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Cullen: Back on track - Infrastructure for NZ

Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister in Charge of Treaty of Waitangi Negotiations, Leader of the House

13 August 2008 Speech Notes
Embargoed until 9:30am

Back on track: Infrastructure for New Zealand


Finance Minister Michael Cullen’s opening address to the New Zealand Council for Infrastructure Development’s ‘Building Nations’ Symposium, Eden Park, Auckland

Good morning and thank you for that introduction.

It is a privilege to be here with you at the start of this important symposium.

The speakers you will hear from over the next two days are people that will have huge influence on the future direction of our economy and our nation. From major players in the business community, to leaders in local government, to the men and women who oversee investment in transport and energy infrastructure, you will hear from and engage with New Zealand’s true nation builders.

And you will hear from them at a time – just months out from a general election – when New Zealanders from all walks of life are taking stock of our national progress and when they have an opportunity to discuss the next steps we will take.

The truth is that New Zealand is at a critical crossroads.

Having undergone a major rebuilding of our nation – with record investments in infrastructure and public services while simultaneously strengthening our fiscal position – we have a once in a generation opportunity to chart an ambitious course for our social and economic development.

There is no question that infrastructure is at the heart of this journey. But in embarking on it we cannot afford to underestimate our challenges or to proceed without a clear vision about what we are trying to achieve. And in a time of international economic turbulence, we must also recognise that the steps we take in the next few years will not be without risk for both current and future generations.

In my comments today, I will lay out three challenges to this ‘Building Nations’ symposium:

First, we must accept that New Zealanders demand that we proceed not just with energetic investment, but with vision;
Second, we must accept that to meet the economic expectations of New Zealanders we will have to grapple with greater restraints on our progress than just limited finances;

And third we must accept that with the world on the cusp of a significant economic transformation, New Zealand’s infrastructure sectors must choose if we will embrace the fight against climate change or if we fall behind as our competitors embrace the sustainability challenge.

But before I turn to the next steps, I will first look back at the very quick progress we have made this decade.


New millennium – big challenges

I think most of us can agree that when the Labour-led government was elected in late 1999, New Zealand’s infrastructure was in need of serious investment.

New major roading projects under construction were virtually non-existent. Investments were barely adequate to cover road maintenance needs.

The sale of New Zealand’s rail system had been followed by full scale asset stripping and a total failure to invest adequately in the needs of the network.

Investment in energy generation and transmission languished throughout the 1990s, a period marked by a drastic power savings campaign in 1992 and the blackout of the Auckland CBD in 1998. Poor regulation and coordination in the sector made problems even worse.

On the skills side the government had downgraded the importance of apprenticeships and allowed huge increases in tertiary student fees year after year.

While the world had already well and truly embarked on a broadband revolution, government policy actively encouraged an anti-competitive telecommunications market and failed to accept any role for central government investment.

Public service infrastructure was being allowed to run down – New Zealand ended the 1990s with 38 fewer hospitals than we began with and those that remained were in dire need of more and better paid staff and urgent capital investment.

In summary, for a newly elected government with an ambitious social and economic agenda the challenges were not insignificant. And for a country that was ready to get moving again after two decades of significant economic restructuring and stagnation, the expectations were high.


Rebuilding a nation

Labour was elected to government on a transparent agenda for change. We campaigned on investing in financial assets and infrastructure, strengthening fiscal management, revitalising public services and income support, lowering unemployment, and even raising taxes. We campaigned as agents of significant policy change.

This upfront agenda combined with the longest period of economic expansion since World War II has allowed us to embark on a genuine rebuilding of New Zealand.

While the story of our social reinvestments is well known – halving the cost of seeing the family doctor, raising superannuation rates, slashing child poverty, building state houses and so on – our work to rebuild New Zealand’s physical infrastructure assets has been equally ambitious.

Over the Labour-led government’s nine Budgets, annual funding for roading has more than doubled from $850 million in 1999/2000 to over $1.9 billion this year. This has seen new highways and motorway extensions built throughout New Zealand, including the Wellington Inner City Bypass and the Auckland Central Motorway Junction.

Our annual investment in public transport this year is over fifteen times greater than that of 1999/2000. This sea change in investment levels has allowed the building of the Northern Busway and the undertaking of the $600 million Project Dart to improve train services in Auckland.

Our buyback of the rail track five years ago has already been followed by over $500 million in investments.

