By Gareth Vaughan
New Zealand should be working towards a 100-year planning horizon when it comes to infrastructure, and viewing planning as "an exercise in dynamism and inquisition" rather than a "bureaucratic exercise."
That's the view of Geoff Cooper, General Manager of Strategy at the New Zealand Infrastructure Commission.
Speaking in interest.co.nz's Of Interest podcast, Cooper argues planning gets a bad rap.
"It's seen as a bureaucratic exercise and it should be seen as an exercise in dynamism and inquisition. I think we need to see more of this planning expertise coming into government, and planning happening from a much earlier period of time, front footing the needs rather than waiting for them to be in front of us," Cooper says.
"Getting ahead of the planning cycle is a really obvious place to start. And start identifying options before we get into solutions because the moment a project is announced you've created interests. The moment you announce a project all of a sudden there's interested parties. And once there are interested parties, whatever the project is, it's very difficult to do optioneering, almost impossible."
"So what we would say here is think slow, act fast. Go through a slow, rigorous planning process, identify your problem definition first ... then once you've got a preferred solution which you've stress tested, then you get on with it and do it as fast as you can," says Cooper.
In terms of the sort of timeframes we should be thinking about for infrastructure planning in New Zealand, Cooper says there's no firm answer.
"But certainly I would be thinking [a] 100-year [time]frame personally."
In the podcast Cooper also talks about the five key drivers of infrastructure demand, NZ's infrastructure deficit, how our infrastructure needs are changing, project selection and delivery, why big projects always seem to cost more and take longer than expected, funding, financing, contestable infrastructure priorities, plus the resilience and sustainability of infrastructure.
"What we're dealing with here is uncertainty and risk. As we're building our new infrastructure what we're seeing are the risks associated with climate change, and the level of resilience that we need, is far higher than what we thought. In fact a lot of our infrastructure is simply not designed for the level of resilience that we need today. And it's going to take decades to get it there as you've seen with things like the earthquake strengthening. The difficult thing with resilience, of course, is out of sight out of mind. It's very difficult to get the acceptance that we need to invest in something that you may or may not need in the future. So it becomes a very difficult thing to sell," Cooper says.
*You can find all episodes of the Of Interest podcast here.
20 Comments
Cost blowouts everywhere, poor maintenance, slow and overkill upgrades, avoidance of satellite builds...Lets look at roads as an apple pick...How much clutter can you jam onto the road...lol Im all for design but creativity is an added expense .... I suspect billions of dollars are wasted that could be better spent developing satellite cities...cities that link or are in between other yet to be developed regions...rather than hogging funding to build jungles. Take the strain off the current and build more expansively...the sheep and cows wont know the difference.... Earthquake strengthening of existing builds is not financially viable in many cases let logic prevail and taxpayers benefit from the savings. Likely cheaper to replicate the features and build elsewhere. Wait ! ...this all makes too much sense it will never happen....
Like the civil service, creating infrastructure has become a talkfest. With vast costs in the talking. And then they get it wrong anyway.
Look at the cost outrages. Can be double and triple or quadruple. You can do fixed price work. But you do need a competent client. And we don't have that.
Given the unavoidable %$#@ fight that there is going to be for materials and labour in renewing water infrastructure right across the country in a narrow time frame.....think of a current estimate from your local council on what the costs are going to be and multiply by x.
That is not exactly accurate in well managed cases. Auckland Council's Central Interceptor project (actually a Watercare project) had a budget in 2018 of $1.2 bln. There have been project extensions added since taking that budget to $1.3 bln. The pandemic inflation surge has caused it to go over budget but only by +$200 mln. The extended project will be completed in 2025 for $1.5 bln. This is a huge project with huge benefits for Auckland's water management. The over-budget costs seem entirely reasonable to me and minor in the circumstance for such a large project - plus 15%. I would defend the CIP as a well managed local water project. Most Watercare projects are well managed, proving it can be done.
Indeed. As Geoff says in the interview - the 'blowouts' are often the result of optimistic or ill-informed initial estimates coupled with inflation, which is compounded by delays. For example, let's say you were costing a project in 2019 for delivery in 2021. Your project is going to need $1m worth of butumen, pre-formed concrete, and fabricated metal products. Given historic trends, you would have been safe to assume around 2% inflation on the price of those goods. So, you would factor in a cost for 2021 delivery of about $1.05m.
So you win the tender and the project is all go. Then COVID hits and everything gets delayed meaning your project actually delivers in mid-2023. Now your bitumen, concrete and metal products have gone up in price by 30% over those four years (avg 7% per year) so, on those materials alone, the costs have 'blown out' by 30%.
The challenge as a provider bidding for these contracts is that you now have to price these kind of risks in to your quotes - or manage them out by negotiating appropriate contract terms. This requires more sophisticated procurement arrangements than a lot of public bodies can support. Especially piddly little councils.
a comparison of typical project costs would be awesome too. as per the recent article in NZ media on pedestrian crossings (Auckland cost vs Wellington). And updated every year. It shouldnt be hard to do.
