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The Govt. role in infrastructure development

Hon Paul Swain

Speech Notes

Going for Growth - the government’s role in infrastructure development

Introduction

Good morning and thank you for the invitation to speak to you today.

As you are probably aware, this government has set itself the goal of lifting New Zealand back into the top half of the OECD. This was the goal of the Innovation Framework, released in February this year. Making sure our infrastructure is up to scratch will be critical in achieving that goal.

Between 1984 and 1999 government economic policy was largely passive aiming to provide an environment in which the private sector could make investment decisions in areas such as infrastructure. This approach did not generate sustained growth.

The government has therefore taken a pro-active role in the economy. To facilitate business growth government has taken many initiatives aimed at creating a supportive business and regulatory environment. These include:

- Promoting workable competition through competition policy and international trade policy.

- Minimising business and regulatory compliance costs.

- Harmonising local laws and regulations with international best practice and norms

- Improving infrastructure and resources by, for example, ensuring efficient electricity and telecommunications markets and managing effective regimes and property rights for natural resources that are controlled by the State.

Given the various infrastructure ownership structures the government’s role and responsibilities will vary but it has been willing to tackle some of the problems that have been left untouched for some time. Using the basic maxim of “as much market as possible as much government as necessary’ we have gone about this in a variety of ways.

The aim of these reforms is to create greater competition, to drive greater investment and ultimately to give a better deal to consumers and a better platform for growth.

Critical infrastructure includes transport, electricity, gas and telecommunications systems. I’ll touch on each of these today but will spend more time on telecommunications including the government’s broadband project, which is aimed at stimulating investment and innovative technology.

Electricity

The previous National Government brought in a market mechanism in the electricity sector but their reforms did not deliver the promised price decreases.

One reason for this is that they left holes in some regulatory areas.

Immediately after the 1999 election, the government decided to take a careful look at electricity regulation and governance issues. Hon David Caygill chaired a comprehensive inquiry. Implementation of a new regime following government’s consideration of the inquiry recommendations is well advanced.

In particular, the Government has:

- Legislated to ensure that electricity line businesses, which are natural monopolies, are subject to firm regulation. The Commerce Commission is reviewing the appropriate way to value lines. In addition, those companies that breach thresholds set by the Commerce Commission will be placed under direct control. A balance needs to be found within these arrangements to ensure that new investment can proceed to meet the needs of the growing economy.

- Fostered the development of robust self-governance by the electricity industry and consumers in those parts of the electricity market where there is competition, to ensure that the industry makes its best contribution to the economy. While there are still some important matters to resolve, the development of self-governance arrangements is well advanced. If self-governance fails, the government has powers to regulate to achieve the same objectives.

Electricity demand is increasing steadily (about 2 percent per annum), and we also face risks when dry years reduce our ability to generate from hydro. Information from generators about plans for new capacity, some of it public and some of it commercially confidential, gives the government confidence that our generation capacity will remain adequate for the foreseeable future. Nevertheless, there may be lessons to be learnt from other countries, and we are having a look at how other countries manage security of supply.

Gas

The Government has recently announced decisions following a wide-ranging review of the gas industry. We have:

- Decided that the Commerce Commission should conduct an intensive inquiry into gas pipelines to see if they have been overcharging. Tighter regulatory controls may be introduced if necessary.

- Challenged the gas industry to develop robust self-governance arrangements like those in electricity. These will be needed, for example, to ensure that gas from new fields can be traded effectively - very important with the decline of Maui since gas from a range of new fields will be needed soon.

- Announced that the government will facilitate the negotiation of arrangements for open access to the Maui pipeline. This is important to ensure that enough gas is available in the north of the North Island to meet the demands of electricity generation and other uses.

Transport

As Minister of Transport I’m currently working on a major transport reform package. The New Zealand Transport Strategy, which outlines the government’s strategic focus for transport, will be released in the next couple of weeks.

The strategy takes a multi-modal approach - the first time all the modes of transport will be looked at as a whole and in an integrated way. For the first time ever, it will link what happens in the transport sector with our wider social, economic and environmental goals. Regional land transport strategies will need to take into account the government’s strategy.

At about the same time that we release the strategy we will be introducing the Land Transport Management Bill to Parliament. The bill allows for more long term planning, introduces more flexible funding mechanisms for transport projects and changes the objectives of Transit and Transfund.

Given New Zealand’s looming infrastructure deficit it introduces generic rules for tolling and public private partnerships.

