The latest OECD economic snapshot of New Zealand warned that despite a rebound in the second half of 2020, the economy was not yet on a firm footing.
They recommended the government swiftly implement the infrastructure spending component of the COVID-19 response package to underpin the recovery.
The reason for the urgency is that delays in spending risk being too late to play a part in the recovery and can actually be detrimental by overheating the economy. However concerns still remain about how quickly many of the so-called “shovel-ready projects” will get off the ground and if they do, how they fit into a national infrastructure strategy.
Global Gap in Infrastructure
New Zealand has invested well below the OECD average in its core infrastructure assets over many decades. Frequent reports of congested roads, fatigued rail tracks, water shortages and burst sewage pipes are a clear demonstration of the impact of this underinvestment.
According to the OECD economic survey of New Zealand in 2019, this has been exacerbated by the fact that local governments have borne much of the infrastructure costs with limited opportunities to recoup these costs through user charging and rates increases.
Source: Global Infrastructure Hub
Investment in road and rail infrastructure as a share of GDP
(average 2000-2010)
However, New Zealand is not alone in facing an Infrastructure deficit. The Global Infrastructure Hub predicts a US$18 trillion gap between the projected investment and the amount required to meet required global infrastructure needs by 2040.
The reasons for the persistent underfunding are complex. In the developed world an aging population has strained government budgets due to increasing costs of healthcare and pension obligations. At a global level, the world’s infrastructure is struggling to cope with the twin forces of urbanization and population growth.
Benefits of infrastructure spending during an economic downturn
Infrastructure investment has long been recognised as critical to long-term economic growth and progress. A review of 200 studies over the last 25 years by Global Infrastructure Hub concludes government investment in infrastructure is more effective than other types of public spending in increasing economic output, particularly over the medium term. In the short term, it can boost demand and in the long term increases both GDP and productivity.
According to an IMF study, the biggest return from infrastructure investments occurs during recessions when the spending is debt-funded, so it is not surprising that many countries around the world are now investing heavily in their infrastructure to spur economic growth.
A solution to our lacklustre productivity performance?
As well as boosting economic growth, according to the US Economic Policy Institute, infrastructure investment can improve a country’s productivity performance. It does this by first creating a tighter labour market through creating new jobs. This can already be evidenced in New Zealand’s where the growth in construction jobs has largely offset the losses in tourism-related jobs caused by the pandemic. Secondly and more importantly, investment in infrastructure can significantly boost productivity by increasing the “public capital stock” or the country’s physical capital. The EPI review of multiple studies on the subject indicated that for each $100 spent on infrastructure private-sector output increased by an average of $17 over the long run.
Shovel ready projects?
As of 28 January this year 170 shovel-ready projects with a total funding value of 2.6b had been announced by the Infrastructure Reference Group. However, there is still a big gap between the committed funding and the total cost of the projects. There are also real concerns that there is a lack of strategy and vision for the infrastructure development will be costly for the country in absolute terms and in terms of growth.
Funding announcements are important for building confidence, but as Sir John Armitt, the chair of the UK National Infrastructure Commission cautions the most important role the government can play is in establishing a clear strategy for what they are attempting to achieve with the nation’s infrastructure “Clear objectives should help build consensus across political divides and ensure longevity, which, in turn, enables investors to orient their portfolios.”
The NZ Infrastructure Commission won’t have a draft strategy available for consultation until mid-2021. While a national infrastructure strategy will be a welcome development, whether it will be in time to play a role in New Zealand’s post-COVID recovery is still unclear.
*Alison Brook is from the Knowledge Exchange Hub at the Massey University campus at Albany, Auckland. She is on the GDPLive team. This article is a post from the GDPLive blog, and is here with permission. The New Zealand GDPLive resource can also be accessed here.
62 Comments
They defer critical investments until a point where it's urgent. At this stage, it is already too late to work up a design, critique it well and train up locals to do the work.
As a result, we miss out on much of the economic benefits available during the long gestation periods by offshoring these high-value tasks.
Agreed, the cost/benefit model of selecting projects is seriously dysfunctional. Think Transmission Gully, Light Rail and the CRL snafu's. If that model had been used back in the '50s we wouldn't have the Waikato or any of the other major generation schemes. Mind you there was no RMA back then either.
