Cost escalations strike Govt action plan, and what’s happening with fuel excise?

Artist’s impression of the new Dunedin Hospital. Photo / Supplied

Finance Minister Grant Robertson says an action plan for building New Zealand’s vital infrastructure will be out shortly which will take account of the sector’s strained capacity to deliver.

The action plan comes against a background where high inflation has led to cost escalation, and supply chain constraints and labour shortages are having their impact.

In May, Te Waihanga, the Infrastructure Commission, released New Zealand’s first long-term Infrastructure Strategy, which set out a principles-based approach, objectives and recommendations on how to address the country’s estimated $210 billion under-investment in infrastructure.

The Government responded by supporting the majority of the strategy’s recommendations.

“When we responded to the strategy we said we wanted to have measurable timebound milestones and targets for that,” Robertson told the Herald. “The action plan is a really important part of making sure that we do deliver on actual infrastructure builds and that we’re doing the work we need to do to make sure we make the best use of the infrastructure we have got.”

Wearing his finance portfolio hat, Robertson is now assessing Budget bids for new capital for infrastructure projects.

“I’m acutely conscious of the capacity within the sector at the moment,” said Robertson.

“I am really looking for things that are able to be delivered and that we have confidence we have got the capacity to deliver in.”

“I think we’re all aware of those capacity constraints. We’ve got a lot of stuff under way. You are likely to see us indicating a direction of travel for some areas that not necessarily fully identified because we need the sector to have some confidence there is work down the pipeline, but also not pile that work in right now when they are really struggling with their own capacity constraints.”

An investment panel assesses bids against “value for money”, deliverability and their alignment with Government’s overall strategy. That panel recommends which projects should be funded and in what order.

There is additional complexity with increasing pressure on traditional funding sources.

“Probably one of the important pieces of strategic work is the review of the National Land Transport Fund [NLTF] that Michael Wood is leading,” added Robertson.

“That fund is the money we get hypothecated out of fuel excise but as the transport fleet decarbonises there is a major, major strain on that fund.”

The fund provides about $4.5b a year, but Robertson said it is “over-subscribed”; there are more projects to finance than the fund allows.

There is also the New Zealand Upgrade Programme, where an investment of $8.7b was heralded in January 2020 to fund transport projects in what Robertson calls “BC” (before Covid).

“All of them have been caught up in Covid and then the cost escalation,” he said. “So we are needing to do some work on phasing and sequencing but not necessarily jettisoning any projects. Just being really aware we need to work our way through those.

“We’re no different from any other person building something — we suffer from those cost escalations.

“But that programme is vast. It’s got a mixture of road and rail, walking and cycling; we will see projects out over the next 10 years and it will give a solid pipeline of work.”

Robertson says the Government has changed the debt ceiling — “which we are well under” — but it is looking at how to further utilise its balance sheet to fund projects once capacity constraints ease.

The Government introduced the Infrastructure Funding and Finance (IFF) Act to assist high-growth councils with constrained balance sheets in areas like Auckland, Hamilton, Tauranga and Queenstown to access alternative funding and finance tools to meet housing needs. The Government works with local councils, creates a special purpose vehicle (SPV) and brings in private finance. SPVs have been used in Auckland; two are being assessed for Tauranga and one for Wellington,

Robertson says one of the three projects is close to signoff, but the process needs streamlining. “It’s brand new and it’s going to need some tweaking to work well. The feedback I have had [from the sector] is: Great idea, but how do we get more? How do we allow ourselves to see more innovative private-public funding arrangements?”

There is also a massive building programme under way, including the new Dunedin hospital and regional hospital builds in Whangārei and Nelson.

Robertson contends the creation of Health New Zealand will give more focus, enabling a nationwide framework rather than say considering 20 separate building projects.