At a glance
It is inescapable that third party investment will need to be part of the solution to New Zealand’s huge infrastructure shortfall. Third party funding tools, where appropriate, offer many advantages.
Each major infrastructure category in New Zealand presents opportunities to overcome the gap accessing funds desperately seeking good investments.
In Part I of this series on the infrastructure shortfall and ways to overcome it, we considered the scale of the problem. We also discussed how putting less into infrastructure than we should have for decades is coming home to roost. Finally, we considered some of the advantages of third-party funding, acknowledging that no silver bullet exists.
Our attention now turns to an evaluation of the third-party funding tools available, which sectors are already in play as far as third-party investment goes, and the main opportunities for New Zealand to apply third-party funding.
Open wide: the range of third party funding tools
There are two main types of third-party investment – direct investment into existing privately-owned infrastructure or publicly traded infrastructure businesses; or via some agreement with government agencies. We touched briefly on these in the earlier paper but will look at them in more detail here.
Direct investment by third parties is the most common and well-known mechanism, whether for infrastructure or some other purpose. It is already possible for private parties, including from overseas, to invest in new-build housing in New Zealand, to purchase shares in publicly-traded infrastructure such as Auckland International Airport or energy generators, or to buy infrastructure that has already been privatised, such as some of New Zealand’s lines companies.
There are at least five further types of investment by arrangement with local or central government:
- Asset recycling
is where assets owned by central or local government and with an established financial value are sold are sold to a private third party. But a key difference to direct investment described above is that the proceeds from the sale are directly invested back into more infrastructure by the government agency. An example was the sale of the old Auckland City Council works depot to help fund Britomart train station. Asset sales can be politically contentious; more support is likely if the government agency can demonstrate how those funds will be directed into much needed infrastructure.
- Developer agreements
are signed between developers and a council and/or central government. They allow for the direct provision of infrastructure or land for infrastructure by the developer. The developer agreement can, in these instances, replace other funding options that would otherwise have been applied, such as Development Contributions. They typically run along the lines of the land developer directly providing certain infrastructure at a certain standard as a prerequisite to approval for development of their land.
- Public-Private Partnerships (PPPs)
allow government agencies direct access to private capital for investment in infrastructure. The various sub-types of PPP may be suitable for different scenarios. Toll roads, for instance, may use a Build-Own-Operate-Transfer model of PPP, where the private investor covers the full cost of the infrastructure, benefits from the revenue, and then transfers the asset to a government agency at a future date for a nominal figure. Examples in New Zealand include Transmission Gully and the prison at Wiri.
- Transit-Oriented Developments (TODs)
can access private funding by offering improved land zoning to a private land owner in exchange for delivering transport infrastructure, typically along a corridor. The private investor can apply the increased yields from the zoning uplift along the corridor to building the infrastructure. This option requires local government, and potentially central government, to work with the private investor to ensure zoning rules and infrastructure requirements align. One example of a TOD in New Zealand was the New Lynn/Lynn Mall transition (train/bus interchange) and level crossing removal.
- Incentives
are a catch-all term for subsidies or concessions to attract investment. Examples include concessions to SkyCity in exchange for building Auckland’s International Convention Centre. Other tools used internationally include tax incentives to encourage businesses to invest in a particular region. One challenge with these incentives is that they typically have to be separately legislated when new categories are introduced, which can be a complex and lengthy process. They can also be politically fraught.
Does this feel better?
In an earlier paper on funding tools available to local government, we talked about several criteria that need to be considered in selecting the right funding tool for an infrastructure investment. Third-party funding of investments will be evaluated against the set of tools already routinely used in New Zealand. They will not always be the best option.
So where is third-party funding already being applied in New Zealand and is there scope for more of it? The private sector already plays a major role in housing, energy and tourism infrastructure. Central government plays a leading role in transport, housing, social and energy generation and grid infrastructure. Local government plays a key role in water, transport and tourism infrastructure.
Housing infrastructure
The vast majority of housing in New Zealand is privately owned and funded, while more than 67,000 social houses are provided by Kainga Ora, funded by central government.
As house prices have risen faster than incomes, Community Housing Providers (CHPs) have entered the market to provide alternative pathways to home ownership, including shared equity and rent-to-buy schemes. Several iwi have used land owned in common among many Māori people within an iwi or hapu to develop papakāinga housing for Māori, effectively providing “free” land to the potential occupants of the home.