Those CBAs have historically underestimated population growth, especially in our urban centres. Every Treasury release projects population growth to taper off in the medium to long-term.
The same goes for IRR - OCR and government borrowing rates have been low for a long time but default capital investments are discounted at 5% (6% for ICT and R&D).
V simply really.
People want stuff done by government that private sector will not take risk of doing
BUT won't pay taxes for it and government will not get elected by saying it will raise tax to pay for it.
So, it is borrow more or do nothing.
Infantile but all OECD countries in same problem, called electorate immaturity specially inculcated by right wing supposedly left parties, since 1976
A standard asset-accounting technique is to suit the depreciation period to the expected life of the asset. So long-lived assets (three waters etc, which often have a useful life measured in centuries) should have commensurately long depreciation periods. I well remember, as a lowly County Treasurer, establishing 'sinking funds' for the eventual replacement of newly built assets.
The issue with hidden services like three-waters is that their actual physical state is hard to ascertain, the plans to fix any breakage fall victim to the old adage that 'plans don't survive the first hostile engagement', and the political capital to be made by constantly maintaining hidden services is negative and at best zero. This neatly explains the deferment of maintenance until something lets go bigly. It's like maintaining an old house: one has to intone the mantra 'not level, not square, not plumb' before every job, in order not to be unduly surprised.
Whereas soft spend - the Social and Cultural Well-beings being a common money-pit - garners visibility, kudos and re-election prospects. And as Councillors are typical publicity-seeking show ponies, guess where the Spend is directed......
Agree with the underlying thrust of your argument - highly visible, vote winning projects get the money. However, my understanding of LG rates is that there is a portion diverted to "funding of depreciation" so therefor at the end of an assets lifetime the money is there (less inflation) to replace it. LG raids on the depreciation fund needs to be curtailed (if not banned). That fund was/is for the replacement of assets (i.e. 3 waters) and is not a slush fund.
Ascertaining the condition of the underground assets, with todays technology (GPR, USI, RVIs, thermography etc) is totally doable. It's about time the puffed shirts we call councillors started to realise what they are there to do - imo
I was on a County Council, and have mentioned the fallacy of 'Funding for Depreciation' here often.
The problem is that maintenance/replacement requires resources and energy. What is being put aside is digital '1's and '0's. Alongside trillions of debt-issued such numbers.
There is no guarantee that the digits can be traded for energy/resources when needed, and per time that gets less likely. Those fools believed the economics-fools - who are still taught this endless-supply/replacement-at-some-price-point nonsense at Tertiary level. And those who teach it, are given oxygen by those whose profession claims to be a little above unchallenged facilitation......
Good to see you've inadvertently admitted why our local infrastructure is in the state it's in - they employed idiots like you. Also interesting to read you mention "County Council" - hasn't been one of those for about 40-50 years. No wonder your diatribes are so far removed from reality - you're stuck in a time warp
Was that work on a sinking fund in the UK?
New Zealand council’s have routinely been calculating depreciation on pipe networks for at least two decades and at least some Council’s have been incorporating depreciation into their pricing so money has been taken in for pipe replacement.
The argument always was that it wasn’t necessary to spend all the money on pipe replacement – which up until now has been a sound argument.
The problem though is that it looks like none of the unspent money was salted away for the replacements that are now becoming necessary, and the money that could have built up into quite a warchest (which would have avoided the need for the type of rate rises we’re seeing in Wellington) was instead frittered away on general Council expenditure.
See my post above.
Also, there is the accelerating trend always associated with Entropy. There has never been more infrastructure in NZ (or on the planet) and it has never been older. There has therefore never been so much maintenance demand, and there will only be more per time.
And there has never been worse remaining raw resources, nor lesser surplus-energy energy. Both were continually cherry-picked. The graphs cross. Except if you are an economist - where permanent exponential growth is considered 'normal'.
pdk,
You seem obsessed with the word entropy. Let's take a simple definition; unavailability of the heat energy of a system for for mechanical work.