The purchase of a majority shareholding in Air New Zealand in the government’s first term not only rescued the airline, but allowed it to flourish, bringing significant benefits for the economy.

In the energy sector, the government acted quickly to improve the regulatory environment and to bring greater coordination through the Electricity Commission.

This is being followed by a major investment in generating capacity and transmission that Dr Patrick Strange points out is unmatched by anything seen in the last 30 years.

Over 1600 MW have been added to our electricity generating capacity since 2000. Already there are over 1,400 MW on the drawing board for the next three to four years equating to around $3.5-4 billion in investments, more than needed to deal with increasing demand.

Our work in the ICT sector has been busy and keeps getting busier. Our regulatory reform agenda – including the operational separation of Telecom – along with significant public and private sector investments have seen broadband coverage and take-up expand significantly.

Broadband coverage is now essentially universal and fixed line DSL-based broadband is available to 93 per cent of all lines. The government’s Project Probe played a significant role in achieving this universality by extending coverage to rural areas.

In this year’s Budget we announced a $500 million broadband investment package – a five year down payment on our ten year plan for a fast broadband future.

The new Broadband Investment Fund will be used to accelerate broadband investment in three critical areas:

• facilitating high speed broadband to businesses and entities such as municipalities, universities, schools and hospitals in urban centres;
• extending the reach of broadband into underserved regions; and
• improving the resilience of New Zealand’s international connections.

The government has also been very active in another area that is increasingly a major focus in the infrastructure debate: the management of New Zealand’s freshwater.

We have been very aware the supply and quality of freshwater – both for drinking and industrial/agricultural purposes – touches on a wide range of complex issues for farmers, Maori, and local government infrastructure. Through the Sustainable Water Programme of Action, we have since 2003 sought to address these issues in a coordinated fashion with our grants to small local authorities to help improve their local sanitation infrastructure just our latest steps. We are currently working on a National Policy Statement on Freshwater Management that will bring a new momentum and an even greater level of coordination to our work.

The government has also been active in improving public sector infrastructure, and we have been conscious of both the social and economic rationale for doing so.

Our hospital building programme has been the largest in New Zealand’s history, with seven new hospitals and eight major refurbishment projects. Spending on hospital infrastructure in the 1990's was a third of what it has been during the last nine years.

In education we have invested $3.3 billion in school capital works. Capacity in our school networks and has increased by over 24 per cent since 1999. Since then, the government has invested over $400 million building new schools in areas of high population growth. Eleven new schools are to be built across the country just through Budget 2008, including five in Auckland, one in Christchurch, one in Taihape, two in Wellington and two in the Queenstown Lakes District.

The overall picture is one of significant rebuilding and unprecedented levels of investment.

In 1999 the New Zealand Government invested $1.9 billion in physical infrastructure.

This year, we expect to invest $5.4 billion – a more than 180 per cent increase.

We have invested the dividends of economic success – success driven primarily by New Zealand workers and businesses – into expanding and repairing the productive capacity of the New Zealand economy.

And we have done all of this while doing something else that is equally remarkable and important for our economy. We not only multiplied infrastructure investment nearly three times over; we did it while reducing gross crown debt from over 35 per cent of GDP to under 20 per cent today. For the first time in our history the Crown is a net positive financial asset position.

Busting the myth that major infrastructure investment and growing indebtedness go hand in hand has been an important lesson for New Zealand, albeit one not everyone seems to have learned.

But I must acknowledge that this rebuilding of our physical infrastructure has been by and large just that – a rebuilding. Despite the massive increase in investment and the huge list of major projects, for the most part we have only recently been able to feel confident that we have broken even, such were the depths of the infrastructure deficit we inherited.

But now, with this rebuilding phase completed, we have a new opportunity.
True, we are still struggling with an unsustainably high national debt and poor savings rate. But we are making significant inroads in turning that around through KiwiSaver and the New Zealand Superannuation Fund. Business tax cuts and international tax reform should help further. And we are currently working our way through the serious fallout from the global credit crunch and commodity boom, but we are doing so with historically low unemployment and with the ability to fight the harsh edges of this cycle.

For the first time in a generation we can truly allow ourselves to ask what sort of country we want for our children and grandchildren. And we can invest in our economy, communities, and our families with a vision of what New Zealand can be, rather than constantly trying to play catch up and jumping on problems as they arise.

