Budget 2021 Analysis for Infrastructure NZ Members

20 May 2021 3:00 PM | Anonymous

Budget 2021 continues with its wellbeing approach. The budget is guided by three overarching policy goals for the next three years:

  • continuing to keep New Zealand safe from COVID-19
  • accelerating the recovery and rebuild from the impacts of COVID-19
  • laying the foundations for the future, including addressing key issues such as our climate change response, housing affordability and child poverty.

The four priorities of Budget 2021 are:

  • continuing the COVID-19 response
  • delivering priority and time-sensitive manifesto commitments
  • supporting core public services through managing critical cost pressures
  • continuing to deliver on existing investments.

Infrastructure Sector Overall

Budget 2021 is a mixture of good news for the infrastructure sector, and some disappointments.

The budget signals the government’s commitment to Three Waters, with 40% more cash ($296m newly committed) available.

It also signals a big commitment to rail, with an additional $722m capital for Future of Rail, most of it for rolling stock and two new capital bases in the South Island (Hillside in Dunedin and Waltham in Christchurch).

There is an investment in encouraging New Zealanders to shift to low-emission vehicles ($300m), a new regulatory standard for clean cars ($16m), and capital to Scott Base ($306m) and the civil aviation/aviation security estate ($113m) up to scratch.  School property maintenance receives a $634m injection of capital.

Big Picture

The Finance and Infrastructure Minister, Hon Grant Robertson, told analysts and media in Wellington that he wanted to provide confidence in the infrastructure sector, with a clear signal as to how much work will be coming.

Total (net) capital investment – including in rail, roads, water, and health - over the near term (five years) is close to $60b. Waka Kotahi will spend $10b over five years on public transport, and roads.

However, nearly half of the $60b will be invested in the 2021 and 2022 years, with capital investment trailing off by 2025. Net capital spending in 2025 will be about $8b, half that in 2022.

So, for infrastructure, the near term looks sunny. The longer-term needs attention.

Reading the Small Print

Elsewhere, the small print reveals the government is under considerable pressure with the New Zealand Upgrade Programme (NZUP). The budget says the $6.8b envelope which was originally provided is proving too small, with costs rising.

Waka Kotahi New Zealand Transport Agency and KiwiRail are going back to basics, reassessing all the NZUP projects.

The small print says the government is ready to put in more to Three Waters, if necessary, additional to the 40% increase announced today, providing a signal of the government’s determination on Three Waters. Funding announced today includes provision for transferring assets from local government to new water enterprises.

Cost increases and skill shortages – on top of costs related to COVID-19 – are biting, especially in the government’s most ambitious builds. Budget 2021 reveals that Kāinga Ora is under cost pressure in its large-scale housing projects, including Tamaki. In Auckland, the budget says that City Rail Link will cost more than $4.4b, partly because of the effect of COVID-19 and skill shortages.

Let’s Get Wellington Moving is likely to cost much more than originally estimated, with the risk rising that the initiative may not be delivered in full.

The defence estate receives an additional $5.1m of operational funding, a low sum given the size of the defence estate. Reading between the lines, the government is apparently having difficulty prioritising any new capital projects in the defence estate.

Post the Resource Management Act (RMA)

Budget 2021 signals the scale of the task in parting company with the RMA, with $131m provided over three years to pay for the design and implementation of the three new statutes that will replace the RMA.

Nearly 38% of that will be spent next year, which suggests the hard graft on post-RMA is beginning now.

Detailed Commentary of Budget 2021

There are two key disappointments that are worth noting.

Firstly, the government has, as expected, shied away from taking on more debt at a time of exceptionally low borrowing rates to fund an expansionary fiscal policy and this will be a cause for frustration. The government could have been more ambitious and spent more on capital in the out-years, which would have raised net debt.

