The Infrastructure New Zealand Funding and Financing working group sees a real opportunity with the new Government to address our $210 billion infrastructure deficit, Policy Director Michelle McCormick writes
The group has been working with the INZ team to develop a Briefing for the Incoming Minister (BIM) which focuses on the successful delivery of infrastructure, and quick wins to support this that can be taken by the Government in its first 100 days in office. It takes a multi-pronged approach to bridge the deficit. In addition to the quick wins, several other areas have also been identified where further policy work to change settings will be required.
Three areas highlighted for deep dives are:
• Utilisation and improvement of the public-private partnership model to hasten delivery
• Evolution of the Infrastructure Funding and Financing Act
• Laying the Pathway for City Deals.
New Zealand’s glaring infrastructure deficit is not just an outcome of historical underinvestment but a formidable challenge that presents significant opportunities. New Zealand currently spends about 5.5% of its GDP on public infrastructure. To meet existing requirements, that needs to nearly double to 10% or $31b a year. The challenges are compounded by the current political uncertainties, diverse governmental capabilities in delivering infrastructure, and geographic and economic realities that discourage foreign investment.
A multi-stakeholder approach
A new approach is desperately needed, as we see delivery of infrastructure slow and get bogged down in endless business cases and decision-making gates. The Government, while a significant player, cannot shoulder this burden alone. INZ recommends a coordinated approach involving iwi, local governments, and the private sector. Key to this is legitimizing reframed public-private partnerships (PPPs) within government departments for projects over $100 million (where appropriate), enhancing the ability of local governments to fund critical infrastructure needs without hurting their credit ratings, and using the international experience of successful City Deals which support local aspirations through an enduring partnership with central government.
PPPs are not new to New Zealand, but the experience has been mixed. While they have successfully delivered projects in education, Corrections, and transport, New Zealand has also experienced some costly negative sides too. Lessons-learnt reviews need to shape future deployment of this model which involves long-term contracts where the construction of a new asset or enhancement of an existing one is financed from external sources, but the asset remains in public ownership.
Criticisms around cost overruns exist, but overall, PPPs offer funding flexibility, capital recycling, and international expertise. They do, however, require a nuanced approach in risk sharing and setting the affordability threshold.
Immediate action points:
- Streamlining PPPs: Make PPPs a business-as-usual model by creating a Cabinet requirement to consider alternative financing methods at the business-case stage. We seem to have gotten entrenched into viewing the Crown as the funder for all infrastructure, without applying some fiscal discipline and exploring the viability of different funding and financing options and establishing sustainable revenue streams.
- Local government financing: Amend the Infrastructure Funding and Financing Act to simplify approvals for utilising these financing tools. Also, consider separating water infrastructure assets from council balance sheets so that borrowing for long-term asset development and renewals is spread over an appropriate intergenerational timeframe.
- City Deals: Provide early clarity on the Government’s approach to City and Regional Deals. Explore alternative revenue tools for local government tied to agreed outcomes. City Deals offer a framework for collaboration between local and central governments, as well as the private sector, to drive regional economic growth. However, the success of City Deals hinges on various factors, including clear governance, well-defined roles, and a long-term, evidence-based strategy. New Zealand has much to gain from this model. Interagency collaboration will be key to delivering successful outcomes. INZ would like to see entities such as Crown Infrastructure Partners, Te Waihanga, and Rau Paenga collaborating toward a common set of actions for infrastructure investment, including City Deals.
- Social housing: An area marked for immediate intervention is a review of the settings for social housing delivered by community housing providers. Key stakeholders such as financiers and infrastructure investors need to be involved in this review, with a focus on identifying a more effective structure to enable the private sector to deliver social housing at scale alongside Kāinga Ora, enabling meaningful reductions to the social housing waiting list. Opportunities include implementing a standardization of the contractual framework and a review of the subsidy framework provided to community housing providers.
- Water infrastructure: The issues around water infrastructure still need urgent addressing, even if the decision is made to repeal the existing legislation. The need for investment in New Zealand’s three waters network is extensive, and the industry needs to gear up to accommodate the required works urgently. At present, our local authorities are constrained by the debt ceilings imposed by the Local Government Funding Agency to maintain the current rating settings. Trade-off decisions will need to be made to meet new water quality standards and manage asset investment in a sustainable way. The choices are to make changes to existing arrangements to achieve either balance sheet separation to enable finance on a standalone basis for water entities; or relax existing Local Government Funding Agency limits and enable a potential ratings downgrade so local authorities can raise debt to invest in the required maintenance and growth capex.
Infrastructure is a long-term investment in the country’s future. Immediate interventions within the first 100 days can set the stage for sustainable, inclusive growth. While City Deals are not a panacea, they could serve as a more streamlined pathway for locally informed investment decision-making. This, combined with changes to local government financing, can potentially bridge New Zealand’s infrastructure deficit and drive economic growth. Urgent action is needed to make these opportunities a reality.