural and remote places.
There are other changes under way. The Government is deep in the throes of reforming the Resource Management Act (RMA), that complex bundle of legislation affecting zoning, consenting and building. It is hoped the replacement act will set a clearer direction for how our physical and natural resources are used over the long term, by listing desired outcomes and requiring regional spatial planning over 30 years. It should also reduce the more bureaucratic and legalistic elements of the RMA, by combining more than 100 planning documents to about 14 and limiting the scope of appeals. These are all positive developments for infrastructure, but the devil will be in the detail.
There are further changes afoot. We have recognised that this country has devolved responsibility for some of its infrastructure much further than other countries – in the name of local democracy – only to find that this is delivering high-cost and variable-quality services. The Government is looking at local-body operations. Recent announcements show it is prepared to consider significant amalgamation of water-infrastructure-delivery responsibility among local authorities and centralisation of district health boards in the health sector. There are efforts to improve work skills and we are looking for ways to stop skilled workers leaking overseas.
Who is paying for all this?
Our infrastructure is paid for by a complex mix of personal and company taxation, rates collection, specific levies, developer levies, user charges, market pricing and emission charges.
In most cases, there is some logic behind the different channels used and they are ultimately transparent. But many consumers of infrastructure are unaware of whether they are paying directly for the services and, if so, how. In some cases, there is cross-subsidisation of costs and frequently charges do not reflect the marginal costs of delivery. There is certainly room to monitor usage and charge to avoid congestion.
Funding infrastructure is different from much government spending in that these are capital items. Modern infrastructure can be very expensive, but, provided funds are wisely applied, they deliver an increase in assets on the Crown balance sheet. The Government has already committed increased spending to fund works. Some local authorities have borrowed significantly to fund their spending, but most have further borrowing ability that could be used. If the infrastructure asset is long-lived – and most are – then borrowing to pay for it is appropriate.
In addition, there are other, more creative ways to fund projects. New Zealand has implemented a number of public-private partnerships through which construction or ongoing operation is funded by the private sector. Some of these have drawn criticism, but others have worked well.
There are also new charging mechanisms available, such as the infrastructure levy model. It allows developers to recoup money spent on facilities for new housing developments, such as roading and wastewater connections, through targeted levies or rates applied directly to the future homeowners by local government. Effectively, user-pays infrastructure.
Most infrastructure investment is very long-lived, up to 100 years in some cases. For this reason, there is a crucial question about how much should be paid for by our current generation (through equity and charges) and how much by future generations (through borrowing). The need for new forms of infrastructure to mitigate climate-change concerns has brought this to the fore, particularly now that we are designing infrastructure today that will be here in 2050, the Zero Carbon Bill's deadline.
Swedish environmental activist Greta Thunberg has railed against older people's misuse of the world's resources, saying they have passed on a massive liability to her generation. On the other hand, Thunberg's generation has had the advantage of Swedish health, education and other facilities that were funded by her parents, her grandparents and even earlier generations.
We need to talk about infrastructure; it's going to be a tough conversation.