New Zealand has been a late adopter of build-to-rent programmes, with the private sector providing medium to high density developments purpose-built for renting. With longer lease-terms, tenants and owners have greater certainty.
Opportunities: There are few barriers to investment in new housing in New Zealand, subject to Overseas Investment Office approval. With an existing national shortfall of perhaps 20,000 dwellings, and a sharply growing population, there is huge potential for more involvement.
Transport Infrastructure
State highways are funded 100% by central government through Waka Kotahi, the New Zealand Transport Agency. Local roads are funded roughly 50:50 between central and local government. Cycling and walking lanes are also funded by a mix of central and local government funding.
Rail infrastructure is typically funded directly via the state-owned enterprise KiwiRail. KiwiRail has required top-ups from central government in recent years as it has been loss-making. It faces major investments accompanied by a desire to shift more of the freight task onto rail from road.
Opportunities: Only three toll roads exist in New Zealand; however, the last two have both been added in the last decade under the previous National-led government, suggesting appetite exists for PPPs. Rail and bus commuter service contracts are typically privately operated. TODs for major infrastructure such as rapid-bus routes would be game-changers for city-shaping and congestion reduction but will require local councils to provide the zoning changes needed along transport corridors.
Social infrastructure
Hospitals and schools are overwhelmingly funded by central government in New Zealand. But the government’s role is to provide health and education services, not to own hospital buildings or schools.
At the local level, libraries, museums, swimming pools, community centres and in many cases stadiums and sports parks are owned or significantly subsidised by local councils.
Opportunities: The new governing Coalition’s commitment to investigate building and lease-back of hospitals suggests a strong appetite for better health facilities. With the long wait lists in public healthcare, there has also been an increase in private health insurance. This may support the growth of more privately-provided healthcare facilities in New Zealand. GP services especially in towns of 10,000 to 50,000 are underprovided from both a service and infrastructure perspective.
At the local level, historical under-investment in community infrastructure is a major challenge to councils, who simply do not have the finances for major newbuilds of all their local amenities. As a result, many councils are developing community hub type models, where multiple sites for different amenities are consolidated, allowing land to be sold to fund a new development on a single site.
Tourism infrastructure
Approximately 93% of tax revenues are collected by central government in New Zealand and only 7% by local councils. Yet impacts on infrastructure from a seasonal influx of tourists are felt locally and funded locally. Some towns experience a doubling or more in their populations during high-season.
Opportunities: One model receiving increasing interest is the delivery of integrated conference and event facilities with hotels and other tourism-oriented amenities. Councils are more open to partnering with the private sector to deliver these precinct-style outcomes, where they directly negotiate a precinct development with a private developer.
Energy infrastructure
All of New Zealand’s four major electricity generators have private investment. Transpower owns the national power transmission grid for bulk distribution of electricity and enables competition in the energy market. Local distribution lines companies were set up in the 1990s, allowing for mixed ownership. Some lines companies are privately owned outright, including by overseas-based firms.
Opportunities: The energy sector is ripe for disruption as new technologies emerge. Decarbonisation of the vehicle fleet will lead to much more demand on the electricity network. Significant international investment is likely to be welcomed. Close work between government and overseas investors would be needed to accommodate change.
Water infrastructure
Water storage and treatment, as well as stormwater management, are currently the responsibility of local government in New Zealand. The incoming government intends to continue to implement a water quality regulator and an economic regulator. If the regulators have the enforcement powers to significantly accelerate water improvements, it will create challenges for councils given the costs of improvement. This may lead to a more organic process of amalgamation or shared services.
Opportunities: It is unlikely that many of the smaller, less financially capable councils will be able to afford the upgrades being proposed. This will likely lead to a combination of a slower pace of change and more direct investment by central government or other third parties. Fresh or wastewater treatment plants are one stand-out example where third-party investment may be welcomed via PPP.
Leaving the consultation room
There is little time for more consultation if we are to reduce the massive infrastructure shortfall. In Part III of our series, we intend to provide an overview of how overseas jurisdictions across the GHD global network deal with inward investment, and the appetite for investment from offshore into New Zealand.
David Norman is Chief Economist Australia and New Zealand, at GHD. You can contact him here.
14 Comments
The NZ Dollar is a fiat currency and the governments unit of account and so the government creates new currency each and every time that is spends. The only problem that we have is that our politicians and the vast majority of economists don't understand this fact.
