Recognising the need for ongoing infrastructure | KPMG | NZ

Budget 2017 - Recognising the need for ongoing infrastructure investment

Recognising the need for ongoing infrastructure

Infrastructure investment in the next four years will be 40% higher than in the last four years. The Government has also flagged that it intends to allocate a further $7b in new capital expenditure in the next three budgets, effectively mopping up the entire forecast cash surplus.

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Infrastructure investment

The key Budget measures

  • $2.2b on Housing NZ’s Auckland Housing Programme (a 10 year programme)
  • $1.8b for KiwiRail, the CRL project and roads
  • $392m for new schools and classrooms
  • $150m for health sector capital projects 
  • $763m for new prison capacity
  • $100m for the Crown Land programme to free up land for new housing
  • $576m in upgrades to Defence Force equipment and estate

What’s driving this?

Sustained high immigration rates, natural hazards and double digit annual growth rates in tourism are both creating and exposing the need for New Zealand to step up its investment in economic, social, and housing-related infrastructure.

The back story

Whether it’s the national state highway network, Auckland’s traffic congestion, housing infrastructure to support new developments, or the need for new school and health facilities to meet growing demand, the need for more investment in infrastructure is never far from the news these days. 

This Government has driven improvements in infrastructure project selection, procurement and delivery over its three terms and has overseen significant investment in both social and economic infrastructure projects. However, a combination of factors including population and tourism growth, as well as natural hazard events, has increasingly exposed to the public the extent to which infrastructure planning, funding and project delivery are now genuine constraints for New Zealand’s economic and societal development. 

The 2017 Budget Policy Statement, issued in December 2016, recognised this with an increase in the capital appropriation from $0.9 billion per annum over the forecast period, equating to $3 billion in 2017/18 and $2.0 billion per annum thereafter. This funding was reserved for “high quality capital and infrastructure projects” that “support continued solid economic growth and deliver better public services”.

On 27 April 2017, the Minister of Finance announced that Budget 2017 would contain a further increase in capital spending, up to $4 billion in 2017/18 and more in out years. In total, the projected spend over the four year forecast period has increased from the $3.6 billion set out in Budget 2016 to $11 billion. In spending terms, infrastructure is Budget 2017’s key area of new investment. The capital expenditure amount soaks up all of the surplus cash generated by the track of increasing operating forecasts over the four year forecast period. The Government could not have forecast to spend any more without increasing net debt, which it prefers not to do.

The Minister has however announced a preference for both public private partnerships (PPP) and JVs with local government, which will mean more bang by leveraging the bucks. Under a PPP, the capital cost is converted into a lease-style quarterly payment through the use of project finance. While there is some public debate about whether the government should borrow more to invest in infrastructure rather than pay for capital out of the current surplus, PPPs will allow the government to leverage projects, and hence make their capital spend per annum go further. Steven Joyce expects to announce more on partnering in coming weeks.

In summary, there is no longer any real debate between major political parties on the need for increased infrastructure spending. The debate is about how much and on what. The opposition is likely to prefer public transport to roads and actual housing to housing infrastructure, but the reality is that New Zealand can no longer afford sporadic bursts of reactive investment in the nation’s infrastructure. If we want to underpin our ongoing economic prosperity over the coming decades, and offer the social infrastructure and services expected by Kiwis, we need a deep and ongoing pipeline of infrastructure investment. Budget 2017 shows that the National-led Government is willing to open the taps if the projects are well developed and aligned with New Zealand’s ongoing prosperity.

New Zealand Budget 2017

New Zealand Budget 2017

 
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