Infrastructure Shortfall Impacts Economic Growth

Published: Fri 30 Jul 2004 09:54 AM
Infrastructure Shortfall Impacts New Zealand's Economic Growth: NZCID
New Zealand's economic growth is at risk unless we can speed up provision of better transport systems, a secure electricity supply and efficient water allocation, according to New Zealand Council for Infrastructure Development (NZCID) Chairman, Hon Jim McLay.
Speaking today at the official launch of NZCID, Mr McLay said the Council will push for greater collaboration between local and central government private-sector providers and the community on the policy, legislative and other changes essential to deliver world-class infrastructure.
"Infrastructure is one part of the economy's capital but an important part because it facilitates the provision of vital services, such as transport and electricity, to businesses and households. The quality and reliability of infrastructure is also vital to attracting the investment that is needed for growth," he said.
The Council's aim is to align developers, constructors, financiers, providers and users of infrastructure from both the public and private sectors to help fund and progress the development of infrastructure projects.
Deputy Prime Minister and Minister of Finance Hon Dr Michael Cullen also addressed the gathering, a sign, according to Mr McLay, of the importance of addressing the infrastructure deficit.
The Council's initial focus will be on the transport, energy and water sectors, since improvements in these areas are most likely to underpin New Zealand's economic growth.
Over 100 senior industry and public sector leaders accepted the invitation to attend the Council's launch.
The urgent need for greater private and public sector collaboration in world-class infrastructure provision was backed earlier this week by Macquarie New Zealand's 2004 report on New Zealand infrastructure, Greenlight for Growth. The report noted that raising the rate of infrastructure investment by just one percent of GDP has the potential to add around $6 billion to GDP in the first year (with those gains compounding over time).
Foundation members of NZCID include ABN AMRO, Beca Carter, Bell Gully, Bank of New Zealand, Employers and Manufacturers Association (Northern), Fulton Hogan, GHD Limited, Kensington Swan, Macquarie New Zealand, Pacific Road Corporate Finance Limited, Siemens (NZ) Limited, Stevenson Group, Transfield Services, Watercare Services, Westpac, Works Infrastructure.
Recruitment of the NZCID Chief Executive is underway. Membership of NZCID is open to all private and public sector entities. Membership enquiries should be directed to Peter Atkinson on (09) 367 0934.
Full text of Hon Jim McLay's address at today's NZCID launch is enclosed below...
"All we want to see is good infrastructure"
Hon Jim McLay CNZM QSO
Acting Chairman, New Zealand Council for Infrastructure Development
Wednesday, 28 July 2004, 4.30 pm
Welcome to this, the formal launch of the New Zealand Council for Infrastructure Development.
We have received a number of apologies from those who cannot be present this evening, but who wish this new Council well.
As one person put it, this "is a crucial and timely initiative"; and another, somewhat little more pithily, "About bloomin' time!".
There are too many to list, but I should record just one, accompanied by best wishes for our future, from John Caldon, Chairman our kindred organisation, the Australian Council for Infrastructure Development (AusCID).
That Council has played a key role in the improvements in Australian infrastructure that we have observed over the past ten years; and Dennis O'Neill, CEO of AusCID, will appear this evening to deliver a brief video address at the conclusion of my speech.
Foundation members
It is, I believe, indicative of the interest in - probably, in many cases, very real concern about - infrastructure issues that the invitation to attend this evening's function has been accepted by over 100 organisations and individuals; and that the Council's foundation membership includes developers, constructors, financiers, providers and users of infrastructure from both the public and private sectors.
Indeed, as an indication of their commitment to the cause, many of the Council's foundation members have asked that they be named at this function; and those names are shown on this slide.
We hope that many others of you will be able to make a similar commitment.
Primary purpose
The primary purpose of the Council is to promote the provision of world-class infrastructure by both the public and private sectors, for the benefit of all New Zealanders.
The Council aims to become the leading non-governmental authority on issues relating to infrastructure provision, and to provide a voice for its members in addressing infrastructure needs and opportunities in New Zealand.
To that end, its objectives are to -
- Identify and prioritise specific infrastructure needs.
- Facilitate and encourage the provision of world-class infrastructure, by both the public and private sectors, in an economically, socially and environmentally responsible manner.
- Influence central, regional and local government decision-making on the provision of infrastructure.
- Identify the impediments to infrastructure provision and provide solutions.
- Assist in creating an environment where -
- it is accepted by all governments and the community that New Zealand must have world-class infrastructure if it is to achieve its economic and social potential;
- the consequences of failing to provide world-class infrastructure are understood;
- the respective roles of both the public and private sectors in the provision of infrastructure are accepted;
- To become the leading non-government point of reference on issues relating to infrastructure provision.
- To provide a voice for the Council's membership in addressing infrastructure needs for New Zealand.
In short, in addition to promoting the provision of world-class infrastructure, we aim to provide a coherent voice to governments, private-sector providers and the community, on policy, legislative and other changes essential for more effective infrastructure development.