There has been a lot of talk in the media lately about public private partnerships, or PPPs lately. They are a funding mechanism that is common overseas, notably in Britain and Australia. The main reason behind PPPs is to let the private sector help finance projects, which might not otherwise get off the ground.

By bundling design, construction and maintenance, PPPs provide opportunities for further innovation. They are also an alternative method of financing which may be useful when a number of high cost projects are coming on stream at one time.

I do not expect that there will be a large number of PPPs in the roading sector in New Zealand but they are potentially a useful alternative procurement method for larger projects.

The Land Transport Management Bill sets out some conditions, which must be met before Ministerial approval will be given for such projects.

To be approved for a PPP approach projects will, among other things, need community support, to assist the government’s transport objectives and be for a specified term.

Usually PPPs will involve tolling. Ministerial approval for tolling will require, among other things, the availability of an alternate route and tolling will only be possible on new roads.

This will be the first time we have tried PPPs in New Zealand. I was recently in Sydney where PPPs are working very successfully. While there I talked to investment bankers and transport authorities who told me that the risk premium is coming down as people become more relaxed about the model.

I’d like to encourage you to get a copy of the bill when it is introduced, read it thoroughly and make a submission to the select committee. If we can get PPPs right in transport it’s possible that the concept could be used in other areas.

Telecommunications

The critical issue for regulation of telecommunications is to find the right balance between competitive forces and government intervention so that incentives for investment and innovation are maximised. As Minister of Communications I am confident the current regime, as set up by the Telecommunications Act 2001, finds this balance.

New Zealand is somewhat unique in how its telecommunications sector has developed. The sector was opened up to full competition in 1989 and Telecom was sold in 1990. While we were one of the first countries in the world to privatise telecommunications, we did not bring in a sector-specific regulator. In most countries a regulatory regime was brought in when the incumbent telco was privatised.

In New Zealand, development of competition relied on generic competition law enforced through the courts. This law aimed to restrict Telecom from taking advantage of its dominant position to act anti-competitively, by denying competitors interconnection with its network for example.

The justification for such a light-handed approach was that heavy-handed regulation of a rapidly evolving industry would be more likely to distort progress towards efficient outcomes. However, it soon became apparent that bilateral commercial negotiations for interconnection were not working.

Clearly there was new investment and new entrants in the market during the 1990s. But it was often a torturous process for the new entrants which in turn unfairly disadvantaged consumers.

General principles within the generic competition law covering such agreements were insufficient to take account of the complexity and changing nature of the telecommunications sector. As a result, there was extensive litigation between parties, with the Telecom v Clear case eventually going all the way to the Privy Council.

The government’s major concern was that the potential benefits of competition were not being realised and inordinate costs were being incurred by the parities involved. In response to this, as Minister of Communications I initiated the Ministerial Inquiry into Telecommunications in 2000.

Following extensive analysis of the NZ telecommunications sector and drawing on international experience in telecommunications regulation, the Telecommunications Act 2001 was introduced. This Act established the Telecommunications Commissioner within the Commerce Commission - an independent, sector-specific regulator - and brought New Zealand into line with overseas practice.

The guiding vision behind the regime set up by the Act is to maximise incentives for innovation and investment. It recognises the differing roles of market forces and regulation and takes as its starting point the maxim of “as much market as possible, and as much government as necessary”. That is to say, the regulator only intervenes where it is necessary to make the market operate more efficiently.

In this regard, the key tasks of Telecommunications Commissioner are:

- Resolving disputes over access to regulated services in the event of failure of commercial negotiation on the basis of prescribed methodologies/principles that take account of the nature of the telecommunications sector.

- To recommend regulation of new services or changes to the scope of existing regulation, as the need arises.

- Providing a process for implementing, apportioning the cost of and enforcing "telecommunications services obligations" (TSOs).

We have recently seen the Commissioner make the first determination under the new regime, on the price for interconnection with Telecom’s fixed public-switched telephone network. The price is based on international benchmarking and more than halves the cost of interconnection to 1.13 cents per minute. Under the regime, Telecom or TelstaClear have the right to get a further pricing decision from the Commissioner on the basis of a fully costed model and TelstraClear has now excercised this right. However, the interim decision applies until the commissioner makes a further decision, which is an improved process.

