The scale of New Zealand’s infrastructure deficit is 'massive' and can't be fixed without billions of dollars of private capital – Jason Walls takes a look at how the Government plans to woo investors

By Jason Walls

"New Zealand is open for business,” Infrastructure Minister Shane Jones declared to some of the country’s top transport officials last month.

With his trademark swagger and flair for the theatrical, he left the stage after just three minutes.

Jones had done what he needed to do – alert would be investors the Government is looking for infrastructure investment partners.

The message he sent was clear: without private capital and large-scale investment, New Zealand’s infrastructure deficit cannot be repaired.

Finance Minister Grant Robertson and Transport and Housing Minister Phil Twyford have both said as much in recent weeks.

Prime Minister Jacinda Ardern highlighted the extent of the problem. It's so bad, she claims, that the Budget’s primary focus will be repairing the deficit.

But her comments were not news to Infrastructure New Zealand chief executive Stephen Selwood, who describes the issue as “massive.”

“Nationwide we have an enormous challenge in front of us.”

Auckland Council's infrastructure deficit, which includes public transport, roading, water and housing, is estimated to be in the tens of billions of dollars. 

“The problem is just getting bigger and bigger. The evidence is clear,” Selwood says.

A recent ANZ report found that because of under-investment, “infrastructure spending needs to be urgently undertaken on a range of fronts.”

Over the last decade, New Zealand’s population has grown by more than half a million people, half of which was during the last three years.

But public and private sector spending on infrastructure was flat between 2015-2017, according to the Ministry of Business, Innovation and Employment.

ANZ’s data also shows new capital spending for each 1,000-additional people has fallen from $142 million in 2011/12 to $37 million in 2016/17.

Government and council’s hands tied

But borrowing more money to address the deficit is problematic.  

Not only are councils – such as Auckland’s, Tauranga’s and Queenstown’s – up against their debt limits, the Government has committed to getting core Crown debt to 20% of GDP by 2021/22.

Robertson is adamant that commitment won’t be broken, so the Government has turned its attention to the private sector for infrastructure investment.

“We need to harness new sources of capital,” Twyford says.

“We have to find sources of revenue within the high growth sectors – not just Auckland, but Tauranga and Hamilton as well – that will fund the marginal cost of growth.”

One way of doing this is through special purpose vehicles (SPV) – a subsidiary company created for a specific project.

They are used as a way of ring-fencing any liabilities associated with the project, meaning the debt does not sit on the Government or council’s balance sheet.

“That partly means the lenders have some assurance that there is an asset there that is not going to leave or won’t be transferred out of corporate ownership,” says NZIER principal economist Peter Wilson.

SPV’s were used by the former Government, which set up Crown Fibre Holdings (CFH) to manage its $1.5 billion ultra-fast broadband roll out.

For that project, the Government partnered with a range of different private and public-sector players, including Chorus and Waikato Networks Limited.

Wilson says that project was a success.

CFH has since been repurposed into Crown Infrastructure Partners and Twyford says the Government will be scaling it up. Last week, he injected an extra $360 million into its war chest.

PPPs, land value capture and infrastructure bonds

Public-private partnerships (PPPs) – where the Government partners with private sector players to invest in infrastructure – will also be a significant tool for the Government.

Last week, $1.8 billion in seed financing arrangement funding was made available so a PPP could be achieved for light rail in Auckland.

“It wouldn’t make any sense to pay cash upfront for a project of this scale that would have a lifetime of 100 years or more,” Twyford says.

“It makes much more sense to spread the cost over multiple generations, so that’s what we will be doing.”

He says there will be a lot more PPP announcements in the future.  

Twyford also points to land value capture – the recovery of some of the increased land or property value created as a result of public transport – as an area where the Government “is doing a lot of work.”

“Particularly in relation to the investments we’re going to be making in the light rail system in Auckland.”

He won’t put a timeframe on it, only that the process “is underway.”