Need to improve quantity and quality of infrastructure investment
The rationale behind the Council's establishment is straightforward.
New Zealand needs to improve both the quantity and the quality of its infrastructure investment.
Transport, electricity and water
While there are many competing infrastructure investment needs, land transport (including road and rail), electricity and water all demand urgent attention.
In a 2003 survey of businesses conducted by Infometrics, transport and energy were identified as constraints to growth by 60 percent of the respondents.
It's in those areas that the Council proposes to focus its initial efforts.
Resource Management and Land Transport Management Acts
Similarly, while there are many process issues that are of importance if we are to achieve the required level of infrastructure development, the Council has identified two - the Resource Management and Land Transport Management Acts - as the two that require the most immediate attention.
It is not necessary, on this occasion, to suggest the legislative changes that might be required.
Many have already been the subject of widespread, public debate.
Suffice to say that the Minister and his colleagues will not be surprised to hear from us on those issues in due course.
Relationship with Government
We are particularly pleased that the Deputy Prime Minister and Minister of Finance, the Hon Dr Michael Cullen, has agreed to join us at this launch, and to deliver a keynote address.
Minister: We realise that your presence does not necessarily imply support for all of our objectives, nor an expectation that the Council and the Government will always be in agreement.
We do, however, see it as indicative of your interest in infrastructure development, that you Chair the recently established group of Infrastructure Ministers.
We particularly welcome your recent statement, in the NGC Winter Lecture series , that "so long as some basic pre-conditions are met, [you] have no problems with private investment in infrastructure"; and also note with favour that you did not just limit that comment to roads.
We would be grateful if you would convey back to your colleagues our wish to work cooperatively with the Government - and, indeed, with Parliament - in achieving our objectives.
Contrary to impression, we seek no confrontation; nor, however, will we hold back from placing our concerns and suggested solutions firmly in the public domain.
In that regard, I should also correct another impression: Again contrary to some media and other claims, the Council's primary role is not to promote Public Private Partnerships (or PPPs) - nor indeed any other form of delivery - although it will not hesitate to advocate PPPs where they might be the best means of delivery.
Finally, Minister, we hope that those SOEs that operate in the infrastructure sector will feel free to join this Council if that is their wish.
Views about infrastructure
The Council's sponsors acknowledge that there are those who, for political or philosophical reasons, may not share the view that the development and delivery of world-class infrastructure is a desirable objective for New Zealand.
And there are others who may have a more limited vision as to what level of infrastructure investment may be required or justified.
And there are still others who, while generally accepting the need for new infrastructure, object strongly to a particular project because of its impact on them or their environment (such as we are presently seeing in both Auckland and Wellington with new road proposals).
The Council intends to address those issues and concerns in a firm, fair and objective manner; and, where necessary, to engage in coherent debate with those who hold a contrary view.
Why is new infrastructure required?
It can be justified at many levels, not least the need to support New Zealand's productivity and to facilitate its exports.
It can, however, also be justified at a very local level.
Only last month, an Australian "National Housing Summit" concluded that unless there was a willingness to fund roads, railways and other amenities needed for new housing development on the urban fringes, home ownership would remain out of reach of many lower-income Australians.
Differing views were obviously expressed at the summit as to who should provide this infrastructure; but there was no debate about the need for that infrastructure.
Physical infrastructure is an important ingredient for overall growth.
While the causal link between infrastructure investment and growth is difficult to quantify, it is well accepted that sustaining growth becomes increasingly difficult if infrastructure investment does not keep pace.
Infrastructure is, of course, only one part of the economy's capital but an important part because it facilitates the provision of vital services, such as transport and electricity, to businesses and households.
And infrastructure is different from other forms of capital.
The quality and reliability of infrastructure is vital to attracting the investment that is needed for growth.
Global competition for the investment dollar is intense.
The perceived quality and reliability of infrastructure-based services is a key consideration when businesses make investment and location decisions.
For example, an electricity intensive manufacturer may now be less likely to consider New Zealand until question marks over the future security of electricity supply are resolved.
Governments and businesses have competing demands on the capital they can supply for investment and are obliged to fund most infrastructure on a pay-as-you-go basis, even though that is really inappropriate for such long lived assets.
For governments, this means that ensuring infrastructure investment is adequate is no simple task; and that is particularly true when the payoff is unlikely to be immediately apparent or easily quantifiable.
Nonetheless, infrastructure is one of the soundest investments a country can make to support its economic growth.
Infrastructure deficit
A report released on Monday by Macquarie Economics (a copy of which will be made available to those of you who are attending this evening) concluded that there is indeed a significant infrastructure deficit in New Zealand.
That conclusion was based, at least, in part, on the Government's recently published PricewaterhouseCoopers Stocktake which identified many sector-specific infrastructure issues, and indicated that the quantity of past infrastructure investment had been inadequate.
There is now sufficient evidence to support the view that (possibly excluding telecommunications and airports) those infrastructure sectors that are most important to economic output and trade appear to facing serious capacity issues, in part the result of inadequate levels of capital replacement and expansion.