This then brings me to the first challenge I want to address: we must accept that New Zealanders are confident about our nation’s future and will demand vision and planning from us all.

It is my belief that all of us with an interest in infrastructure planning and investment need to move beyond the simple question of how much we should invest – we all agree that despite the huge investments made in recent years, more will be needed in the years to come.
If we want to build a genuinely ambitious infrastructure agenda, the real question for us to consider is ‘where is New Zealand going’?

While potentially a daunting question, there is an emerging consensus on our nation’s direction for the first time in decades. Understanding that consensus is crucial for our infrastructure and investment planning.

We know that New Zealanders will not again accept the argument that policies for greater fairness come at the expense of economic growth.

We can and should expect future generations of New Zealanders to be surer of their place in the world than the generations that have come before them. And we can be certain that linked closely with this sense of national identity will be a deepening of our commitment to New Zealand’s natural environment.

In summary, it is not just a richer and more productive nation that New Zealanders want, but a wealthier, healthier, and stronger nation that they will demand. And having acknowledged this ambition, all of us with a role in investing in New Zealand’s physical assets and driving our economic performance have a bigger task than just finding more ways to spend both public and private money.

This brings me to the second challenge: we must look right across the infrastructure sector and accept that we have greater restraints on our ability to contribute to economic and social development than just finite funds.

I believe the challenges are numerous, but there is one that I would like to draw special attention to. We must accept that throughout the last nine years of rebuilding infrastructure a lack of skilled workers has been a much greater drag on our economic potential than a lack of money to spend.

The government has worked tirelessly to address this situation and have built some of our strongest relationships with the business community on these issues. Since 1999 we have:

• Revitalised skills and industry training through modern apprenticeships, school-based training, and greater support for training organisations and institutions;
• Reformed the tertiary education sector first to expand access and then to improve quality, promoting greater synergy between our economic and educational priorities;
• Embedded the NCEA, allowing employers to have greater confidence in the skills of new school leavers and boosting those skills in the process;
• Reformed immigration policy to attract more skilled workers, leading to year after year of net positive skilled migration, something other nations look at with envy;
• Promoted active labour market policies that have joined up industries with acute shortages with unemployed workers seeking jobs and training.

The list goes on.
But even after this work we must acknowledge that if we were to throw fiscal caution to the wind and embark on Think Big 2.0, New Zealand would struggle to find the workers to make it happen. And we would run the risk that those areas that need greater human capital – from agricultural science to research and development – would end up facing even greater challenges than they already do today.

It is the Labour-led government’s belief that further fundamental reforms of our education system – from Schools Plus through to the New Zealand Skills Strategy and the embedding of the tertiary reforms – are among the most pressing economic undertakings of our day.

I will also say that the Labour-led government is willing to work with all of you on innovative solutions for speeding up our development of infrastructure. I announced in February that we will consider refining our legislative tool to implement private public partnerships. My colleague Transport Minister Annette King will be making announcements later this month on the likelihood of progressing the Waterview Connection as a PPP.

We also need to recognise that with major skills and infrastructure investment locked in, and with the business tax cuts and research and development tax credits delivered, it is time for New Zealand business to acknowledge that we are not investing enough capital per worker to drive the productivity growth we will need to deliver greater wealth.


Global economic transformation

I turn now to the third challenge I believe this symposium needs to address.
We must all accept that the current economic slowdown is not a run of the mill low point in the economic cycle. While I have full confidence that New Zealand will start growing again later this year, no one should expect that once growth returns the world will keep ticking along as it has for the past two decades.

Fundamental change in the global economy is occurring right now and we need to get ready for it. That change is being driven by three interrelated forces, all of which have major implications for New Zealand.

First, the price of food is rising sharply. The spread of prosperity through Asia and potentially the production of unsustainable biofuels mean that the growing demand for food will at best stabilise, but is unlikely to decrease as a long term trend.

The price of food is also being driven up by the other two forces, the sharp increases in oil prices and the early effects of global climate change. As oil prices rise, the cost of producing food is increasing significantly, and as severe storms and drought increase in frequency the world’s ability to produce food in a number of important regions is under threat.

The slowdown we are experiencing now has of course been influenced by the global credit crunch. And we of course should be wary of anyone who takes a casual attitude to debt in this financial climate. But the triple effect of expensive food, expensive and increasingly rare oil supplies, and global climate change will persist long after the mess in the financial markets is cleaned up.

This means we are faced with several decisions.