When will this occur here? According to the figures I have recently seen, the world's known oil reserves will last for some 47 years. Just how much progress might we make over that period-even if we find no other sources? If, as is likely, the oil price rises, then that will accelerate our move away from it.
You are exhausting and misinformed, the energy received from the sun, moving around with tides and locked up in the ground and sea (e.g. thorium, uranium, H2O) as well as in many other places is more than enough to meet needs beyond our wildest dreams. Even if we don't know how to get at the energy efficiently now based on 10,000 years of human history I bet we will at some stage. Humans have been sustainably unsustainable since before we walked out of the Africa and hunted to extinction all the large animals in the Americas. My bet is we have another 10,000 years of being unsustainable ahead of us.
As well as the above the human population of the world is starting to Plateau.
I'm not saying there isn't challenges that humans will need to overcome, but if you are betting we are going to 'power down' you will be still be frustrated it hasn't happened on your death bed.
And don't even get me started on the abundance of raw materials....
Sherwood, you've hit the nail on the head. The whole point of the depreciation fund was to indeed build a "warchest" for the ultimate need of replacement. Maintenance of assets came from a different funding source. The "unspent" money WAS supposed to accrue to a point where, if invested wisely, it would pay for the replacement costs - let's face it, if you can't get better than inflation on a multimillion dollar fund you should probably be fired. Unfortunately NZ had idiots like PdK, that drove their own misguided wheelbarrows which captured the gullible and now we have raw sewerage discharging into our harbours, fresh water mains erupting and people worrying about lead poisoning (not counting the Havelock North debacle)
The re-establishment of the Four Well-beings as the foundation objective of LG purpose is the culprit, Sherwood. The four: "to promote the social, economic, environmental, and cultural well-being of communities in the present and for the future" - Sec 10(1)(b) LG Act 2002 - . - are heavily weighted towards soft spend. And soft spend - the Yarts, Events, Buskers, handouts to 'local community development' all suck away the rates revenue or accumulated funds which should be devoted to checking the 3 waters, keeping roads, bridges, drains and waterways in good order.
The 4WB were introduced by Sandra Lee (Labour) in a 2002 amendment to the LG act, removed by National in a 2012 amendment, and reinstated by Labour in 2019. Hey ho - the soft spend - popular with all but fatal to infrastructure - continues unabated..... And LG generally completely disregarded the brief period - 2012-2017 - when their objective was good stewardship of assets. "to meet the current and future needs of communities for good-quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost-effective for households and businesses." The soft spend is now far too well retrenched to winkle out.
I get that the change in the LGA would have been part of it, but it seems like there needs to be more of an explanation as to why they would start charging for depreciation without setting up the dedicated funds for future replacement.
Do you know when charging for depreciation started?
To be fair much of the country still has old creaky piping with lead joins so we should all be worried about metals in the tap water, since none of the governing bodies are actually required to test for it and there are a lot of metals other than lead that can do far more damage, and a lot of pipe networks that are in much worse states of repair that can have problematic leaks & fouling going for decades. Add to that much of the nation already dumped sewage with stormwater for decades since it was designed longer than half a century ago so it has not been a new recent failing at all. In fact in NZ we are gifted with much of the country under threat from sewage flooding and overflows. Go team in focusing on the big issues, not those that affect human & environmental health but score media points instead that we can trade for carbon credits while the environment & public health goes to shi.
Is it any wonder when our politicians and bureaucrats behave as if we are still on the gold standard where money is a scarce resource that they have to scour the world to find.
In fact we now have a fiat currency where money is nothing more than numbers on a computer screen that can be typed into existence just by pressing keys on a computer keyboard at our central bank. The commercial banks are doing this on their own computers each and every time that they lend money.
We are told on a daily basis what the governments debt figures are as though it is the latest cricket score when in fact it is of no particular relevance to anything.
The governments debt is nothing more than a record of the money that the government has created through its spending but has not yet taxed back and cancelled. This is the money that is left in the banking system for us to keep as our savings. The government can then choose to hold this money in the form of bonds and pay interest on it.
I think there is a good reason why the AU and NZ economies have done so well comparatively over the last 20 years and especially through global crisis, and that is our low government debt.