The second disappointment is around the lack of innovation. The government has missed an opportunity to be innovative, especially in making cities and regions internationally competitive and increasing their contribution to the gross domestic product. Auckland remains the engine of New Zealand’s growth as well as our only internationally competitive city, but there is little for Auckland – or indeed, any region – in the budget.  

Transport

Transport is the biggest single infrastructure winner. It has received a capital funding boost of over $939m over the 10 years (2021-21 to 2029-30).

Across the forecast period there will be $10b of investment in roads and public transport projects through Waka Kotahi New Zealand Transport Agency.

For the 2021-22 period, a funding allocation of $7.906b has been made up, comprising of the following:

  • National Land Transport Programme (NLTP), funded through the National Land Transport Fund  50% at $3.976m
  • A loan facility for cash flow management – 9% at $750m
  • Rail, in addition to funding through the NLTP – 22% at $1.77b
  • Road, in addition to funding through the NLTP, additional Crown and loan funding is provided for specific roading projects – 12% at $900m
  • Crown Entity and other funding – 7% at $519m.

Rail

Budget 2021 allocates a further $1.3b towards a reliable and resilient rail system, comprised of $810m capital spending and $535m operating spending.

Of this, $810m is also allocated to purchase 60 new locomotives and 1,900 new wagons and upgrade existing stock, adding to the more than $4b put into rail over the last term of government.

The rail allocation includes $85m to build a local wagon assembly facility at Hillside Workshops in South Dunedin; the facility will initially assemble 1,500 wagons.

City Centre to Māngere Rapid Transit Project

The government acknowledges that the cost of the preferred rapid transit solution for the city to Māngere corridor is uncertain at this stage.

An indication of costs will be provided through the business case process undertaken by the establishment unit. Significant Crown funding will be needed to deliver the preferred solution. Other funding tools, including value capture will be further considered.

NZUP

The transport component of NZUP consists of projects delivered by both Waka Kotahi New Zealand Transport Agency and KiwiRail within a fixed funding envelope of $6.8b.

Waka Kotahi has advised its component of NZUP is facing a significant increase in forecast costs, primarily due to property price escalations and acquisitions, inflation, and revised standards and assumptions behind cost estimates.

A baselining exercise has been undertaken to better define the scope, costs, outcomes, and

schedules for the projects and identify options for moving NZUP forward.

Housing Acceleration Fund

The government had announced earlier this year $3.8b to establish the Housing Acceleration Fund. $1.069b has been allocated for the 2021-22 period.

The contestable fund will be aimed at boosting supply of ‘development-ready’ or infrastructure-serviced land across New Zealand and will go some way in increasing development capacity which is required through the National Policy Statement on Urban Development.

Three Waters

Budget 2021 allocates a further $296m (original funding $761m) to fund the costs of the creation of new entities to effectively, equitably and efficiently manage water infrastructure and provide New Zealanders with safe supply wherever they live.

The government says it is committed to water remaining in public ownership, with local authorities, communities, iwi and others playing a central role. Further announcements on the details and further support for the programme will be made in coming months.

District Health Boards

A further $700m has been allocated for district health boards’ capital investment over the next four years.

Final Remarks

This is a high-level analysis prepared in a very short period of time. The focus of the analysis is on infrastructure matters.

Some big questions remain for the infrastructure sector, notably how NZUP will roll-out post-assessment, and how the government’s $300m fund for low emission vehicle uptake will take effect.

Three Waters remains a work in progress, with the government underlining its commitment today, but with big hurdles to overcome yet.

Hidden in the fine print of the budget are cost pressures on Auckland’s City Rail Link, Kāinga Ora’s major housing projects, and other places. Skills shortages are biting on big build projects.

The story of Budget 2021 and infrastructure is less in what happened today, and more in what happens in the next 12-18 months.

ENDS 

For further information and comment on Budget 2021, contact Owen Gill, Chief Executive, on 021 961 922 or Azeem Khan, Senior Policy Advisor, on 021 150 8677, azeem.khan@infrastructure.org.nz.


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