Then when we elect a mayor and counsellors we can take into account how well they manage their costs vs others.
Might see such a report after i see my first unicorn.
I always enjoy your interviews Gareth, and Geoff clearly knows his onions on the infrastructure stuff... BUT, good lord, Geoff's misunderstanding of Govt financing tools is really worrying. Do the people at the top table in Govt on infrastructure really believe that Govt has to go and 'raise the money' for infrastructure investment from private capital or taxpayers? Do they understand how Govt actually financed and built all of that infrastructure in the 40s, 50s and 60s?
There's a particularly troubling point in the interview where Geoff quotes some mad as a hatter numbers on how NZ Govt debt to GDP would have to go up to 98% to support an extra 5% of GDP investment per year in infrastructure. This is TOTAL nonsense and can be easily disproved. Let's walk through what would actually happen if Govt chose to spend an extra 5% of GDP ($20bn) on infrastucture per year...
- RBNZ would debit the Crown Settlement Account at RBNZ by $5bn dollars in the first quarter and credit the Institutional Settlement Account of a commercial bank (Westpac) by the same amount - $5bn. The commercial bank would then credit the bank account of the Govt agency paying for the infrastructure investment.
- As soon as that first $5bn hits the commercial bank's Settlement Account, the Crown starts paying daily interest on that $5bn at OCR (currently 5.5%). This is when Govt 'goes into debt' - when RBNZ debits the Crown Settlement Account and credits a commercial bank's Settlement Account.
- Now, the Govt agency pays that $5bn to companies to put pipes in the ground, build flood defences, etc.
- Once that $5bn is being spent in the economy, what happens? People get paid, people go shopping, materials get bought, people get paid etc etc. As these transactions take place, people and companies pay taxes and quite a lot of that $5bn flows back into Govt bank accounts. Remember, the more Govt spends, the more tax comes in. Let's assume $4bn of that $5bn flows back into the IRD account in the first year.
- RBNZ would then debit the Institutional Settlement Accounts of IRD's bank by $4bn and IRD's bank would debit the IRD bank account by the same amount. RBNZ then credit $4bn to the Crown Settlement Account. These transactions reduce the 'Govt debt' by $4bn (meaning that Govt stops paying interest to the commerical bank on that $4bn).
- Where's the other $1bn gone? The private sector (households or businesses) have stashed it in a savings account or a term deposit somewhere - they have got $1bn richer. Yes, Govt spending $5bn and taxing $4bn means that the private sector has $1bn that it didn't have before. This is where well-targeted taxation comes in - to take that money back from people that are hoarding it.
Now, let's review what has happened here. Govt has spent an extra $5bn per quarter, or $20bn in the year. They have given that $20bn to the private sector to build infrastructure. Govt has then collected $20bn of taxes from the private sector. Govt debt to GDP has not changed. Private sector financial wealth has not changed. What has happened is that people have done some work, jobs have been created, raw materials have been used, companies have built stuff.
As Gareth notes halfway through the interview, it is the supply of labour and materials that is the real constraint on our infrastructure development. It is NOT however a funding challenge. Economists get this wrong because they wrongly assume that Govt borrows funding from a limited pool of private sector funding before it can spend. This is simply wrong. We used to understand how things really work - it's how we financed wars and built loads of stuff. Govt creates money when it spends, destroys it when it taxes.
Apologies for the long rant folks.
There's a particularly troubling point in the interview where Geoff quotes some mad as a hatter numbers on how NZ Govt debt to GDP would have to go up to 98% to support an extra 5% of GDP investment per year in infrastructure.
Just for a bit of perspective, govt debt to GDP of countries with comparatively better infrastructure:
S'pore - approx 160%
South Korea - 50%
Japan - 262%
Netherlands - 50%
Japan is an outlier and fits the bill of having an 'infrastructure surplus'. Compared to the other countries (and NZ), Japan has a much lower h'hold debt to GDP.
Netherlands and South Korea have lower govt debt to GDP, but obviously NZ would unlikely match their infrastructure if our debt were similar.
Yes, that's right. Infrastructure spending leads to a BoT deficit, which shows up as a increase in NZ dollars or NZ govt bonds being owned by overseas investors (what I would describe as 'offshore savings'). Obviously it is hard to retrieve those savings with a trade deficit.
But, for me, this just emphasizes the need to be strategic with infrastructure investment - eg electrification of transport (and mass transport systems) will reduce the BoT in the long run as we import less fuel - and cut carbon emissions.
"eg electrification of transport (and mass transport systems) will reduce the BoT in the long run as we import less fuel - and cut carbon emissions. "
Agree with the end goal but foresee issues with the transition....always remembering that any such transition will require the acceptance by (majority of ) the population.
Such a transition would require a significant change in lifestyle for a large portion of the population.
Hi JFoe - thanks for your comment on this - and i'm really glad to see it getting attention. It's a large number. It comes from a piece of work to help contextualise the equally large numbers that are thrown around in infrastructure. You can find more detail in our BIM and we're intending to publish further in this space (let me know if you want to stay in touch on this). We think this is important because, at least in my experience, a billion dollars has more zeros than people know what to do with.
