The Future of New Zealand’s Infrastructure
This is my monthly column for the National Business Review, out today, accessible here https://www.nbr.co.nz/robert-macculloch-infrastructure/ or below (the NBR call me "Ivory Tower" or "IT", a nickname which I don't greatly like):
Although economists have become a hunted species in Wellington – probably because of their focus on efficiency, which makes the public sector uneasy – I did manage to track one down in the Windy City.
Geoff Cooper, who has a first-class honours degree in economics from Auckland University, is the chief of strategy at the Infrastructure Commission. Previously, Cooper was chief economist at Auckland City Council, before he left New Zealand for several years to study at Princeton University and then work at the US Treasury and New York Federal Reserve. So, having known him for ages, I asked Cooper to give NBR readers an ‘exclusive’ about what the heck’s going on with our country’s infrastructure. Here we go:
Ivory Tower: How big is New Zealand’s ‘infrastructure deficit’?
Geoff Cooper: The deficit is estimated at $104 billion, but that’s just a fraction of the real challenge. On top of this, we face a growing population (another one to two million by 2050); net-zero 2050 carbon targets and a need for greater resilience to a shifting climate; an unstable geology; a global pandemic; and evolving cybersecurity threats; to name a few. This is all before we consider the cost of maintaining existing infrastructure, which accounts for 60 cents in every infrastructure dollar.
The Infrastructure Commission (Te Waihanga) has estimated that building our way out of this would require an annual spend of almost 10% of GDP. That’s almost double current expenditure and is widely seen as unaffordable. As well as thinking about new assets, then, there is a clear need to identify opportunities to improve the utilisation, management, and maintenance of existing infrastructure.
IT: How did the deficit get that big? What’s gone wrong?
GC: The diagnosis varies across infrastructure sectors. In some sectors, such as telecommunications, New Zealand actually spends more than most countries, per capita.
Our energy sector was recently described by the International Energy Agency as a success story in the development of renewable energy. In these cases, effective and adequately regulated markets have allowed for security of supply.
In other sectors – such as water, transportation, waste, health, and education – performance is mixed. In these sectors, there is less use of demand management strategies (for instance, congestion charging or volumetric charging), and instead a reliance on centralised funding from taxes or rates.
These are sources that are easily squeezed as other priorities arise or as business cycles turn. In the absence of secure and adequate funding, and with more uncertainty about which projects might get supported and at what times, those delivering infrastructure often report that they cannot invest appropriately and attracting talent is difficult.
Environmental concerns IT: How do environmental concerns affect New Zealand’s infrastructure priorities?
GC: Infrastructure is regularly mischaracterised as a trade-off between the economy and the environment. In fact, the goals of infrastructure are often to improve the environment.
New Zealand has committed to net-zero carbon emissions, which requires a major energy transition and infrastructure investment levels not seen since the 1970s. Our aspirations for healthy and readily available drinking water and clean waterways requires adequate investment in wastewater treatment plants.
Moving to a circular economy where there is less waste means investment in recycling and resource recovery infrastructure. Supporting the growth of our cities can also be good for the environment. Bigger, denser cities where people live in smaller homes mean less electricity for heating, shorter car trips, and more use of public transport, emitting less carbon into the atmosphere.
Our regulatory system is not always environmentally friendly, however. The ‘effects’-based nature of the existing resource management legislation means that even projects designed to help the environment face considerable head winds because of localised effects. This is a common problem for networked infrastructure such as windfarms connecting to the grid because, by their nature, those benefiting are dispersed, while those experiencing effects are concentrated.
Poor regulatory policy at the local government level is another source of grit. For instance, zoning ordinances regularly act to spread economic activity across our regions and cities, resulting in low-density urban form. By limiting density, these policies can hamper the economic case for infrastructure.
Many of these issues are an outcome of increasingly complex consenting systems. One recent report by Sapere estimates the annual cost of consent is now $1.29b annually. That is roughly enough to meet our carbon emission goals. Infrastructure priorities IT: Do we need a list of New Zealand’s infrastructure priorities?
GC: The New Zealand Infrastructure Strategy recommends the creation of an independent infrastructure priority list (IPL). The purpose is to depoliticise infrastructure decision-making (one of the reasons Te Waihanga was established) and build consensus on key projects and initiatives that address significant long-term problems.
During times of economic stimulus, like we have recently experienced, the IPL could act as a go-to list for government investment. Projects would only make the list where a business case demonstrates public value for money, is aligned with strategic objectives, and is affordable. The list would build on the experience of the Australian Infrastructure Priority List, which was established almost a decade ago.
IT: How would these projects get funded?
GC: The purpose of the IPL is to build consensus on the infrastructure required to meet national objectives. It isn’t necessarily a funding vehicle, although there are examples where the two are linked. Centralised funds should only be used in certain circumstances, however.
Generally, infrastructure services should be paid for by those that benefit most. For instance, those filling up large swimming pools, watching more Netflix, or driving large trucks at peak times should pay more. When this creates issues of equity, as often it can, policies that target vulnerable New Zealanders should be used, resisting the temptation to reduce charges for everyone, which can exacerbate funding deficits without improving equity.
NBR Ivory Tower: So, there you have it. Straight talk, without political spin, it would seem. Straight from the horse’s mouth.
Robert MacCulloch is the Matthew S Abel Professor of macro-economics at the University of Auckland Business School. Robert MacCulloch Thu, 16 Jun 2022