Introduction
Thank you for having me here today and welcome to Wellington, the home of the Hurricanes, the next Super Rugby champions.
Infrastructure – the challenge
This government has inherited a series of big challenges in infrastructure.
I don’t need to tell an audience as smart as this one that we have a big infrastructure deficit. There’s a lot of debate about how big it is. That misses the point. The real question is what we do about it.
On top of this, to put it simply, the way we plan, invest, build, and manage infrastructure is inefficient and fragmented.
We have to do a better job of maintaining existing assets. That means funding both the up-front cost and ongoing maintenance of infrastructure over the life of the asset.
We need a credible pipeline of infrastructure projects to attract the capital and talent we need to get building.
We need to reduce barriers that are holding back infrastructure delivery and growth. It costs too much and takes too long to build infrastructure in New Zealand.
We need much more of a focus on value for money. Reducing the cost for each metre roads or rail will help close the deficit, improve resilience, and lift productivity.
And we need new ways to fund and finance infrastructure. That’s what I want to talk about today.
Funding and Financing Infrastructure
Cabinet has recently agreed to an ambitious work programme to allow the Crown and councils to more smartly and fairly fund and finance infrastructure and I want to run through some of the details for you today.
I want to warn you in advance. The work programme is immense and ambitious. Some of it will be, as I like to say “edgy”. That’s political code for “controversial.”
But as you’ve heard the PM say many times, this government was elected to make the tough decisions to get the country back on track.
We can’t shy away from tough decisions anymore. We simply have to do better. Decades of underinvestment in maintenance, poor use of pricing, an unwillingness to use private capital, and lack of desire to use new tools has really caught up with us.
Our Infrastructure Funding and Financing work programme has three pillars.
- Clarifying when the Crown will use its balance sheet to fund and/or finance infrastructure
- Broadening and enhancing the funding and financing tools available to the Crown and councils, and
- Modernising and developing the Crown’s policies, frameworks, and contracting models
Before I get into the details, let me just make a simple point about funding. Crown and council infrastructure has historically been primarily funded by taxpayers or ratepayers. Taxes and rates can be an appropriate source of funding for some forms of infrastructure, but our heavy reliance on this approach has resulted in the emergence of three significant challenges.
First, funding settings, like pricing, for many assets do not manage investment demand or signal where investment is required. This places pressure on the Crown and councils to build new infrastructure, rather than more effectively utilise existing infrastructure. The Infrastructure Commission has done really good work here. Our infrastructure deficit simply cannot be resolved from building new infrastructure alone, and an improved approach to utilising existing assets is necessary. One way to achieve this is through changing the way we pay for assets and services to better manage demand.
So yes, that means congestion charging to manage demand. It means water meters.
Second, funding models for many assets do not reflect the full economic cost of delivering the service. This means operational activities, including asset renewals and maintenance, often compete with wider priorities. A classic is water infrastructure. For years water infrastructure has competed for scarce capital with other worthy and not-so-worthy council projects. With respect, some councils, including here in Wellington, have funded “nice to haves” at the expense of core business.
Again, I’d point you to research from the Infrastructure Commission which shows the amount we are investing in renewals is far below depreciation for road and water infrastructure.
Third, and I hope you agree with me, councils are not currently sufficiently incentivised or equipped to deliver infrastructure in advance of growth, even when it is economically efficient to do so. The way current tools are designed and used, at times, struggle to recover the full cost of growth from users or beneficiaries. This results in a reluctance by councils to utilise existing tools, including making more appropriate use of financing or their broader balance sheet.
As a result the taxpayer steps up. That explains why we have a proliferation of Crown funding buckets for Councils like the Housing Acceleration Fund, the Infrastructure Acceleration Fund, and the NZ Upgrade Programme. This is unsustainable and often unproductive. You as councils spend a lot of time lobbying your local MPs and Ministers about ever increasing buckets of Crown money. This avoids the real issues.
So that brings me to the first pillar: clarifying when the Crown will use its balance sheet to fund and/or finance infrastructure.
This government is going to be more strategic and informed about how it uses its balance sheet. Rather than defaulting to the use of grants, our expectation is that every significant infrastructure project that seeks support from the Crown will consider opportunities for user-pays funding and private financing. If such opportunities are not available, we will expect to understand why and what the options are to ‘bridge’ to those opportunities.
We’ve started this process already. Simeon as Minister of Transport is soon going to confirm the new GPS for Land Transport. He’s already signalled that each of our new Roads of National Significance will be tolled.