I didn't have time for this in the podcast, but the three scenarios we look at to fund the deficit are 1) keep revenue constant and throw it all on the credit card (98% GDP); 2) fund through higher taxes/rates (3 percentage point increase in tax:GDP ratio or a 21% increase in average income tax) and 3) fund with higher infrastructure charges (38% increase in spending on infra services). In reality, there will be a combination - but we're offering corner solutions to help draw lines on the option set. Importantly, i'm not taking a view on likelihood or desirability here.
You've taken issue with scenario 1 and if i understand correctly, it is because you believe that the asset will likely generate additional revenue for the investing institution. This actually puts us more into scenario 2 - so the empirical question is whether the stimulus you speak to would result in a tax:GDP ratio increase of 3%.
Ok. This certainly could happen, but it may not. As it turns out, it is highly dependent on which institution is doing the investing, the investment type (economic, social, green), the economic cycle and how good the project is. Local government or commercial/regulated utilities don't benefit from the tax increase you speak of, but make up 54% of our infrastructure. Similarly, the project could be labour intensive or capital intensive, with big differences in tax treatment. The investment could occur in a market constrained by resources, where additional investment might be pro cyclical, so we'd be worrying about inflationary effects and questions of additionality, with the potential of funding more projects than our market capacity will actually allow.
These issues are material to the question of revenue generation. Thinking more about the 54% of providers that are not central government - this group needs to be far more intentional about revenue. If they choose to debt fund without any additional revenue, at some point debt limits are going to come into play (known as covenants for local government and the LGFA). Some already are. Breaking these is very difficult because of public tolerance, political contestability, increased debt servicability costs etc. In my experience, LG is far more likely to slow down capital investment (even strongly net positive ones) than blast through covenants. This is where IFF is starting to play as I mentioned in the podcast.
The last point I would make is that this is not just an issue of raising funds for capital expenditure. Far from it. Roughly 60% of our infra dollar needs to go on maintenance and renewals. This has to be funded over long periods of time. The economic stimulus revenue is long gone at this point. You might have higher ongoing taxable income if the project is net positive economic infrastructure (investment that has a long run impact on productivity), but far less likely if it is social infrastructure, reinstatement from natural hazards or green infrastructure (for instance, swapping carbon intensive with clean energy). To my mind, these project types are starting to make up a larger proportion of our needs. Debt funding is of course a poor answer to our hefty opex and maintenance requirements; for Local Government, it is impossible, because of legislative requirements to have a balanced budget.
Geoff
I am flattered that you took the time to respond, Geoff, thank you.
I think there are a few points that I would ask you to mull over.
It is correct that Local Govt borrows and collects revenue so that it can then spend. When Local Govt borrows money, there is a transfer of cash from the private sector to the Council who then spend it (and start repaying the debt etc with interest). However, National Govt spends before it 'borrows' / collects revenue. To put it another way, when National Govt spends there is a corresponding increase in private sector net financial worth - new money is created. When Govt taxes the private sector, the net financial worth of the private sector reduces (money is destroyed).
Understanding this was key to infrastructure investment in the mid-20th century. Govt (supported by RBNZ) spent new money into the economy to pay for infrastructure. The spend on that infrastructure generated additional economic activity and productive capacity, which then led to increased taxation revenue. The State just ran 'bigger' for a while.
For example, in 2026/27, NZ Govt plans to spend about $150bn and tax back $150bn (a balanced budget). They could achieve the same balanced position by spending $170bn and levying taxes of $170bn. The private sector is no worse off in aggregate under either the $150bn or $170bn scenario. There are obvious distributional impacts of course, and obviously what can be achieved with the extra $20bn of expenditure depends on the availability of real resources. But, you'll get the gist.
Most economic models that I have seen Govt / consultancy economists use make the mistake of assuming that Govt spending is debt-financed - i.e. that private sector net financial worth is reduced when Govt 'borrows to spend', and that the private sector then has less money to spend as a result. This is the opposite of what actually happens - Govt spending adds to private sector cash balances.
The investment could occur in a market constrained by resources, where additional investment might be pro cyclical, so we'd be worrying about inflationary effects and questions of additionality, with the potential of funding more projects than our market capacity will actually allow.
This is the point I was (not very eloquently) trying to make above. For every council that is drawing up long term plans with today's numbers, maybe some allowance for inflation, I can see them getting tripped up when they are all fighting for a labour and resource pool not big enough to get all renewal works done concurrently. And it's not like a new road when we've got existing roads. These are pipes that so many people rely on for drinking water etc.
I think we need to see more of this planning expertise coming into government, and planning happening from a much earlier period of time, front footing the needs rather than waiting for them to be in front of us," Cooper says.
He's advocating for a revamped Ministry of Works in other words. How ironic given that the Infrastructure Commission sits within the Treasury, which led the assault to kill off the MOW off in the 1980s. We've come full circle it seems.
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