Financing New Zealand’s Infrastructure And Improved Social Outcomes

To grow the economy and improve social outcomes, New Zealand needs sustained and ongoing investment in and improvements to its infrastructure. Successive Governments have been determined to address New Zealand’s infrastructure deficit, and Infrastructure Minister Chris Bishop says Budget 2024 lays the foundations for a better performing infrastructure system. The funding allocated in this year’s budget, while significant, is insufficient in and of itself to address the infrastructure deficit which is estimated to be in excess of $200bn. New Zealand must address this to meaningfully improve living standards.

While central and regional authority funding will always be vitally important to improving infrastructure, appropriate private sector finance has a key role to play in advancing these objectives and addressing New Zealand’s infrastructure requirements.

What are the benefits of private sector financing?

Appropriate private sector financing (used prudently) can accelerate the delivery of infrastructure necessary for social and economic development. Many private sector entities, including investment companies, the investment arms of insurers and pension providers, and commercial banks, are actively looking for opportunities to deploy capital and increasingly have wider social objectives at the heart of their mandates. Accelerated delivery brings real improvement to the livelihoods of those connected to the infrastructure. In the public sector procurement of infrastructure, the procuring entity and public sector benefit from:

- bringing forward significant infrastructure projects;

- greater price certainty and incentivisation to deliver the infrastructure on time and on budget;

- a strong level of risk transfer to those best able to manage them;

- its resources being freed up to focus on core business, rather than asset management; and

- private sector expertise and innovation.

Such financing also brings with it the investors’ and financiers’ oversight of project governance and performance, supplementing the public sector’s due diligence.

Private sector financing of public infrastructure in New Zealand

The New Zealand Public Private Partnership (PPP) model was developed over a decade ago with a focus on achieving better service outcomes for the procuring entity at an equivalent or lower whole of life cost. The New Zealand Infrastructure Commission, Te Waihanga, has published several reports reviewing the PPP model to better understand how it has operated in practice and derive lessons that could be applied to the future procurement of major infrastructure projects (which are not necessarily limited to PPPs).

Reports have found that, while there have been some challenges on some horizontal projects, the model has been generally successful in delivering major infrastructure projects with greater time and cost certainty for procuring entities. Te Waihanga considers that the model should continue to be regarded as a procurement option for major infrastructure projects, an approach the new Government has signalled and reiterated in Budget 2024. Te Waihanga has also made recommendations designed to improve the costs and complexity of the model, and for changes that could be made by procuring entities in relation to future procurement and PPP policy management. These recommendations build on the lessons learnt by procuring entities from other PPP projects. Non-PPP procurements can also benefit from adopting the model’s disciplined approach to risk identification, quantification and optimal allocation, incentivisation and its whole of life considerations.

Other models are also available which facilitate infrastructure development through the use of private sector financing. The Infrastructure Funding and Financing Act 2020, for example, introduced a model allowing the construction of infrastructure for housing and urban development to be financed through private sector debt by levying those who benefit from the infrastructure. This model has been used successfully to provide funding towards 13 transportation projects procured by Tauranga City Council and Wellington City Council’s sludge minimisation facility. Other local authorities are exploring the application of the model to pipeline projects.

The proposed new National Infrastructure Agency will be critical to connect domestic and offshore capital to New Zealand’s infrastructure opportunities, and further refine and improve these models, and/or develop further funding and financing models (perhaps using the signalled use of additional tools such as tolls, value capture and dynamic time-of-use charging), to optimise available funding, build critical infrastructure faster and achieve broader social objectives.

Key requirements for success

Private investment in public infrastructure must meet the needs of all stakeholders, including the communities benefitting from the infrastructure and taxpayers generally. It must deliver a value for money outcome for those stakeholders. This is reiterated by the new Government’s stated commitment to fixing New Zealand’s infrastructure system and addressing the infrastructure deficit, and Te Waihanga’s reviews of the PPP model.

While different private financing models may be better suited to certain types of projects, to be successful long-term options and to meaningfully improve living standards, public support is essential. Identified issues in procurement should be positively addressed. All stakeholder groups would benefit from the publication of additional information relating to the use of and business case where private finance is employed. From the outset:

- public and private sector objectives should be clearly articulated and aligned;

- risks identified and appropriately allocated, acknowledging that the private sector cannot price all risks; and

- the business case for the benefits accruing to the public clearly communicated.

Ensuring public support requires strategic direction and transparency, and for stakeholders to educate and take responsibility, and to remain accountable.

Private sector finance has a key role to play in infrastructure procurement

Successive Governments have committed to closing New Zealand's infrastructure deficit and ensuring the country has modern infrastructure to support a more productive, sustainable and inclusive economy, and the wellbeing of New Zealanders. The opportunity costs of failing to convert that commitment to action are too great, and growing. Continued investment in infrastructure will be vital over the next 30 years and beyond: the counterfactual offers New Zealanders a lower standard of living. Shortfalls in government funding are often cited as a limitation on our ability to advance these objectives.

This need not be so. Improved infrastructure, sustainable growth and improved social outcomes can be achieved successfully through appropriate private investment (utilising both debt and equity) in public infrastructure, coupled with strategic direction, transparency, responsibility and accountability.

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