These "significant issues" are already acting as a constraint on new investment, and are clearly posing a barrier to the Government's growth objectives.
Macquarie's economists concluded that closing the gap between present and desirable levels of investment will, for the immediate future, require investment at annual levels of around 5 percent of GDP.
While, obviously, there can be debate about whether the required level is exactly 5 percent, or what contribution to that we might reasonably expect from central and local government, two things are clear to most New Zealanders (the more so to those involved in production and export) -
- First, whether you base your conclusions on the PricewaterhouseCoopers Stocktake, or on the Macquarie assessment, or on the Government's own statements (not least its claimed determination to deal with the issue) or, indeed, on your own observation and experience, there is, unquestionably, an infrastructure deficit in New Zealand; and,
- Secondly, again whether you base it on the Macquarie assessment or on the government's own decision to establish a framework for private sector involvement in some aspects of infrastructure, fiscally responsible governments (whether local or central) can only meet part of that deficit and the rest will probably have to come from the private sector.
Against that background, it is hardly surprising that this year's IMD Competitiveness Survey ranked New Zealand 26th in respect of infrastructure, compared to its overall median position of 18th, and well below its other main indicators (business efficiency, 12th, economic performance, 18th and government efficiency 19th).
Raising long-term growth rates
Addressing New Zealand's infrastructure deficit, raising the rate of infrastructure investment by just one percent of GDP, has the potential permanently to raise New Zealand's average GDP growth rate by 0.5 percent a year, from its current 3.5 percent, thereby adding around $6 billion to GDP in the first year (with those gains compounding over time).
Raising long-term growth rates for a diversity of productive infrastructure investments would also help to safeguard the economy from volatile shifts in future economic performance; and would greatly assist in reaching the government's stated goal of raising New Zealand into the top half of the OECD rankings.
That fact alone should be enough to justify the Council's objectives.
What you can expect from NZCID?
Let me tell you a little more about what you can expect from this Council over the next few months.
We are in the process of recruiting a full-time Chief Executive Officer; and, to maintain the present momentum, are also investigating the possibility of appointing a short-term, temporary CEO.
A website will be launched in coming weeks, and that online resource will be a portal to the Council's research output, submissions and membership.
And, in October, we plan to hold a formal General Meeting at which all of the present, acting Council members, myself included, will resign and, if available, for formal election, will seek such a mandate.
The Council also plans to undertake and then publish original, quality research on New Zealand's infrastructure needs, and how these might best be addressed.
Indeed, one of the key requirements for the new CEO will be a recognised ability to lead that research programme.
Similarly, we will make formal submissions on those issues - lobbying, if you want to call it that - to the Government and its agencies, to all other political parties, to local government and (where legislative proposals are being considered) to Select Committees.
We will seek to identify new ideas, new technologies and new structures that might improve infrastructure delivery.
We will seek to benchmark New Zealand's infrastructure against that of other, comparable countries.
We will also focus on community attitudes to infrastructure development; and will promote conferences or seminars to address infrastructure issues.
Finally, we plan to work with other like-minded organisations, including sector-specific groups.
In short: If there is a real infrastructure issue, we plan to be there.
Infrastructure not a new requirement
The need for infrastructure is hardly new.
The ancient Sumerians, Egyptians and Romans all needed it.
The only reason that "all roads led to Rome" was because they were needed to move its armies quickly to protect and expand the empire, and because someone responded by building them (and also Rome's aqueducts and other amenities).
In the early 1600s, a consortium led by one Hugh Myddelton, acting under a Royal Charter from King James I, first brought fresh water supply to London.
That was, for its time, a massive project, bringing water 40 miles to large cisterns at Finsbury, before delivery in "pipes" made from hollowed logs.
It was considered unnecessary by some, and loudly opposed by others.
We still need such infrastructure today.
Seven years ago, I chaired the Roading Advisory Group which developed new, in some cases quite radical, proposals for the funding and management of New Zealand roads; and I'm pleased to say that some elements of that report finally saw the light of day in last year's Land Transport Management Act.
In the process, I learned how inadequate our roading system had become in many respects (something we had in common with some other countries), and how unfair and inefficient were the means of pricing and managing those roads.
And, above all, I learned the sheer enormity of the challenge of improving that situation.
What we need is determination to respond to the sort of challenge that was put to the Group by someone from a remote and economically disadvantaged part of the country -
All we want to see is a good road.
What better statement could there be of a simple and clear objective for road reform?; and what better statement could there be of a simple and clear objective for the whole infrastructure sector.
No ideological nonsense, from the left or the right; just a plain statement of need.
Fairness, efficiency, maximising the value of investment, supporting economic growth, dealing with and introducing new technology.
All those are things that must drive us to find new ways to manage and fund all infrastructure; to provide not just the "good road", but "good infrastructure" in all its forms.
That is the challenge.
And, on the occasion of this launch, the New Zealand Council for Infrastructure Development affirms its determination to take up and to meet that challenge.
Put simply -
All we want to see is good infrastructure.

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