Unlocking investment in infrastructure
Productivity, jobs, well-being, and growth are at the very heart of why we have public infrastructure. Few people would disagree that addressing New Zealand’s much-discussed infrastructure deficit needs to happen – and now.
Infrastructure is the bridge to every New Zealander having access to housing, education, and employment – not to mention safely drinking water from a tap and swimming in clean beaches, rivers, and lakes.
The New Zealand Government is seeking to address the gap between our infrastructure needs and current infrastructure stock: in May the Government announced that it is putting NZD3.8 billion into a fund to increase housing supply, and has committed NZD57.3 billion to infrastructure spending over the next five years – this was an increase from NZD42.2 billion already budgeted for infrastructure investment over the next four years. While this is a significant funding boost, it’s widely recognised that more is needed.
The question then quickly turns to: how will this actually happen?
Private sector capital and capability is an essential part of the solution.
MinterEllisonRuddWatts asked Brian Harrison of InfraRed and Infrastructure NZ, and Ngāi Tahu’s Chief Executive, Mike Pohio what is needed to unlock private sector investment in New Zealand’s infrastructure.
Mike Pohio says that any strategy to overcome New Zealand’s infrastructure deficit cannot come from government alone.
"The Government can kickstart the process, but I would recommend a mix of predominantly government and some private investment.” - Mike Pohio, Ngāi Tahu Holdings
The Government can kickstart the process, but I would recommend a mix of predominantly government and some private investment. NZ Super, ACC and iwi can all contribute.”
He says that examples already exist to show how the recovery of private capital can be achieved.
This has been successful with private infrastructure investment at Milldale, a residential subdivision north of Auckland. The outcome of this model, which saw private charges funding residential infrastructure development, could be more widely used.”
In applying such a model, Pohio says there is the issue of the cost of capital and a fair return on that capital.
“What might a fair return for private capital look like now, and would people think it would be a great investment? A capital asset pricing model would fix this, with many references to data points already out there. We need to get to a fair return through the data points, not through a bidding process. The amount of justifiable capital required, and the capital asset pricing model justifies the rate. We would be talking an absolute minimum 5%, but no more than 10%.”
Brian Harrison also points out that with the scale of proposed projects, New Zealand needs to attract large, international contractors with the capability, capacity and balance sheets that support big projects – and access to the necessary supply chains.
Is New Zealand an attractive proposition?
Harrison says the right settings need to be in place to create a competitive market model that attracts private sector involvement.
“New Zealand is a small country, and it’s relatively remote.
“The cost to set-up in New Zealand is high, and there is no pipeline that contractors can rely on. It is unattractive for international firms to invest time, management, and resource here with the prospect of delivering one project – the costs involved can severely impact the returns.
"If you’ve got a strong pipeline and a plan you create certainty to offset some of the costs to setting up in New Zealand. You can also attract the best contractors at the most competitive price.” - Brian Harrison, InfraRed
“To attract international investment, we need a plan that transcends governments, so priorities don’t change with each election. If you’ve got a strong pipeline and a plan you create certainty to offset some of the costs to setting up in New Zealand. You can also attract the best contractors at the most competitive price.”
Competition and value
Stripping political views on the rights and wrongs of private sector involvement away from the debate is essential to understand that the private sector is only a part of the solution, says Harrison. Then the challenge exists for the private sector to articulate the value it brings.
“Commercial understanding is an important long-term contribution that the private sector can make to projects. It actually brings a commercial level of risk and financial acumen to projects.
“Private participation in infrastructure is just one of many forms of procurement and contracting models. It has been very effective in ensuring that infrastructure is built in climates of constrained public borrowing by setting the budget from day one and spreading the capital and maintenance costs over time, for the period of the contracted concession.
“The key focus needs to be on prioritising where your infrastructure spend is to be allocated and then deciding what procurement method will be the best use of available resources to deliver it – whether that be private, public or a combination of both. To inform these decisions you need to promote the factors that will create a competitive market that attracts and warrants private sector allocating their resources to bidding and participating – this includes a trusted pipeline and fair procurement and contracting models.
“There are numerous organisations involved in commenting on infrastructure in this country. Perhaps a team could be mandated to look at the key areas of focus and advise Government accordingly.”
Mike Pohio’s message to the industry is: “We need to demonstrate the medium and long-term impact on our standard of living. That’s where Treasury’s Living Standards Framework allows people – be it investors or the public – to better present their cases against what Treasury can genuinely match.
“It’s a simple decision tree. If you invest you get this, if you don’t, here’s your standard of living. Which one would you choose?”