Yes. Public debt is low, but private, particularly household, debt is high. Japan has superior infrastructure but their public debt debt is high (mostly owed to themselves).
Public debt is probably fine if you owe it to yourself. But we all know that wouldn’t happen here. In fact I think we run an inverse economy here: the more money people have, the more private debt we rack up with Australian banks! Best for the government to take as much as they can from us.
Best that you read this article by economist Warren Mosler. The 7 deadly frauds of economic policy. Have a look at fraud number two.
http://moslereconomics.com/mandatory-readings/innocent-frauds/?__cf_chl…
That is because you have the wrong understanding of the nature of money. It is not a physical commodity like gold. It is only a medium of exchange, something that allows people to trade with one another. Fiat money contains no value of itself.
The NZ Dollar is the governments unit of account and it owns the right to create it, it delegates some of these rights to the banks with special conditions attached and anything else would be called counterfeiting.
The money that the government issues can be thought of as tax credits. It issues them to us pay for the goods and services that we provide to the public sector and we then owe the money back to the government again in taxation upon which the money is cancelled, it has served its purpose and is no longer required. It has paid for all of the services that we and the government have provided to us all.
Alright treadlightly, assuming you're theory is correct- what would you trade for food when your services aren't required by the owner of the food?? I've got a cattle beast that needs killing - can you do that and process the animal? I need a fence line repaired - can you do that??. How about harvest some hay, bale it, stack it? The day you cloistered admin whallahs get out of the beltway and actually open your eyes will indeed be a watershed moment
As I said money is medium of exchange and it enables us to trade with one another. Trade involves exchanging money for goods and services. You seem to be suggesting some sort of barter system that doesn't involve money.
The government issues new money when it spends and it cancels money when it taxes. The Levy Economics Institute tell us here that taxation and borrowing do not finance the government.
http://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-g…
It seems that you do not understand what government debt is. It is our net money supply that is created by the government when it spends into the economy. Do you have any cash in your pocket or savings in the bank? This is all money created by the government. Otherwise all we would have for money is bank created debt. Economist Wynne Godley described with his theory of sectoral balances that a government sector deficit must equal a private sector surplus and that they are a mirror image of each other. Some further explanation here.
https://gimms.org.uk/fact-sheets/sectoral-balances/
Usual shyte. Interest.co should challenge some of the repetetive assertions:
Recovery and Productivity
I challenge the writer, and Interest.co, to defend both assumptions. Recovery from and to what? Because? Who asserted growth (because I presume it's a growth-recovery they're wittering on about) is available?
Who asserted productivity was anything more than energy-efficiencies, as in work-done per energy expended?
References please.
How about some references to prove that deenergising an entire economy leads to better outcomes for it's constituents?
Most people (my assumption) would prefer to avoid going back to subsistence existences whilst living in a naturally provided enclosure (i.e. a cave)
Last time people existed in your "energy neutral utopia" in NZ there was only maybe 100-150K inhabitants, large flightless birds were common and the average lifespan was about 40-50 years(max). Sure sounds like an ideal existence - although granted it was probably sustainable - until the largest source of non-human protein was wiped out. To have an idea of the ultimate result of that we only need look at Rapanui (Easter Island)
Actually there was a lot of starvation and early death then even with low population numbers and eating species to extinction. It was only when humans started large scale farming, burning for energy, metal work and construction for sourcing water & shelter that made the largest differences in human survival and allowed populations to increase significantly. You can only hunt species to extinction for so long before you exhaust the local supply of edible animals and need to move on. Hence early tribe migration patterns and nomadic cultural development. Even remote tribes to maintain their population regularly now farm local food sources, construct on clear felled land spaces, burn for energy and have metal tools. It makes the prechewed stewed plant and meat cook better.
Agreed. With the internet we can finally have direct democracy instead of representative democracy. In practise I am likely to assign my vote to someone I consider better informed with better judgement - lets call him an MP but it would be like assigning my votes at a shareholders meeting. There are issues I would retain my vote and make my own decision.
An assessment of whether or not we have an infrastructure deficit and the size of it depends a lot on what metric you use. I’ve seen research saying that our capital stock as a proportion of our GDP is actually relatively large, higher than almost any country except Japan which is a massive outlier.