If the resources are available then the government can always afford to employ them. Someone should explain this to Nicola Willis when she says that the government cannot afford the new ferry terminals.
The Public Purse lecture with Stephanie Kelton. https://youtu.be/6IBEoWSiTHc
What I have described is how our monetary system works every day of the week while taxation and borrowing never finance our governments spending, we spend the governments money and it never spends ours and taxation is only used to cancel the governments currency again after it has been spent Argentina doesn't have a sovereign currency as it borrows in foreign currencies and the commercial banks create the majority of our money as credit at around $600 billion anyway.
https://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-…
money creation on NZ, https://www.rbnz.govt.nz/-/media/518b0156a77949d08cfee13723f98974.ashx
Given the massive infrastructure backlog ... Isn't it time we recreated the Ministry of Works?
The MoW provided a valuable foil to ensure projects were realistic and fully costed. And when they bid for a bit of work, either wholly on their own or as a project partner, (as a non-profit supplier) they set the benchmark.
And with the massive backlog, they wouldn't be, as many used to claim, "sitting around waiting for the next project".
NZ Inc's enthusiasm for neo-liberalism saw many non-profits sold off. Isn't it time they came back now we have seen what an abject failure neo-liberalism has been for everyone except the very rich?
Albanese Government can find money for infrastructure https://independentaustralia.net/politics/politics-display/albanese-gov…
Yep, typical economist speak and further privatisation of the commons. What can ya do though when rent seeking is the most prized game, the foundational belief structure? We were warned about it yet the laws and narrative were written to encourage and justify it.
Even if they were viable options there would need to be a massive reset in "prices" for them to be affordable to the public.
100% AR.
When you add business to the mix you have to include a(ever increasing) profit margin and there is nowhere else the extra money can come from but our pockets.
The health care model is being exported from the US, where it's 1000 time more broken than ours, their government spend on health is 30% of their annual budget and when you consider a large portion of the population pay for private health care which is not cheap AND they often have to pay a top up on top of the amount the insurance pays out for a claim. The future of NZ?
"an increase in private health insurance" fun fact health insurers can discriminate against people by birth and so deny all forms of insurance, even life insurance in the event of a plane crash (because as I found out they blame a victims genetics and not the pilot who crashed the plane or maintenance faults that caused the issue). Yep insurers are such a trustworthy bunch who are known for ethics and non discrimination. Complete sarcasm in this sentence because the operating model is to discriminate against most people, show immense bias, and put profits over human life.
Even ACC is well known to discriminate claiming that a 30year old losing vision due to burns caused through a work accident was degeneration by age, a physical assault causing bone and joint breaks was degeneration by age at the age of 40, that those with TBI & repeated concussions must just be depressed and their inability to physically perform neurological tasks and having to relearn how to read and write must just be anxiety "all in their heads". That those with disabilities unrelated to the effects of injuries caused by accidents are often just denied ACC cover & support outright. Which is telling. Even Our Public Insurance is highly discriminatory and fails in its obligations under the law. Resulting in millions wasted in court cases and legal fees every year just to deny people the cover that would have cost less if it was rightfully provided in the first place.
"This may support the growth of more privately-provided healthcare facilities in New Zealand." Yeah even now they don't do this even with both private and public insurance making up the bulk of orthopedic & specialist access. We literally do not have public capacity so we are losing the ability to train specialists. With private insurance bodies are just happy to offer even less specialist access coverage to their customers resulting in literally zero access for critical specialist needs in many regions. Go on test having a severe infection of the skin & nails causing severe pain and loss of mobility of the foot joints and try to get access to a dermatologist through your insurer before you need emergency access to save your life before you die of sepsis. In many regions in NZ the feet & skin are not covered even though it is hard to get outside and go to work without them. In many NZ regions allergy specialists are not covered even though this is a deadly condition well known for deaths & disablement worldwide. Sadly as you go down the list of specialties most will not have an insurer approved provider available to make an appointment with in most NZ regions. Keep this in mind that even private medical access is exceptionally limited in NZ. As you get older you may need to make a careful decision on where to live based on common health risks; best bet is moving to Australia.
Yes, ACC is well and truly broken. Very much run like a corporate entity. It is supposed to cover the cost of treatment, but it now costs $50 to see a physiotherapist. This means that ACC is only paying about half the cost of treatment. And yes ACC will decline your cover at every opportunity.
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