Infrastructure bonds are also on the Government’s radar, Twyford says.

A lot of interest

There is a lot of appetite from private sector players and large funds to partner with the Government on these projects, Twyford says.   

“Internationally, pension and wealth funds have built up quite a track record of investment in this kind of infrastructure.”

Closer to home, the New Zealand Superannuation Fund has taken an interest in what the Government is proposing.

“The NZ Super Fund is interested in the possibility of providing investment capital and expertise to support the Government’s priorities in the infrastructure, housing and forestry sectors, including leveraging our peer and co-investor network to bring in compatible investment partners from overseas,” a spokesman says.

But there is still work to do before the Government can completely open New Zealand’s infrastructure needs up to investors.

“One of the big issues for the Government is identifying a revenue stream that can be attached to the particular asset that can finance some borrowings,” NZIER’s Wilson says.

Put simply, investors have to be able to make money from the arrangement.

But who pays?

Twyford says the onus will have to fall on the users.

In the case of infrastructure bonds for new development, that means targeted rates.

“That could replace the current systems of financing infrastructure which is essentially the developer acting as a financing vehicle, supplemented by developer levies that the council charges the developer.”

For transport projects, land value capture will be leveraged and for PPP motorway projects, Twyford says tolling will be used.

“That’s the essential part of the equation really – putting together revenue streams that can support the debt.”

Does this mean a more pay as you go system across New Zealand’s cities?

“I think the answer to that, oddly, is yes,” Twyford admits.

“We have to be willing to invest in transport infrastructure to lead urban [growth], not follow the growth 20 years later and subject people to decades of misery in the interim.”

The next roadblock for the Government to overcome will be attracting the capital and setting up the projects.

That’s where Shane Jones comes in.

A new beefed up Treasury unit

During April, Jones was sent to Australia on a fact-finding mission to assess how PPPs and SPVs operate across the Tasman.  

He agrees the infrastructure challenge New Zealand is facing is massive and private sector investment is needed.

To get New Zealand ready for the new wave of investment, Jones is beefing up Treasury’s Infrastructure Board and turning it into a “robust infrastructure agency.”

At the moment, that board is a “skeletal… small, obscure unit,” he says.

“It needs to achieve Charles Atlas-like proportions, with the right sort of financial and policy acumen.”

Jones has asked Treasury to prepare a paper, detailing options on what the unit would look like, which will be taken to Cabinet a few weeks after the Budget.

But in a nutshell, Jones says its job will be to provide high-level, top quality advice as well as finding and managing private sector investment into New Zealand’s infrastructure projects.

And Jones is expecting a lot of investment interest. If his trip to Australia is anything to go by, he says there will be no shortage of investors lining up to invest their capital in the projects.

“New Zealand,” he says “is open for business.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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59 Comments

Halt immigration, encourage emigration and the infrastructure deficit has gone away. A policy that might cause problems.

No, it doesn't work that way. Reducing population might help a bit on some things, but a lot of the stuff that needs doing is simply lack of investment in the last few decades. No matter how much you drop immigration and encourage emmigration it wont turn the 60 year old infrastructure nearing the end of its design life into new shiny infrastructure. The harbour bridge, most of Aucklands main sewer lines etc are all old. they need replacing or upgrading to modern standards. We are going to have to suck it up and pay for it, somehow.

That may be true for some things, but certainly Auckland's transport systems were functional 5 or so years ago.

People have always been bitching about Auckland roads as long as i've been driving. More roads just leads to more driving, leads to more congestion. Keep building more and more roads and we end up like California. Time to get hard on the carpooling and public transport, make people pay to drive a single occupant car on the motorways in peak hours and let the market solve the problem.

Hey you could even consider encouraging the use of small electric cars based on the NZ Post vehicle which if stretched a little perhaps could take two tandem seated and with a slightly larger battery extend it 60/70Kms to 100 and no pollution if sitting in stationery traffic or in the CBD. And Taxinda if you recognize this idea is more pragmatic than the rest of your cabinet I am available if not will help the opposition return you to the opposition benches next election and even provide the Tandem for your transport.