In a world where sustainable food production will not be a throwback to an agrarian yesteryear but a hallmark of a modern competitive economy, will New Zealand be willing to invest in the research and technology to help our farmers become world leaders in sustainability?

In a world where fossil fuels are so expensive that the economics of alternative energy and new transport technologies are changing rapidly, will New Zealand take steps to make our adjustment to a post-oil economy as smooth as possible, or will we keep rolling with the shocks and price spikes and leave our families hostage to the whims of commodities speculators?

In a world where climate change is no longer a debatable theory, but a phenomenon that is already occurring, will the New Zealand economy embrace the transformation we need, or will we fall behind all of our major competitors and keep our heads buried firmly in the sand?

And with the world on the brink of a major economic transformation, will we invest and plan for our infrastructure needs with the vision and responsibility that transformation demands?

For the Labour-led government, an awareness of these challenges is driving the next wave of our work for New Zealand.

For two illustrative examples of how these three challenges are influencing our infrastructure investment decisions, you only have to look at the New Zealand Fast Forward Fund and last month’s buyback of New Zealand’s rail system.

Starting with the latter, the Fast Forward Fund is an aggressive attempt to reposition our economy to secure maximum return from higher global food prices and also to take advantage of the increasing premium that will be placed on sustainability in food production as the world steps us efforts to fight climate change.

New Zealand’s agricultural sector is already one of the world’s most efficient and innovative. Our farmers are not protected by subsidies as their competitors in other nations are. They long ago had to find out how to make every dollar count and have developed efficiencies that serve both financial and environmental ends.

But our entire economy got a major wake up call with the emergence of the food miles debate in 2006. Suddenly New Zealand products were confronting new, consumer-driven non tariff barriers despite their low carbon footprint. The implications for our export sector and our overall economy were potentially quite serious – we could no longer expect to rely on our clean and green national image to handle sustainability concerns. We were going to have to walk the talk in a ways we had not previously.

The Fast Forward initiative will see a $700 million capital investment from the government to get the fund going – an investment that will be matched by private sector partners and paid out of 10-15 years into pastoral research and development initiatives. This is a major investment in sustainable practice and agricultural infrastructure that is an important step for our economy.
Our commitment to a sustainable future was also on display with our buyback of the rail.

After 15 years of private ownership, our rail asset is in bad shape. Even after Toll Holdings’ attempts to lift volumes on rail freight in recent years, it was clear to everyone that getting trains back on track was going to require significant government subsidies, not just over the short-term, but well into the future. The government knew New Zealanders would not tolerate a situation where large chunks of taxpayers’ money were sent across the Tasman for the 62 years that would have remained on Toll’s operating monopoly.

So we had to decide if we could afford to have a rail system incapable of contributing to New Zealand’s economic future. The answer was a resounding ‘no’.

We knew that when our major food producers were looking to get their products off roads and onto rail in order to bring costs down, we could not let our rail asset deteriorate further and let Toll close down provincial freight services.

We knew that with rising oil prices, the interest of both urban commuters and freight operators in using energy efficient rail services would only continue to grow.

And we knew that with the threat of global climate change and the inevitable introduction of carbon pricing throughout the global economy, we had to take urgent steps to reduce the carbon footprint of our transport sector.

That is why we invested $690 million in buying back New Zealand’s trains for New Zealanders. And that is why we must invest another $1 billion or more in the next ten years in modernising KiwiRail as our economy confronts the sustainability challenge. And that is why New Zealanders have embraced KiwiRail with such enthusiasm.


Conclusion

The lesson of KiwiRail is that we must bring new thinking to our infrastructure investment decisions. We will continue to invest in major new roading projects and we will continue to place priority on the security of energy supply.
But anyone who believes that with the rebuilding phase of the government’s infrastructure programme completed that we can just carry on as we have been is sorely mistaken.

Saying we need more infrastructure investment is not enough. Of course we need more.

It is the vision of what we are trying to achieve together that will really matter.
You will be hearing a lot more about infrastructure from the Labour-led government in the months ahead. And let me assure you that no one should expect the government that has multiplied infrastructure investment by nearly three fold, overseen an explosion in wind generating capacity, and bought back our rail system while protecting strategic assets is going to let ourselves be outflanked on the infrastructure front.

We will deliver more investment. And we will deliver the vision to match it.

Thank you and good luck for a successful symposium.


ENDS

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