Week in Review

Why $12b isn’t enough to fill this infrastructure chasm

Jacinda Ardern is about to launch her campaign for re-election by announcing how she'll spend $12b on infrastructure. That seems a lot, but Dileepa Fonseka shows why it's just one half of the funding jigsaw needed to build tens of billions worth of roads, railways and pipes.

Prime Minister Jacinda Ardern is set to announce the first of nearly $12 billion worth of projects this week. That sounds like a lot, but it doesn't solve the funding problems of councils which are integral parts of the bigger funding picture. Economists and infrastructure experts say that amount barely scratches the surface of what's needed to catch up with population growth running 30 years ahead of schedule, and infrastructure building that has been largely stalled for the last 30 years.

It also doesn't solve a lack of new revenue streams for councils to service extra debt, or the reluctance of ratepayers and taxpayers to allow their politicians to borrow more to build infrastructure, they say. Ardern's announcements are just part of the solution, and only the start of what's needed if New Zealand is to fill an ever-growing infrastructure deficit fueled by record-high population growth, or deal with its housing affordability crisis and its climate change problems.

Where's the Peacocke?

One of the best examples is in the flat and lush Waikato, which doesn't have an isthmus or bay or impossibly steep hill to stop the building of a city. Yet even in this sprawl-friendly landscape with forecasts galore of population, progress has stymied by funding and political restraints at the council level.

It’s a situation that has already been 30 years in the making. 

The land was zoned residential and annexed into the Hamilton City in 1989, and is named “Peacocke” after a farming family who go back four generations there but it has been farms and sparsely occupied rural land all of this time.

As Hamilton city began to sprawl north, developer (and a descendant of the original farming family) Mark Peacocke started approaching successive mayors with a plan to kickstart development on the land along with a request that it be infrastructured, according to evidence he gave to a resource management hearing in April last year.

“Essentially, the message I got from the council was that if we wanted to develop the area, we would need to finance any infrastructure upgrades ourselves,” Peacocke said.

Hamilton has consistently been one of the fastest growing cities in New Zealand and its council consequently became one of the country’s most indebted. 

Between 2009 and 2018 it had a gross debt ratio (total liabilities to income) averaging 248 percent during that decade according to Infometrics figures.

That debt number is a problem for councils whose borrowings can’t exceed 250 percent of their revenues, according to local government financing rules. 

Beehive helps Hamilton (a bit)

But the New Zealand Government has no such limit on its own finances and in 2017 granted Hamilton City Council $290.4 million in the form of a 10-year interest free loan and subsidies from NZTA for transport infrastructure to unlock growth at Peacocke.

But funds like the above for local government are likely not going to be a feature of  Wednesday’s $12 billion infrastructure announcement by Prime Minister Jacinda Ardern in Auckland.

Finance Minister Grant Robertson has already flagged the broad breakdown of how the money will be spread: $6.8b for new 'shovel ready' transport projects, largely road and rail, $400m one-off increase to schools’ capital funding, $300m for regional investment projects that didn’t quite make it across the line for Provincial Growth Fund (PGF) funding, $300m for District Health Board asset renewal and $200m for “decarbonisation” of some public assets. 

Robertson has been able to set aside that money for infrastructure spending because the Government changed its self-imposed Budget Responsibility Rule pledge to keep debt to 20 percent of GDP and widened it out to a band of 15 to 25 percent of GDP. Net debt is currently around 19 percent, so the Government could borrow $18b or six percentage points of GDP and still not be above the 25 percent top end of the rule, given current nominal GDP of around $300b. Within five years, that extra six percentage points of GDP would allow $22b.

'Not even touching the sides'

But more money is still needed, Infometrics Economist Brad Olsen said, and the country can afford to spend it. 

Olsen said New Zealand is one of the least-indebted countries in the OECD and could afford to take on more debt. 

But he noted the reluctance was more socio-political than practical. 

“I think New Zealand does have this fascination with wanting to keep our debt and our liabilities low,” Olsen said.

“We always say that we, and by that we mean both people and the Government, need to live within our means," he said.

“Well, look we don’t do that. Anyone that has a mortgage is quite clearly not living within their means in the strictest sense, they’re borrowing and that’s good.”

Isn't the rainy day now?

As for the need to save for a rainy day, or keep the country’s powder dry in case it needed to battle a financial crisis (all rationales that have been advanced by previous Finance Ministers), Olsen posed another metaphor in return: 

“If we are waiting for a rainy day how rainy does it have to get before we do invest more?” 

The shortage of infrastructure funding is most acute at a local government level. 

Capital spending of $91b is planned by councils across four infrastructure areas (roading, water supply, stormwater and wastewater) over the next decade, but 46 percent of that is simply to replace assets that already exist. 

Only 23 percent of that will be spent meeting additional demand.

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