I don’t think there is necessarily a ready link between infrastructure spending per se and additional productivity. Rather it needs to be high quality spending and we do need something like benefit-cost tests to ensure that happens. The fact that there aren’t stacks and stacks of projects with good benefit-cost ratios sitting on the shelf suggests that our infrastructure deficit may not be that large. Other than Wellington pipes perhaps.
Given that we’ve weathered the Covid storm quite well economically, I think there will be an argument for looking at whether we need to do all the emergency infrastructure spending. Rather we could start looking at those projects for which there is a clear need or high benefit from doing them.
Agreed, Sherwood (Murray? of Prod Commish?) But benefit/cost analysis goes squarely against Gubmint by continual polling, feelz, and public display of emotion which may be real but may also be open to the notion that 'if you can fake Sincerity, you've got it made'......
At base it's a matter of Trust. And trust in institutions is rapidly dissolving. So getting a 'publicly acceptable c/b study' is well on the way to being an oxymoron. Getting the best such option through the hoops into actual, real Action, is therefore, and likewise, a chimera....
We don't achieve good benefit cost ratios because of our population. One tool will simply never do it all, and especially not across different infrastructure types. That is oversimplification in the extreme.
For example, there is currently insufficient justification for Far North to fund either a satellite wastewater treatment facility in Waipapa, or to install a rising main system to Kerikeri. So they have on-site facilities within a mixture of commercial, industrial and residential zoning. Up until recently, they had wastewater discharging to ground immediately over the bore which supplied everyone with drinking water. Thank goodness the new drinking water standards put a stop to that. Other systems discharge to the roadside table drain (a number have a history of non-compliance with some very high ecoli readings) which then discharges directly into a local stream.
If a wastewater solution for Waipapa isn't even on the council 10 year plan for funding because they have more pressing issues (and trust me, they do), I just want to suggest that your interpretation that our infrastructure deficit may not be that large, because projects aren't meeting benefit cost ratios? Is full of crap... a bit like the town I mentioned.
Water and wastewater spending is just a small fraction of the projected bill: https://www.infometrics.co.nz/new-zealand-invest-129b-infrastructure-ne… I'm taking aim at the rest of it.
As I said in the example I gave, that infrastructure deficit isn't on their 10 year plan, so it won't be identified anywhere for funding. Many more like it. There is such a history of underfunding that the council's have given up identifying necessities, so again any statement to the effect that infrastructure is unnecessary because of cost benefit analysis is rubbish. Same goes for roading assets (which I assume you are targeting if you linked that article). In locations with lower population bases, there is inadequate infrastructure that is severing communities and effectively opportunities for those populations whenever there is a decent bit of rain. Those projects don't stack up because of these assessment profiles, and it sucks. And trust me, I am not a fan of inappropriate public spend, I literally refused to work on the Waikato expressway because it is a white elephant in my opinion, I am probably one of the more conservative engineers you will find in that respect. But we don't even know the real scale if the problem, so for you to say we are going to possibly overinvest?? Please just understand this is completely and utterly wrong. It's not even possible!
I am not advocating knocking all infrastructure spending on the head, but I am disputing whether we need to go on a $75b or $100b splurge like some advocates think.
The arguments for an infrastructure deficit of this scale usually rely on cherry picking the data (e.g. like presenting data for the 2000s like the article above does while ignoring we spent way more in the 2010s) or coming up with dubious arguments about the link between infrastructure spending and productivity. If you think the Waikato Expressway was a white elephant you should wait for the dross that we would be spending on if we tried to clear a so-called $75b or $100b deficit.
I didn’t say cost-benefit analysis should be used religiously in every context, but I do think that the lack of good benefit-cost ratios for large scale roading projects for example does indicate that we’re getting near scraping the barrel on projects like that.
I was not surprised to see how badly NZ has done, but was somewhat surprised to see Mexico at the bottom. I am in the process of reading a report on the global auto industry from the Feeral Reserve of Chicago and they cite one reason for Mexico's success in attracting so much investment as being the amount they have poured into their rail network in recent years.
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