Pragmatist: fair point. And a good point about the harbour bridge - is that included in the $28b?
If this is the world's most liveable city why do I have electricity delivered by pole rather than underground - it seems so 3rd world.

Because undergrounding the entire electricy network would cost billions of dollars in this city built on volanic rock.. and large scale or prolonged power outages are fairly rare. They are progressively undergrounding the network and all new developments are underground now I believe.

1/2 a million immigrants stepped off the plane and got our infrastructure for free in less than 10 yrs.
Now the Tax payer having already laid it on for these people is expected to front up and subsidize these immigrants.by building the infrastructure needed.
Meanwhile the door is still wide open with 68,000 net growth the last year, a year that follows an election where population growth was one of the major issues.
Labour needs to shut the door!
NZers need to realize that bridges hospitals roads, Hydro dams etc are not the natural landscape and our infrastructure has taken 100 years to build and is worth a trillion dollars. We have to stop giving it away and place a value on it.
Realistically an immigrant should be fronting $250,000 to buy into NZ.

This is an Australian article on population growth and infrastructure:

"Major infrastructure typically lasts for about 50 years. That means we have to replace about 2 per cent of it every year, on average. What the bean counters call gross fixed capital formation (i.e. infrastructure) cost $283 billion in 2010, about 22 per cent of GDP for that year. So the cost of just maintaining our infrastructure is very large.

Now here's the key point. If our population increases by 1 per cent in a year then we have to build extra infrastructure. Instead of building 2 per cent of total infrastructure, we have to build 3 per cent, half as much again. So, working backwards, that $283 billion bill comprised about two-thirds replacement, $190 billion, and one-third addition, $93 billion. Today, that $93 billion would be well over $100 billion, and that's only part of the cost.

The result is that a population increase by 1 per cent a year uses about 7 per cent of GDP. For Australia, with a population growth rate about 1.5 per cent, the cost is more than 10 per cent of GDP.

That's a huge impost on our national effort – about $15,000 per taxpayer.

Why has this huge cost been overlooked? One reason is that the cost shows up in many different parts of our economy, some public and some private. One large effect in the private sector is to push up housing prices, but malfunctioning banking and investment policies also contribute to that problem. Governments are happy to leave the public costs scattered through many portfolios so the total is effectively invisible."

https://www.canberratimes.com.au/opinion/the-huge-hidden-cost-of-populat...

Interesting...so the last years' reliance on immigration volume to prop up GDP has resulted in even more under-investment in infrastructure that has been identified to date. Short-termism that will ultimately bite us in the posterior.

Sound fiscal management.

I guess that is what Michael Reddell has been saying for years.

Interestingly, if you divide the $28 billion guesstimate of the infrastructure by the 500,000 guesstimate of population growth in the last ten years, you get, by my calculations, $56,000 per person. So if we paid people $5000 to leave we would make a profit of $51,000 a head. That's rather shocking.

So you are quoting Michael Reddell who is only quoting some NZ Economist from the '50s and I think he was quoting authorities from pre-war.

The problem is there are three vested interests that are pushing for immigration despite the facts: (a) businesses that build things (b) businesses that prefer cheap docile foreign labour to training stroppy and mobile Kiwis (c) numerically illiterate academics and journalists who get to feel good proving their superior ability at acceptance of alien cultures over the majority of cautious native Kiwis (and a handful of evil racists who would happily vote for Hitler). We can never stop the first two with their financing our political parties but the third group are slowly realising that high volume immigration is a mistake - I think they get the message every time they sit in a traffic jam.

The conversation has certainly changed. Immigration was seen as a totally positive thing, and any criticism meant you were labelled a racist.