In the near future the commissioner will also be required to make a decision on prices for wholesaling of Telecom’s fixed network

The Commissioner is also required to report on the issue of unbundling Telecom’s local loop by December 2003. International experience indicates that there may be some benefits of local loop unbundling in terms of increasing the level of competition for services such as broadband internet access. This has to be weighed up against opportunities in new technologies including wireless.

Again, the Commissioner will follow a comprehensive and transparent process in reaching a decision on whether or not local loop unbundling may have benefits in New Zealand.

The Commissioner is currently preparing the calculation for the cost of the TSO Kiwi Share Obligations. The calculation will determine the overall loss incurred by Telecom in meeting its obligations under the TSO and how much the other telecommunications companies connected with Telecom’s network should pay. The determination is expected in early 2003.

To conclude, NZ’s regulatory regime for telecommunications promotes competition as the primary means of encouraging investment and innovation, improving service quality and ensuring fairer prices, with government intervention only occurring to improve the efficiency of competition. I am confident that the existence of the Telecommunications Commissioner will allow fair and efficient competition to flourish and consumers will reap the benefits through fairer costs and access to a wider range of services.

Project PROBE

A recent survey of regional economic development aspirations has shown that

most regions see availability of broadband as being the single most important factor in economic development and regional broadband pilots have shown that demand in New Zealand for high speed internet access is rapidly increasing, as is the capability to use it. The education sector's projected demand for broadband position it well to lead the rollout of broadband into regions where it has not been previously available.

Project PROBE (Provincial Broadband Extension) has been developed jointly by the Ministry of Education and the Ministry of Economic Development to roll-out high speed internet access, or broadband, to all schools and provincial communities by the end of 2004. Project PROBE is funded from Votes Education and Industry and Regional Development, with overall responsibility with the Minister of Education. The Budget estimate for PROBE is 'tens of millions of dollars.'

Project PROBE is intended to ensure that all schools, in particular provincial schools, will have sufficient bandwidth to provide all students with access to the curriculum. The bandwidth will also be available to others in the communities - libraries, farmers, businesses, local government, marae, health agencies, community services and home users. It is up to those groups to maximise the available benefits.

A secondary objective is to increase levels of competition in the telecommunications sector outside of the main metropolitan areas.

The PROBE budget is to allow for a level of underwriting the costs of infrastructure in order to minimise the commercial risk to telecommunications operators and to provide some opportunity for new operators to enter the market.

Despite no money having been spent at this stage, Probe has already had a considerable impact on the telecommunications market and competition levels

have increased markedly. There is a high level of interest from suppliers, many of whom are new to this sector. New entrants include wireless and satellite operators but also power line companies looking to develop new business models. In some regions new start-up operators are being formed, backed by local authorities, community trusts and private sector groups, offering new business models for the provision of services.

Under PROBE, the country has been split into 14 regions with each having a separate tender process. Southland has been first off the block and has chosen a consortium of Vodafone and Walker Wireless as its preferred tenderer. This is a huge breakthrough for the region as it will for the first time introduce genuine competition throughout the province and give all Southlanders access to 21st century telecommunications.

Access to the road reserve

Finally I would like to briefly mention access to the road reserve, which has been an issue concerning local authorities for some time. The Telecommunications Act 2001 clarifies the types of conditions road owners can apply to “network operators’ in accessing the road reserve. The government’s aim in specifying these conditions was to balance the needs of the telecommunications “network operators’ with the needs of the local government authorities. I know that local authorities are keen for similar provisions to also be in other utility acts.

I have asked industry and local government to work together with the aim of establishing an industry code of practice. I consider that in general such a voluntary solution would be better than legislation. A Utilities Advisory Group had already been established and I understand it is currently working on such a solution. If the Utilities Advisory Group is unable to resolve some issues, I have asked the group to report to government and we will look at whether there is a case for any government involvement.

Conclusion

In conclusion you can see that the government has been active in this area. However as you know regulatory economics is extraordinarily difficult. Governments can and have got it wrong in the past. What we don’t want is investment decisions being skewed towards a particular player or technology. Nor do we want the entire energy of infrastrucuture industries being spent on gaming the regulator.

That is not an excuse for the National Party’s do-nothing strategy of the 1990s. Clearly instead of a one-size-fits-all ideological response we need to take different approaches in different areas depending on the dynamics of the various industries.

Making sure that the government sends out the right investment signals to infrastructure providers is critical if we are to achieve our economic goals, which is why this conference is very timely.

I would be very interested to see a summary of conclusions at the end of the conference, particularly in any areas where you think government and the private sector should be working together.

ENDS


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