Brian Fallow: Users to pay toll for building spree

User charges and fuel taxes will be used to cover Government spending on roads. Photo / Paul Estcourt

In one respect at least the national infrastructure plan is a reassuring document.

It reminds us that most of what we would normally think of as infrastructure lies in the realm of user-pays, and is therefore not constrained by concerns about the Budget deficit or mounting Government debt.

At a time when billions upon billions need to be spent on infrastructure and the Government has told most of the public sector not to expect any new money for the foreseeable future, the decoupling of most infrastructure investment - both the decisions and the funding - from the general state of the Crown's finances is helpful.

We will get hit in the pocket as motorists, ratepayers, energy consumers and so on. But as taxpayers, not so much.

Take the national grid. After a decade or more of woeful underinvestment, Transpower has $2.3 billion worth of investment already committed and a pipeline of other projects awaiting Electricity Commission approval. The costs will flow through to power bills.

On the energy supply side a market system is in place and even though many of the major players are state-owned they are required to do business as any private company would when it comes to deciding on, and financing, generation investment.

The telecommunications sector has reminded us lately that new infrastructure can be as creaky as old infrastructure and that the market is no guarantee against costly lapses of service.

But at least disgruntled Telecom XT customers jammed in the doorway have somewhere to go.

The industry spends around $1 billion a year in capex. Yet the Government discerns market failure in the speed with which fibre to the home is likely to be rolled out, and it plans to invest $1.5 billion to expedite that. The intention is to recover that cost.

Ports and airports also operate within a competitive market. The Government "does not see conditions that might justify Government intervention".

Water and waste water are the responsibility of local, not central government. Councils' long-term plans indicate about $6.5 billion of capital expenditure in those areas will needed over the next 10 years. Metering would help.

When you add the other fixed assets, including roads, which local authorities are responsible for, their average annual capex over the next 10 years is expected to be some $3 billion.

After 20 years in which rates flatlined at around 2 per cent of gross domestic product, they have risen steeply, relative to the size of the economy, since 2005 and are forecast to reach 3.5 per cent of GDP over the next 10 years.

"Further analysis is required," the national infrastructure plan says, "to determine the drivers of that increase."

As local body rates have become something of a recidivist offender in the inflation statistics, let's hope that analysis occurs and reveals drivers that can be curtailed.

The Government is spending $3 billion on roads this year and that figure is expected to rise to $3.5 billion over the next eight years. That does not include the $500 million to $750 million a year councils have to find for local roads.

It is essentially financed on a pay-as-you-go basis, with both capital and operating expenditure funded by fuel excise and road-user charges.

Since 2008 those charges have been "hypothecated" or fully dedicated to roading and not used to boost the Government's general revenue.

The Treasury-based authors of the national infrastructure plan murmur some misgivings about this "pay-go" approach, contrasting it with the "more conventional business approach where investment is funded from the capital markets and operating expenditure, including the servicing of debt and equity, is funded from user charges".

The New Zealand Transport Agency, in its submission on a draft version of the plan, was more forthright: "There is a strong case for financing capital; expenditure through borrowing on the grounds of inter-generational equity alone."

In other words, why should today's road users bear the full cost of road works which are intended to last for decades? (The young might respond that it makes a change from policymakers' preference in other areas to push costs out into the future when they can.)

NZTA worries about the long-term adequacy of its funding sources as vehicles become more fuel efficient.

Road pricing - code for tolls - might prove a more durable revenue source and, just as important, provide much better signals to users about the costs of using infrastructure at times of the day when it is congested, it argues.

The national infrastructure plan takes a broad view of what to count as infrastructure - not just networks and facilities for moving people, goods, energy and information around, but "social infrastructure" such as schools, hospitals and prisons.

In all the Crown owns and manages around $110 billion of physical assets, only half of which - the SOEs and state highways - are funded from dedicated revenue sources. That leaves some $2.5 billion to $3 billion a year needed from general tax revenue to maintain and renew the rest of the asset base. With more and more claims on the tax revenue from an ageing population and a growing stock of public debt to service, the Government is casting about for ways to deliver services "more cost-effectively and with less capital".

That is code for public-private partnerships. These are contracts to deliver a service, where doing so requires the construction of some facility or asset. The private-sector partner finances and builds the facility, operates it to provide the service (which needs to be very carefully defined) and usually transfers ownership to the state at the end of the contract. As the authors of the national infrastructure plan see it, the potential advantage is not about finance. The obligation to make future payments to the private-sector partner has to be recognised on the Crown's balance sheet just as if the project was financed by government debt.

Nor is it really about offloading risk onto the private-sector partner. Less risk for the Crown would be offset by a risk premium in the price for the project.

But officials argue that allocating all the construction and operating risks to a private-sector partner provides stronger incentives to minimise cost over the whole life of the project.

Finance Minister Bill English says the Government is focusing on whether PPPs could be useful for building schools or a new prison before considering them for transport projects. Incentives matter but so does public opinion. How well rent-a-schools and hire-purchase jails go down with the public remains to be seen.