Infrastructure investment is desperately needed but the money to build it is scarcer than ever, writes Paul Callow.
A NY business knows that in order to grow you need to invest, and what is true of business is also true of Governments.
The key difference is that Governments need to invest in infrastructure that will enable their economies to grow, rather than invest directly in productive assets.
The recession has hit Government revenues hard, so at the very time infrastructure investment is desperately needed to help with the recovery, the money to build it is scarcer than ever before.
The New Zealand Government is unusual among developed countries in owning a variety of entities through commercial company structures in the form of both state-owned enterprises and, in the case of Air New Zealand, a listed company. In contrast, in Britain and Australia, much of the electricity sector is privately owned, water provision is corporatised or privately-owned, and ports, airlines and mining companies almost exclusively private investor owned.
It is difficult to believe the current model was ever intended to be the end game for the Government's infrastructure holdings. Government-owned companies competing with each other and private investor-owned companies makes little sense other than as an interim step to full or partial sale.
The evidence suggests there are some substantial problems with the current model, which can at least in part be traced back to an ownership structure stuck half way between a private and public model for more than a decade. Further reform is clearly needed and the introduction of private capital, if done well, could provide a golden opportunity for Government to free up capital for infrastructure needs.
Privatisation of public assets is a sensitive political issue, however. Issues of control, profit and public good activities make it difficult for Governments to secure public support for the sale of assets. But owning assets is an expensive luxury and we need to ask whether this is the best use of the Government's limited capital resources.
Investment in SOEs is considerable. The Government reported in its National Infrastructure Plan that the value of its interests in SOEs was $33.1 billion, with a further $46 billion in Crown Entities. Setting aside the debatable value of KiwiRail, that leaves Government with assets having a book value of around $20 billion - which on the open market could achieve substantially more.
With this amount tied up in what are essentially commercial companies, is the Government's capital invested in the right place? A glance at the recently released National Infrastructure Plan suggests it is probably not.
The plan provides details of about $49.1 billion in planned infrastructure spend across transport, water, education, health, electricity and gas.
The majority of the burden of this falls on central and local Government and is planned to take place within the next 10 years, with the majority loaded towards the first half of this period. A hefty chunk is incurred through ownership of electricity SOEs.
A substantial proportion of this spend will be the exclusive preserve of Government and it will not be possible to substitute private capital for public. A large proportion will be funded from tax revenues but these are finite and projects will need to be programmed to a point where funding is available, delaying the benefits which flow from them, and reining in economic growth.
It cannot be sensible to have Government capital tied up in owning around $20 billion worth of productive assets when much could be substituted for private capital which the Government could then use to accelerate infrastructure investment and economic growth. Floating the SOEs would relieve the Government of $4 billion to $5 billion of future capital burden and provide proceeds which would meet around half the infrastructure bill over the next 10 years.
Partial or full floats of SOEs would also be good for capital markets. It would increase the market capitalisation of the NZX by about 50 per cent and provide a home for at least part of the $5.8 billion of KiwiSaver funds and $15 billion in the Super Fund currently under management.
One of the concerns raised over floating Government companies is that of control. How could the private sector be trusted to run a power station, electricity transmission grid - or farm for that matter - and heaven forbid that someone foreign should ever buy it.
This rather overlooks the fact that Government makes the laws and regulates industries where market mechanisms are weak. A float provides the opportunity to design a well-conceived regulatory regime for governing that industry or sector.
The privatisation processes for utilities in Britain and Australia were combined with the implementation of regulatory regimes which provided certainty to the new investors, continuation of public good activities and protection for vulnerable consumers.
Regulation through ownership is an extremely expensive way of achieving a result which is often little better and fraught with conflicts of interest for the Government. How do you develop a fair, independent regulatory regime for airport landing fees when you own the main airline using them?
Economic growth through infrastructure investment is an esoteric concept and fiendishly difficult to measure. But imagine what the North Shore might look like without the Auckland Harbour Bridge. Then think what might be achievable with improved communications through a second crossing and you begin to get the idea.
The new Tauranga Eastern Link toll road is predicted to create substantial economic growth in that region with a town the size of Nelson expected to spring up. Now imagine applying $20 billion of capital to accelerate these sorts of developments and you can get a sense of the magnitude of the opportunity cost of current investment in SOEs.
Redeploying $20 billion of SOE capital to infrastructure still leaves a large gap. SOE capital can, of course, only be used once, but that one use has the potential to create a step change in economic performance. The question then becomes, what is the plan to fill the gap and how do we maintain the momentum at the new level?
Private sector capital has a role to play in helping to fill this gap and continuing to contribute into the future. The PPP model has brought private capital into areas traditionally the exclusive preserve of the public sector. It has matured in overseas markets to the point where there are few areas where it has not been used. It has worked best in providing capital-intensive fixed infrastructure, such as roads, hospitals, prisons, and defence facilities, and it is encouraging to see the Government taking forward projects in the prison sector and looking at more in education.
These are steps in the right direction but the model has substantial potential beyond this. Why are we ignoring it for road and bridge projects?
The Government's balance sheet is substantial but the future needs for capital are large and unceasing. We are still trying to claw our way out of a deep recession and have little choice but to grow. But in order to grow we need to invest and an overhaul of our current national investment portfolio is long overdue.
* Paul Callow is a partner at Deloitte and is its Energy and Infrastructure sector leader.
