Is the much-used term "deficit" really the best way to frame New Zealand’s obvious infrastructure challenges?
Is the much-used term "deficit" really the best way to frame New Zealand’s obvious infrastructure challenges?
OPINION
It is often said New Zealand faces an infrastructure deficit. In an influential paper, economic consultancy Sense Partners estimated the cost of addressing this shortfall as more than $200 billion.
But is deficit the best way to frame New Zealand’s obvious infrastructure challenges?
First, it implies New Zealand has not spent enough on infrastructure, and that we can simply build our way out of today’s challenges. That is misleading and ignores affordability constraints.
Second, the deficit narrative obscures a harsher truth about the poor state of infrastructure delivery.
The New Zealand Infrastructure Commission notes New Zealand currently spends around 5.5 per cent of GDP on public infrastructure, a greater proportion than Australia and the OECD median.
Despite this comparatively high spending, New Zealand reaps a relatively poor return from its infrastructure investment. Alarmingly, we rank near the bottom 10 per cent of high-income countries for the efficiency of our infrastructure spending.
In other words, we don’t get much bang for our buck.
The Infrastructure Commission’s Briefing to the Incoming Minister for Infrastructure was unequivocal about the problem.
It said the challenge was one of investment efficiency.
“Our infrastructure is becoming more expensive to build and maintain, infrastructure prices have risen one-third faster than prices elsewhere in the economy, while infrastructure construction productivity has grown at one-third the rate of the overall economy.”
This inefficiency must be addressed. Not to do so would be irresponsible. Sense Partners have estimated infrastructure spending would have to increase to 9.6 per cent of GDP to deliver the infrastructure we need. That would substantially reduce opportunities to improve outcomes in education, health, housing and other areas.
Wasteful spending also increases public debt and puts upward pressure on taxation. The Infrastructure Commission’s briefing note estimates that, to allocate that amount to infrastructure would require either:
A 98 per cent increase in debt-to-GDP ratio by 2051; or
A 3 per cent increase in the tax-to-GDP ratio (equivalent to increasing GST from 15 per cent to 21 per cent; or
A 21 per cent increase in the average income tax paid per taxpayer); or
A 38 per cent increase in household spending on infrastructure services (about $5200 extra per household per year).
None of these scenarios are appealing. The fallout from Robert Muldoon’s Think Big energy projects in the 1980s should serve as a stark reminder: extensive borrowing to fund public infrastructure can jeopardise public finances and expose the country to considerable risk.
How can New Zealand generate greater value from the money it spends on infrastructure?
Following are two opportunities for reform.
Better public investment practices
New Zealand’s decision-making processes for infrastructure investment are out of kilter.
Fancy projects that capture media headlines, like Auckland Light Rail, are often announced without a business case or coherent plan, only to see costs spiral out of control. The recent Interislander ferry fiasco is just the latest example in a string of infrastructure blowouts, raising doubts about the public sector’s ability to effectively manage large projects.
Indeed, the Auditor-General’s recent scrutiny of both the $12 billion New Zealand Upgrade Programme and the $3b Shovel-Ready Projects underscores just how dire the situation has become.
Despite repeated warnings from Treasury and the Infrastructure Commission, the Ardern Government pushed ahead with the projects, even though, as John Ryan’s report notes, “Ministers did not have enough information to be sure that decisions supported value for money.”
A more robust approach to public investment would safeguard against poor-quality spending. There appears to be a case for investigating whether the Cabinet-mandated Investment Management System is fit for purpose – although that is a topic for a future column.
Too many recent projects have been imposed on the public without being fully scoped or planned, leading to cost overruns, or cancellation when the political winds shifted.
If the new Government is serious about improving New Zealand’s infrastructure delivery, it will ensure projects are only selected after a robust business case has been completed. Crucially, these business cases should consider how infrastructure assets are owned, governed and funded. Details matter.
More emphasis on management, maintenance
Wellington’s water woes show what happens when asset management is neglected. For years, Wellington City Council has failed to invest in routine maintenance and renewals – a major problem when some of the pipes in the network are more than 100 years old.
Regrettably, the problem of faulty infrastructure is not confined to the capital. New Zealand’s roads are another telling example. If you’ve been fortunate enough to enjoy a classic Kiwi road trip this summer, chances are you encountered your fair share of potholes along the way.
Burst water pipes in Wellington have highlighted a lack of investement in water infrastructure. Photo / NZ Herald
Neglecting basic maintenance ends up costing more than regular renewals in the long run.
Cue Wellington’s broken pipes. Ratepayers are now faced with rate hikes of more than 15 per cent as Wellington City Council scrambles to invest more than $1b in capital expenditure over the next 10 years to address the problem.
It is essential that government agencies and local government manage assets more efficiently than Wellington City Council, not least because the cost of repairing or replacing ageing infrastructure is projected to exceed new investment over the next 30 years.
Improving asset management can be approached in several ways. Requiring asset management reporting, akin to regulated utilities in electricity and telecommunications, is one strategy.
Another is to ensure ownership structures impose commercial discipline and offer the right incentives for routine maintenance.
New Zealand has an infrastructure deficit, but it is not solely about bridges and roads. Rather, it is an intellectual deficit that encourages us to believe we can simply build our way out of the immense challenges we face.
Recognising the root cause of our failing infrastructure is investment inefficiency is the key to getting back on track.
Dr Matthew Birchall is a Senior Fellow at the New Zealand Initiative.
