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Hon Michael Cullen: Speech- Development

28 July 2004

Hon Michael Cullen: Official Launch of the NZ Council for Infrastructure Development

Bell Gully Offices, Symonds St, Auckland

I would like to begin by welcoming the launching today of the NZ Council for Infrastructure Development. We need well-informed debate on the issues around infrastructure and its role in building the economy and sustaining our quality of life, and I look forward to the Council making a valuable contribution to that interchange.

Given the very large, long-term resource commitments involved in infrastructure development, poor quality debate, especially if it is driven by sectoral interests, can have quite major consequences. We learned that lesson with the Think Big projects.

To my mind there are three major temptations we need to resist. These are:

First, the temptation to seek bureaucratic solutions to infrastructure issues;

Second, the temptation of building infrastructure for its own sake; and

Third the temptation to link infrastructure to ideological positions around the balance of public and private financing.

The bureaucratic temptation is something that is largely confined to the precincts of central Wellington. It is the belief that, since infrastructure is a large, all-encompassing concept, we need a large all-encompassing plan to address it. While I understand where this impulse comes from, I have been a consistent opponent of the attempt to formulate an infrastructure master plan.

The fact that we group together under the category of infrastructure transport, energy, water, telecommunications and (depending on how expansive we might feel) a range of other public amenities, does not suggest that the issues regarding investment, planning and management are uniform across all of these areas. Indeed, there are as many differences as there are similarities. Each has its own micro-economy, its own questions of public interest, its own risks, and its own pattern of public and private investment.

For this reason I have always advocated a sector by sector approach, ensuring only that we address cross-sectoral questions when they arise (and our current review of the Resource Management Act is a good example of this) and also practice the discipline of asking whether lessons learned in one sector may be applicable in others.

We do not have the time to wait for a master plan to be created, and the benefits of such a plan are, in my view, quite marginal.

That view was reinforced by the recent release of New Zealand’s first nationwide infrastructure stocktake. It contained an audit carried out by Price Waterhouse Coopers, which identified a number of problem areas, specifically:

Security of electricity supply, both in the short term (due to the shortcomings of a market model which does not factor in security margins), and in the long term (due to issues around the supply of gas in particular, but also the environmental issues around alternative fuels);

A lack of investment in electricity transmission, brought about by a combination of land access issues and uncertainties over pricing and who should pay for investments;

Road congestion, primarily in the Auckland region;

Water allocation problems, due to a deficient statutory framework for prioritising water use; and

Water quality problems in some areas.

Significantly, the Price Waterhouse audit also concluded that the plans already formulated to address each of these problem areas were sound and were already achieving their expected milestones. The conclusion I draw from this is that, so long as we continue to take infrastructure issues seriously and maintain our current programme of investment, there is no reason to panic.

The second temptation is what you might call the aesthetic appeal of infrastructure. There are those who feel the New Zealand landscape could do with some more grand structures of concrete and steel. But we need to beware of the lure of building infrastructure for its own sake. Do we need a four-lane highway stretching the length of the country? And (if I might take issue with some of the terminology in the objects of the Council for Infrastructure Development) do we really know what we mean by ‘world-class’ infrastructure, and are we sure that it is a meaningful benchmark for New Zealand?

Infrastructure exists to serve the needs of the nation, rather than being an end in itself. Because of our geography and our population size and distribution our needs for roading, water and energy will be different to, say, the UK with a larger, denser population, or Australia a larger country with a highly concentrated population in key cities.

Perhaps one of the tasks the Council can address is to define what we might mean by ‘world-class’ infrastructure. What are the appropriate benchmarks for aligning infrastructure investment with the needs and priorities of our economy and our communities?

One approach I would be rather suspicious of is the attempt to define some percentage of GDP as a norm for infrastructure expenditure. The fact is that a substantial amount of capital is invested in infrastructure in New Zealand. For example, as at June 2003, the Crown owned:

Transpower's electricity transmission network, valued at $2.2 billion;

Electricity generation assets held by state owned enterprises, valued at about $6 billion; and

The state highway network, valued at $12.6 billion.

The Crown also owns an 80 per cent share in Air New Zealand, and is in the process of transferring the rail network back into public ownership.

Meanwhile, drinking water and sewerage assets owned by local government are conservatively estimated to be valued at $3 billion plus.

There are also substantial assets held by the private sector. Telecom dominates the provision of telecommunications infrastructure with an asset base of around $7.8 billion. And Contact Energy is a major player in the electricity industry with assets of some $3.8 billion.

As for new investment in infrastructure, the government has recently provided significant financial support for infrastructure investment through:

Project PROBE (amounting to tens of millions of dollars);

The Whirinaki reserve electricity generation plant ($150 million);

The Sanitary Works Subsidy scheme ($15 million per year over 10 years); and

The Auckland transport package ($1.6 billion).

Commercial interests are also investing heavily in infrastructure. For instance, Telecom has signalled that it intends to move to a Next Generation Network, which will involve investment of upwards of $1 billion over 10 years; while its competitor Woosh is investing heavily in wireless broadband.

