New Zealand needs a step change in infrastructure investment writes NZ Super Fund CEO Matt Whineray.
There is no quick fix for dealing with New Zealand's infrastructure deficit. Ensuring our country has the roads, rail, telecommunication systems, pipes, power lines, ports and airports it needs to succeed in the 21st century requires unprecedented levels of investment.
Treasury estimates capital spending on infrastructure will top $129 billion in the coming decade — but it's unlikely to be enough. According to the Global Infrastructure Outlook report, New Zealand will have an annual infrastructure investment gap of 0.3 per cent of GDP (approximately NZD$890 million in today's dollars) per year until 2040. Clearly, our historic policy settings, funding systems, decision-making processes and the associated institutional structures need a shake-up.
We must be willing to innovate and push ahead with significant changes to the way we do things if we are to deliver the quantity and, critically, quality, of infrastructure investment that is required.
Four trends are driving demand for new infrastructure: population growth, ageing existing assets, the need to respond to climate change and technological shifts.
Our population continues to expand, with Statistics NZ's median growth projection predicting 6 million people will live here by the mid-2040s, while much of our existing infrastructure (such as aging water networks) needs upgrading or replacing. Despite the pressures, New Zealand remains one of the most desirable countries in the world to live and there is little reason to believe that the attractiveness of our lifestyle will diminish.
In addition to catering for growth and replacing old infrastructure, responding to climate change is a significant challenge. Infrastructure design can make a huge contribution to both mitigating the effects of climate change and creating resilience to changing conditions.
We need to ensure that investment is consistent with the low-emissions and climate — resilient developments that will help us deliver on the Paris Agreement.
Climate change is also driving a need to de-carbonise, which is being met by technological shifts like the move to electric vehicles, thereby placing even more demand on infrastructure. The Productivity Commission estimates New Zealand will need to increase electricity generation by at least 50 per cent (and conceivably double it) by 2050 to meet this growth.
The demand for infrastructure is not unique to New Zealand. The Global Infrastructure Hub says the world faces a US$15 trillion gap between projected investment and the amount needed to provide adequate global infrastructure by 2040. Expecting governments to cover everything is neither realistic nor desirable. Engaging alternate sources of capital to bring expertise, innovation and resources to the table is vital — and there is a willingness from investors to get involved.
Internationally, pension funds and sovereign wealth funds such ourselves see infrastructure as an attractive investment opportunity. We — and they — like its development risk, followed by consistent returns and yield; defensive characteristics; and diversification benefits. McKinsey estimates global demand to invest in infrastructure assets from these sources alone at US$21 trillion.
So there's plenty of capital available. And clearly, New Zealand requires significant new sources of financing and funding options, along with construction skills and other operational resources, to meet its infrastructure deficit.
It's important, however, that we attract not just any capital, but high quality, stable capital. By this I mean long-term investors with genuine infrastructure expertise and a commitment to creating not just great investment returns, but positive social and environmental outcomes for New Zealanders.
In our experience, these institutional investors are attracted to countries that have stable and predictable regulatory systems, high levels of transparency, low corruption and long term certainty about projects. These investors have choices about where they allocate their investment funds and actively compare the investment environment in different countries.
The NZ Super Fund has therefore warmly welcomed the Government's formation of an Infrastructure Commission, and its willingness to look at a dedicated tax regime for infrastructure as part of its current taxation work programme. Such a regime is in place in a number of other countries, including Australia. These are important initiatives.
For our part, we are actively seeking opportunities to invest in New Zealand infrastructure.
The Fund is now $43 billion and is therefore looking for the large scale opportunities that infrastructure can deliver.
We have developed a partnership model for investing in infrastructure alongside local and central government, which is the basis of our bid to fund, design, construct, own and operate Auckland's Light Rail Project alongside Canadian investor CDPQ Infra. We have a highly skilled team focused on pursuing other opportunities for domestic investment in infrastructure. We also continue to show leadership, as is appropriate for a Crown fund, on investing in an environmentally- and socially-conscious way.
The Fund has some very successful offshore infrastructure investments, such as our stake in Horizon Roads, which manages Melbourne's East Link toll road, and a fast-growing investment in Longroad, a US renewable energy developer. However, we have few local infrastructure investments within our $6 billion portfolio of New Zealand assets.
We're looking to change that.