By Claire Edmondson, Infrastructure New Zealand Chief Executive

This year’s Budget is set to place a heavy emphasis on health reforms and investing to meet New Zealand’s climate change goals.

The Government has also set new operating allowances at $6 billion for Budget 2022, which will then reduce to $4 billion for Budget 2023, and $3 billion for Budgets 2024 and 2025.

Investing to meet our climate change goals will be a costly affair. At the same time, the Government needs to ensure we do not wean off fossil fuels like natural gas too early to look good internationally, and become more reliant than we already are on imported fuels and more vulnerable to fluctuations in global energy prices. Russia’s invasion of Ukraine and the increased volatility in energy prices this has caused is a stark reminder of this.

Budget 2021 committed $57.3 billion for infrastructure between 2021 and 2025. The nation’s existing infrastructure deficit however is much more than that, with Treasury’s 2022 Investment Statement putting our combined infrastructure gap at $210 billion.

The Government does not have the financial capacity to finance the entire deficit itself and will continue to be forced to prioritise and stage projects – as is usually the case with public capital expenditure programmes.

There is a huge opportunity for the Government to partner with the private sector and take advantage of under-utilised private sector capacity. A partnership approach would enhance delivery capability and provide the ability to finance multiple infrastructure projects simultaneously instead of staging them, as is the current practice.

The private sector is well-placed to provide significant support in delivering the country’s infrastructure needs through its significant:

  • delivery capacity (and ability to quickly expand such capacity)
  • finance pool
  • commercial discipline
  • industry and technical know-how.

Partnering with the private sector allows private capital to fund public – and often social – infrastructure that would otherwise not be progressed at the pace our communities need it to be. Private capital plugs the gap by allowing projects that would have otherwise been delayed for several years to be brought forward, thereby reducing opportunity costs to society.

There has been a long-running misconception that the private sector makes excessive profits when financing public infrastructure. The reality is that the eventual cost difference between an infrastructure project delivered by the Government (e.g. under a cost plus contract type scenario) and a project financed by the private sector tends to be minor.

There are also structures – such as finance lease arrangements – that allow private sector profits to be capped.

When talking about private sector financing of public infrastructure, it seems to only mean public-private partnerships (PPPs). While these have become a common private financing structure of public infrastructure, PPPs are not the only ones.

Last month the New Zealand Infrastructure Commission: Te Waihanga told the Transport and Infrastructure Select Committee that the PPP model is used successfully internationally to deliver many projects, and that it has been delivered successfully in New Zealand for vertical projects across the education and corrections sectors. Te Waihanga went on to say that Waka Kotahi NZ Transport Agency had taken learnings from the Transmission Gully experience, and was applying it to their other PPP contracts such as the Pūhoi to Warkworth programme.

Te Waihanga earlier published PPP guidance for public sector entities that are considering or implementing PPP as a procurement option.

The use of private sector capability and capacity provides an important means to address New Zealand’s infrastructure deficit and there are many layers of opportunity to explore in this discussion. This is an area I am focusing Infrastructure New Zealand’s advocacy efforts on and look forward to bringing you updates in this space.

Finance Minister Grant Robertson will deliver Budget 2022 on 19 May. I will attend the Budget Lock-up briefing at the Beehive on 19 May and look forward to the Government’s announcements around infrastructure spend. We will be undertaking our own analysis and provide members with an update on the day.

 

 

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