Reddell uses the depreciated value of the infrastructure we have to come up with a cost of $80,000 per migrant. But the article I quoted uses figures from Queensland University's Jane O'Sullivan, and she calculates it much higher - $200,000+ per migrant.

Is the tax system for it? Could be government obligation/bonds to its citizens?
De-privatisation of infrastructure is the way, no other way around.
Then correct level of taxes for maintaining it.

NZ has already signed the Belt Road Initiative memo, and should be able to get some low cost funding from AIIB.

Build two large and multi-purpose sea ports in both Bay of Islands and Invercargill and connect both with high speed unmanned railways. Someday, the Invercargill port will be demanded heavily for Antarctic related explorations.

Let's stay well clear of OBOR.

In the real world, it is more like that BRI will stay clear of NZ. So NZ needs to try hard to get involved.

Belt and road goes in the opposite direction. What possible advantage has it got for NZ?

Agree totally. BRI represents a poisoned chalice because of the infrastructure debt that comes with it (just look at Pakistan, Sri Lanka and the Maldives to see how the money and the political influence works). Owing money to the AIIB will open up NZ to Chinese political interference and will result in a reduction in political independence. Some things money cannot buy, and some things should never be sold.

NZ already has a history of Antarctic access using existing infrastructure, so the idea of building a specialist port in Invercargill is quite transparent for what it is: one step along the way to an ultimate plan for resource extraction from the Antarctic. Again, such infrastructure would most probably be funded using Chinese money and if so would simply give leverage to the Chinese government.

You mean more Chinese political influence than a Chinese spy as a shadow minister?

Antarctic explorations for what exactly? We are supposed to be leaving it alone.

Sounds like we need to raise business confidence. Foreign capital tends to be very sensitive to governments trying to get them to invest only to later seize their profits by way of taxation and/or market intervention!

It's time to pay the piper !

Time to kiss low cost and free services goodbye ... All i can see is the Big ugly Inflation head popping out of the bottle ..

Finding payment streams means we are selling the country's infrastructure to private investors - would that be any different from selling Telecom or Contact Energy? ... Eh Winston Peters ?

Where are NZF asset selling policies?

Here is my take on it today: Refusing to push the debt barrier and refusing to borrow more ( 10s of billions more) is a conspiracy to sell the country's silverware down the river no matter what and how this CoLs want to dress up ....It makes no sense to sell the assets up front when you can borrow and keep it for life ..this is economy 101

We all know too well how these assets can later be offered in IPOs and sold left,right, and centre mostly to overseas owners / investors. we also know that hedge funds and the like are not into this for ever and will sell their interest to a higher bidder sometime in the future .... the details of the aftermath of these policies are quite bitter and goes well beyond the comprehension of this CoLs.

Every country who did that ( down to the bare bones of infrastructure) has later sold their soul to hedge funds and corporations ... and became like Greece and others.

This issue needs to be put to the public to decide on , it is too important to leave it in the hands of some novice CoL Gov driven by "Advice" that doesn't make any sense!

The CoL have broken tons of rules and promises thus far, and they Refuse stubbornly to brake the only promise that is beneficial to the entire nation.

We have the ability to borrow and NZers will be happy to pay that debt for 100 years BUT will keep the asset !!

When I think of foreign investment I think of Hong Kong, Singapore and Germany. Countries like Greece are usually associated with voting more money into people’s own pocket / bigger government.

I would also prefer to see borrowing used - interest rates are lower than the rate of return investors will be looking for. It's a shame that this government is following the same path laid out by National in selling off assets.

As an immigrant of a couple of decades I was appalled when I first arrived at the state of infrastructure and the small-minded approach to development of infrastructure in NZ. This is very encouraging to see that the thinking has matured and at last .... a little bit of creative and grown up thinking. There is still much catching up to do, but at least the willingness to build infrastructure to meet the needs of a first world economy is no longer (such) an impediment.
Think big - Think long term. We are no longer an isolated backwater.