Now obviously the Government remains committed to using its balance sheet for infrastructure, and grants will remain a core part of the funding mix, but we will preserve that capacity for investments where alternative options are not available or where it is more appropriate for the Crown to be the primary funder.
The next step in this work is for Treasury to develop and publish a set of principles that will guide the Crown’s rationale and approach to the provision of Crown funding and/or financing. The principles will set out the issues the Crown expects to have been considered before providing support to any infrastructure investment, including opportunities for private capital and existing infrastructure specific Government funds to be deployed effectively.
These principles will also provide clarity to Councils and agencies working across the infrastructure system.
The second pillar is to broaden and enhance the funding and financing tools available to the Crown and councils.
There are two key things I want to highlight here that I’m really excited about – value capture, and transport revenue reform.
There are lots of ways to do value capture and people have been talking about it for a while. I’m determined that we get on with it.
Put simply, value capture means that those who gain benefit from public investment help pay for it. We really missed a trick with the City Rail Link in Auckland, where landowners in and around the new stations are getting windfall gains as a result of public investment in a transformational new public transport infrastructure.
The Ministry of Housing and Urban Development is working right now on a sector agnostic policy framework for value capture. We’ll be looking at whether we enhance existing tools like levies, targeted rates and development contributions. We’ll also be looking at land acquisition prior to the announcement of infrastructure investment intentions.
Work is underway right now to improve the Infrastructure Funding and Financing Act. We campaigned on this and we intend to deliver it. Uptake of the mechanism has been relatively low since it was developed and it hasn’t really been used the way it was designed, which was to allow growth to pay for growth in greenfields housing developments. I view reform of the IFF Act to be crucial across our wider housing agenda and I’ll have more to say about that soon.
On transport revenue reform, Simeon has a massive programme of work underway to use better pricing on our roads. The first step was to make sure every vehicle pays for using the roads! Electric vehicles now pay Road User Charges so the free ride for people like me driving Nissan Leafs around town is over.
The next step is time-of-use pricing and congestion charging, to better manage demand on our roads and get more out of our existing assets. Tolling reform is part of that.
The third pillar is modernising and developing the Crown’s policies, frameworks, and contracting models.
Again, there is a huge amount of work to be done here. The Crown has not always been a particularly fair or competent client and I have directed Treasury to lead work on modernising our policies and frameworks. I view this as very important.
The Infrastructure Commission is leading work right now to modernise the PPP model with input from the Treasury. We want a best-in-class approach to PPPs. The last government just rejected private capital outright. Our approach is the exact opposite but it’s going to take some time to build up the commercial expertise and competence inside government.
I want to be clear that this government is open to PPPs, sale and leasebacks and unsolicited proposals for private sector infrastructure investment.
That brings me finally to City and Regional Deals, which I know there is a lot of excitement about. Simeon and I are working on a framework for how we will set these up, and once we’ve done that we’ll have more to say. I view City and Regional Deals as about the Crown and councils sharing their aspirations, agreeing on shared objectives, and looking at long-term funding and financing arrangements centred on economic growth, productivity and housing. We can build on some of the existing urban growth and spatial planning partnerships already in existence.
The tools I’ve talked about already – like value capture, tolls, and IFF transactions – will be part of these conversations.
Finally, no speech by me would be complete without talking about housing. You’ll heard me talk at length about our housing crisis. I regard changing the political economy of housing as very important in addressing it. That means two things. First, making sure that growth pays for growth, in other words, the beneficiaries of new housing bear much of the cost of the infrastructure required to service that growth. And then beyond that, making sure we shift the balance of views inside councils and inside communities to be more supportive of housing. I want councils to not see housing growth as a burden to bear but a benefit to be embraced. Housing growth is good for all of us.
So, I repeat today that we are looking at direct financial incentives for councils who facilitate housing growth. We have a coalition commitment to look at ACT’s idea of GST sharing and that will be part of the conversation.
Conclusion
There’s lots more I could talk about today.
Our plans for a new National Infrastructure Agency to help address some of the problems I’ve talked about.
A new consenting framework for infrastructure and regional projects. It’s not just Fast Track, but wider RMA reforms to make it easier to get things done in New Zealand.
Our plan for a 30-year National Infrastructure Plan.
There’s lots happening and I find it energising and exciting, and I hope you do too.
Can I say in closing that I am already really enjoying working with you all and I value our conversations both in Wellington and as I get around the country. What I’ve found so far in the job is that people know we can’t go on the way we’ve been. We have to change. My sense is that you’re up for it. The Government is too. So let’s make it happen.
Thank you.
Note to editors:
The cabinet paper underpinning this speech has been proactively released on the Treasury website.