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Budget 2018 - Capacity constraint and spending restraint – Balancing New Zealand’s infrastructure needs

Budget 2018 - Infrastructure

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Partner - Deal Advisory, Wellington

KPMG in New Zealand

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Infrastructure

The key takeout

Net capital spending in the next five years will be almost triple that of the previous five years. The Government intends to spend approximately $42b through to 2022, predominantly on transport, housing, regional infrastructure projects and on health and education investments.

The key measures

  • $28b over ten years on transport initiatives in and around Auckland, of which $10b will be raised in Auckland and the rest nationally.
  • $2b for KiwiBuild for the construction of 100,000 homes over ten years.
  • $3b over three years for the Provincial Growth Fund, to support infrastructure and other investments outside the main centres.
  • $300m for Crown Infrastructure Partners to deliver enabling infrastructure for new housing.
  • A series of new funding techniques to support this, including Auckland’s Regional Fuel Tax, increased national fuel taxes, increased use of road tolling, and other revenue raising measures.

What’s driving this?

Continued immigration, repair and resilience spend and growth in our major centres are all driving New Zealand’s need to increase its investment in transport, social and housing-related infrastructure.


The new Government has also identified a backlog in infrastructure maintenance – disputed by the opposition - including some high profile examples in schools and hospitals, requiring urgent investment.
 

The back story

The state of our infrastructure places a constraint on the nation’s economy. Traffic congestion, especially in Auckland, the need for more schools and hospitals, and of course rampant house price inflation, are all symptoms of growth and the resulting demand pressures on New Zealand’s infrastructure networks is evident with daily news items since well before the 2017 election.

In April, Transport Minister Phil Twyford and Auckland Mayor Phil Goff unveiled a $28b programme of investments in Auckland’s transport system over the next ten years. This includes $1.8b towards Auckland Light Rail, approximately $4b of road projects (including the new Penlink toll road) and $3.3b of asset renewals. The Provincial Growth Fund will also invest a significant portion of its $1b per annum over three years in infrastructure, enabling works and scoping projects in the regions.

The challenge, as always, is twofold:

  1. How these should be funded; and 
  2. What sources of capital are available to finance the upfront investment that is required. It is now widely acknowledged that our local authorities, particularly in our high growth regions, are financially constrained and there is a limit to the extent these costs can be continually passed onto ratepayers. The Government has also made commitments in relation to maintaining its own fiscal position. 

To help bridge the funding gap, we expect the Government to look at new revenue sources to fund infrastructure. It was announced that 36% of the funding for Auckland’s transport investment is to come from the city, by way of a new 11.5c per litre regional fuel tax raising $1.5b. This is on top of proposed increases in the national fuel excise duty over the next three years. Other initiatives might include road tolls (already proposed for Penlink), user pay mechanisms and/or new rates or levies on the immediate beneficiaries of an infrastructure investment.

In terms of financing tools, expect to see further exploration of new commercial structures such as the use of Special Purpose Vehicles to deliver investment through the likes of Crown Infrastructure Partners. While the new coalition Government has shown reluctance to continue New Zealand’s involvement with Public Private Partnerships (PPP), it does remain open to using them in certain circumstances, such as transport. Pre-budget releases from several ministers indicate that the Government is not only comfortable with, but will rely on, private capital being invested. In April, Minister Shane Jones went on a fact finding mission to Australia to investigate avenues for private sector investment in infrastructure. The long term nature of infrastructure assets is well suited to capital market investment and we expect the Government may also consider infrastructure bonds or similar constructs. NZ Super Fund also expressed its interest in funding significant infrastructure projects, such as Auckland’s light rail.

Budget 2018 also plans the use of Housing NZ and Crown Infrastructure Partners balance sheet to borrow. Housing NZ is expected to borrow $2.9b as well as reinvesting operating surpluses to help with the housing investment. This borrowing is not included in net Core Crown debt. If this borrowing was included, the forecast debt percentage would be 20.1% rather than the forecast 19.1%.

In summary, New Zealand’s “infrastructure deficit” is now widely accepted across the political divide and by the public. This budget shows that the coalition government is prioritising infrastructure which we welcome. The previous Government, over its three terms, oversaw improvements in the selection, procurement and delivery of social and economic infrastructure projects. In an environment whereby infrastructure project delivery is accelerated, it remains important to maintain robust processes for prioritising projects and making smart decisions. We advocate continued use of robust business case methodologies.

It is also clear that local authorities need access to new funding sources and financing tools. Clarity on both these fronts will help address New Zealand’s capacity constraints and support its ongoing prosperity.
 

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