Dear Government - wake up.

1) Treat the cause and not the symptoms & cut the immigration rate to something sustainable that maximizes gdp/capita not gdp. The infrastructure deficit is a function of too higher growth rate and diseconomies of scale

2) Rein in local government and make it focus on critical infrastructure needs (& not wants) & force business case assessments on all spending

3) GHGs - The immigration rate has to be at a sustainable level if we are to go zero carbon and meet our Paris commitments to GHG reductions.

4) PPP monopoly providers - See https://www.macrobusiness.com.au/2018/04/privatising-profits-socialising... TransUrban is laughing all the way to the bank.

5) Introduce congestion tolls - this will delay the need for much of the transport infrastructure and make the spending profile much more sustainable as well as providing revenue.

5) Capital gains tax and land value capture ???? - I don't think so

6) Targeted rate - fine, & get rid of the developer contributions at the same time to reduce the up front capital cost of housing

7) Australia is littered with failed PPPs as is the rest of the world. Either the government gets ripped off or the PPP goes bust and the government ends up bailing out the PPP. An SPV is no different. There is no free lunch - Government can borrow at much lower rates. The PPPs demand higher returns & are higher risk.

8) Good luck with a PPP/SPV for the light rail. It will always require subsidy to operate. The PPP will just add to the cost. This is not Hong Kong where the operator is stock exchange listed and gets first in access to greenfield development land around new train stations.

@kiwi_overseas this is exactly the small minded retrogressive thinking that needs to be resisted and overcome.

We need to build to move forward... its too late to go back to the 1950's and recreate and live in the Quarter Acre Paradise.

Disagree - read his points and they all made sense to me except #6 and that is worthy of a long article not a bullet point in a comment.
We need infrastructure spending. The only fair and effective way is either borrow with lots of risks or massive increase in rates. I could accept the increase in rates if council staffing returned to pre-amalgamation (roughly half - but we were promised savings!) and ATEED closed and POA and the airport could be sold off to ratepayers. No more sponsoring sport events - leave that to the spectators. Etc.

Lapun and kiwi_overseas - sure some valid points I agree and don't mean to 'throw the baby out with the bathwater'. Hover, the point I'm making is that as a nation we need to rise above the minutiae and think bigger and fund more creatively (a la PPP as proposed in the article).

PPP not something I have any expertise in but I keep reading about various mistakes made in the UK with the negotiating skills of the private business being greater than those of councils/governments. Seems just like a way of getting a loan without putting it on the books - would rather the council sold bonds at a discount to ratepayers. But as I say I'm a layman.

Global companies are not going to invest in NZ infrastructure if there is negligible ROI. This is a pipe dream. Ultimately, the lion's share of any infrastructure spend is going to have to come from within (taxes or public debt). Arguable the most successful transport infrastructure company in the world is Japan's JR (Rail Network). This was a public company and not privatised until the late 80s.

SPV's - that does mean more debt but the government can say it's not core government debt. I wish they were just honest and say they want to spend more money and there are only two ways: raise tax or raise debt.

Twyford also points to land value capture – the recovery of some of the increased land or property value created as a result of public transport – as an area where the Government “is doing a lot of work.”

Yes, that is what Auckland needs - some way of making it even less attractive to build near public transport. Forcing more people into sprawl.[/sarc]

Why should I pay taxes to build amenities that increase property values for landholders close to those amenities?

Those bludgers should damn well have the value uplift captured.

Because it is called a social contract. And that is not a bad thing.

So if the new infrastructure reduces property value then surely some compensation is required as a quid prop quo. A new train station of road may create more noise and people movements which reduce the prior attractive suburb to a bustling unattractive ghetto.
Watched a programme on Choice about Mexico city with a population similar to Australia and the Cable Car system which moves Millions daily and has had an unexpected side benefit of people sprucing up the previously slum areas - still not Remuera but a definite improvement. Doubt the current Twitfords are capable of such innovative thinking before raising a whole new raft of taxes/levies/charges so perhaps we should invite the Mexicans involved to help whilst Phil has an extended stay in Alleppo watching its rebuild.