However, substantial investment is still required in a number of sectors:

Transpower has estimated that total grid investment requirements over the next 10 years are around $1.5 billion;

Significant investment in electricity generation is required to cover ongoing growth in demand (a concern which becomes even more acute following Meridian's decision not to proceed with Project Aqua);

The Crown has agreed to spend up to $200 million on capital works for the rail network, but this may not be sufficient to address deferred maintenance issues, let alone new investment;

An estimated $100 - $300 million of investment in drinking water supply is required. In addition, the Crown will be asked to contribute a proportion of this on a similar basis to the Sanitary Works Subsidy Scheme.

My government has overseen an increase in the overall level of expenditure on infrastructure, both by direct government expenditure and by encouraging others to invest. The 1990s was not a great decade for infrastructure investment in New Zealand. For example, in the years from 1994 to 2000 net purchase of physical assets by government amounted to only $5.8 billion or an average of $800 million per annum. In the period 2001 to 2008 we have increased that commitment to $8.6 billion or $1.1 billion per annum.

Since 2001, line-by-line consolidation of the Crown accounts also allows us to understand the level of investment by central government as well as Crown Entities and State Owned Enterprises. From 2001 to 2008 actual and forecast spending on purchase of physical assets rises to around $29 billion. This includes the rail network and Auckland transport. We also have our majority interest in Air New Zealand.

My point in enumerating all of these investments – current or planned – is that investment should be driven by an analysis of future need. Current expenditure amounts roughly to 2 per cent of GDP. Increasing that to 5 per cent – or any other arbitrary benchmark – should not in itself give us any assurance that we were addressing the issue adequately.

This leads me to the third temptation, which is that of ideology. There are two diametrically opposed views I am thinking of. On the one hand there are those who argue that we need more private financing of infrastructure in order to achieve some optimal mix of public and private investment. And on the other, there are those who argue that infrastructure should be the sole preserve of central and local government and should not be owned in any way by private interests. Frankly I am not convinced by either argument.

I would like to make it clear that I and my government welcome the prospect of increased private investment in infrastructure. Our approach is pragmatic, and we do not have any ideological position that holds that a private dollar is any better or worse than a public one when it comes to such investment.

The current public-private mix in New Zealand’s infrastructure has arisen out of a mixture of historical accident, the prevailing technology and the economic realities of public goods and network industries. In some areas the sheer cost of infrastructure investment and the uncertainty of the returns has precluded any private investment. Technological innovations have altered those calculations in some instances and provided opportunities for private investment, usually under a regulated market. One could cite wireless telecommunications technology as an example of that.

In other areas the economic analysis remains problematic. Private roading investment in New Zealand will always have to overcome the difficulty of generating a sufficient income stream, due to the relatively small volumes of traffic available to generate toll revenue and the (quite legitimate) requirement that a free alternative route exists alongside any toll road.

Submissions on the Land Transport Management Act passed last year highlighted these tensions, in particular the arguments raised over the proposed regulatory framework for private investment in roading. I do not intend to comment on the detailed arguments; however, I would point out that the heart of the matter is the sharing of risk over the lifetime of infrastructure assets.

If we can create a regime in which there are prospects for private partners to earn a competitive return while bearing an acceptable share of the risk, then we are in business. Suffice it to say, no government is about to agree to bear an unreasonable or inefficient portion of the risk (and that includes political risk) simply to attract private investment into roading.

We need to remember also that there are numerous avenues for public private partnerships in infrastructure. One I have been considering recently is a broader investment vehicle such as an infrastructure bond.

This would differ from a conventional government bond in that it would be directly linked to new infrastructure investment and would be likely to have a significantly longer term of 20 to 25 years as opposed to the normal 5 to 12 year term. The Treasury and the Debt Management Office are currently looking into the feasibility of such a bond, and how it might be received by the markets.

A word finally on the review of the Resource Management Act. Clearly, there are some aspects of the RMA that are unhelpful from the point of view of national infrastructure priorities.

One example is the need to achieve the right balance of national and local interests. This is particularly important for infrastructure projects which cross regional boundaries, and where local authorities are increasingly being asked to consider issues of national significance using an Act that provides little or no guidance on how competing national benefits and local costs should be weighed. I am confident we can find a way of expressing some straightforward principles in this regard.

We also need to look at improving the consent decision making process, to ensure more consistency between councils; reduce delays and costs; provide greater clarity and certainty for applicants; and largely eliminate opportunities for abuse of the process for personal gain, trade competition, or other vexatious reasons. We should bear in mind that this is as much an issue of the capacity of local councils to handle the process as it is one of the legislative requirements themselves.

That is why part of the review is to consider measures for building capacity and promoting best practice among the 86 councils who decide approximately 50,000 resource consents each year. One thing that is clear is that the putative structural failings of the Act have much less impact where there is a high degree of technical competency and efficiency within the responsible council. And conversely a council which is under-powered in terms of the requisite expertise will struggle to provide a good service regardless of whether the process is streamlined or simplified.

So, to return to my starting point, the New Zealand Council for Infrastructure Development is a welcome addition to the debate we need to have around infrastructure issues. We talk a lot about innovation in this country, and generally associate that with new technologies.

However, some of the most influential innovations have arisen from applying fresh ideas to old and familiar technologies. Certainly, in areas such as energy where the underlying technology is fairly settled and where the issues are often about how individuals and communities choose to organise their lives and their work, that should be a strong focus of our efforts.

Thank you.

ENDS

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