So if the new infrastructure reduces property value then surely some compensation is required as a quid prop quo.

So if the new infrastructure increases property value then surely some compensation is required as a quid pro quo.

Makes sense, huh?

I guess that's why many have been advocating for owners who have benefited so grandly from betterment contributing via land value taxes.

If govts had managed our tax money prudently over the last 30-40yrs this wouldn’t be a problem. Tens of billions have been squandered on welfare and other pork barrel projects and we are taxed to the point where the average person has no disposable income, yet govt can only dream up more taxes. The road ahead is clear to even a blind man...higher taxes, a declining standard of living and never ending debt.

I would have thought someone with a nom-de-plume like yours would have been aware of the fact that the higher taxed countries with more comprehensive welfare are often the places with the highest standard of living and happiest citizens.

https://www.cnbc.com/2017/08/09/the-happiest-countries-in-the-world-also...

Which make them the most attractive for immigrants. Since most (not all) of the infrastructure is needed to handle the population growth and that population growth is all immigrant with long term Kiwis breeding below replacement rate then why not divide the cost of the infrastructure by the number of anticipated immigrants and add it to the cost of their residency?

Because most of the cost is not due to immigrants. Decades of underfunding and short-term thinking from politicians at all levels of govt is the problem.

Let's do it anyway.

If not all how about 39% which is the fraction of foreign born Aucklanders.

Okay, but we backdate it 20 years to get all the previous arrivals that have caused the problem in that case.

Ok that does include me but it makes sense. I never did understand why they let us in so cheaply. They told me I had to have $200,000 to make the immigration point count and I was astonished to discover I did not have to give NZ $200,000 but just have it available in the bank or a property.

You are confusing the cause with the consequence.

Here we go. Targeted rates which are not targeted. North Shore ratepayers will be milked again and again.

Yes! North Shore ratepayers had it coming due to their high house prices bhuahahaha!

Not so funny for those with mortgages or on fixed incomes who will have higher rates bills which will essentially delay repaying the mortgage and which will either delay or reduce their wealth during retirement. And if mortgage interest goes up, it will not be pretty. For home owners, renters and retail. ie Almost everyone.

Nah you're all richies lying on the beach sipping cocktails. We can tap you for a LOT more.

Global city, Elysium, yada yada yada. It's never been cheap living in a global city. Once flat whites and Sky telly is cut out it's doable.

It mostly requires aggressive legislative attack on high regulatory costs, health and safety, pandering to Maori, Greens and Nimbies that make infrastructure impossibly expensive. Do that or find work arounds (tunneling). Status quo is unaffordably expensive and slow and won't even scratch the surface of the problem.

..

WOO INVESTORS ?

Please do me a favor ........... this is the Government couldn't woo an ant into a sugar bowl

They , who have summarily banned the whole oil and gas exploration industry , without any consultation whatsoever, has not a snowballs chance in hell of wooing any more money from anyone

We are now seeing the ramifications of decades of government budget "surpluses".

"We'll achieve surplus by undercooking our infrastructure obligations. What could possibly go wrong?"

It always comes out in the end.

She'll be alright, mate.

Why don't we just borrow a big chunk of the money from our own central bank - the Reserve Bank, That's what China is doing to fund its massive international Belt and Road infrastructure building. That's what Japan is doing and it has cut it's government debt in half (and the interest bill that comes out of taxpayers pockets).
If quantitative easing (the central bank issuing money) is OK for the European Central Bank, The Bank of England, and the Federal Reserve, to list just a few, why can't we do the same to build infrastructure assets.
Fine for taxpayers to pay for much private enterprise to build needed infrastructure, but why pay investors (read speculators) a profit to finance that building, when we could follow other countries lead and borrow from ourselves?