Speech to New Zealand Council for Infrastructure Development
Good morning and thank you. It is a pleasure to be here.
This symposium is very timely – not just for you and the organisations working in the infrastructure sector, but indeed for the Government.
It’s no coincidence that you are hearing from two Cabinet ministers – my colleague Transport Minister Steven Joyce will join you tomorrow morning.
This reflects how important infrastructure is to the Government’s wider economic policy programme and New Zealand’s longer-term economic prospects. High calibre infrastructure matters because it supports productivity and economic competitiveness.
http://www.youtube.com/watch?v=z5QC1ABYjuc
And, in the deepest and most coordinated global recession since the 1930s, effective investment in productive infrastructure will support many thousands of jobs across the country. We can already see that starting to happen.
This is particularly important in light of the unemployment figures issued last week and our expectation that unemployment will continue rising well into next year.
To turn that around, we must unclog our economic arteries and ensure that our vital infrastructure is modern and world class. That’s why our multi-billion dollar infrastructure investment programme is a priority.
Infrastructure is also important for social and environmental reasons.
So today I want to update you on our progress and thinking as we get that programme underway and move towards issuing our first National Infrastructure Plan.
But before I do that, I’d like to put this within the context of the Government’s substantial economic work programme for dealing with the significant challenges facing New Zealand.
The Government has a very clear plan to increase our productivity, grow our exports and start narrowing the income gap with our trading partners. We’re focused on what matters: jobs and growth.
Since the election, the economy has been the Government’s top priority.
We inherited a New Zealand economy that had already gone into recession in early 2008 and was under considerable stress from imbalances built up over the past decade.
Looking back at the data, it’s now clear that our economy started to get out of kilter around 2003/04 - and it has since got progressively worse.
Bank credit and household debt started blowing out.
Non-tradeables inflation took off and remained stubbornly high at over 4 per cent.
Government spending ballooned, increasing by 50 per cent in the past five years – double the rate of economic growth and government revenue.
Public sector wages increased well beyond what we’ve seen in the private sector.
And, since 2003/04, our productivity has sunk to a 25-year low.
Our lopsided economy is laid bare by two worrying indicators – and I make no apologies for having talked about them regularly in the past couple of months:
First, the tradeables sector - that’s exporters or industries competing with imports – has actually been in recession for five years, contracting by about 10 per cent.
And, even more staggering, there have been almost no net jobs created in the tradeables side of the economy for the past 10 years.
By contrast, the non-tradeables sector – domestic industries not competing with exports, including the Government – has grown by 15 per cent in the past five years.
The second symptom of our unbalanced growth is the red ink in the Government’s accounts – the result of falling revenue and fast-rising spending.
We expect Government cash deficits of between $10 billion and $12 billion over the next four years and, on current forecasts, we will not be back in surplus for 10 years.
These deficits are larger than we had foreseen – larger, in fact, than New Zealand faced in the early-1990s.
For all of that, a recession for ordinary New Zealanders is all about whether they have a job.
The Government is concerned about the loss of any job - it has a profound effect on workers and their families.
Unfortunately, unemployment is rising – the data last week confirmed unemployment had increased to 6 per cent in June from 5 per cent in March.
The quarterly increase was higher than most forecasters had predicted, but the trend is not surprising.
Unfortunately, unemployment will continue rising, probably well into next year - even when the economy starts to recover.
This reinforces the need for urgency in our economic programme.
Over the next four years, the Government will borrow an extra $40 billion to support the economy and particularly to support many thousands of jobs.
We have rejected calls from our political opponents for a reckless spend up that would have seen government debt skyrocket out of control and made the recession worse, costing thousands more jobs.
Having dealt with our immediate challenges in the Budget, the Government is now focused on a bigger task – a three to five-year programme that will set New Zealand along the road to recovery.
Our economic challenges
New Zealand’s economic challenges are threefold:
Increasing our productivity growth.
Maintaining high levels of employment.
Reducing our vulnerability to adverse events.
Improving productivity is important because, over the past 20 years, New Zealand has failed to keep pace with the incomes of Australia and other countries.
Maintaining high levels of employment – creating sustainable new jobs – is critical because this has important social, as well as economic, benefits.
Finally, it’s essential that we reduce New Zealand’s vulnerability to future shocks because, as we’ve seen with the current recession, economic conditions can change extremely quickly.
New Zealand must move away from borrowing and spending and towards exporting and productive investment. That means reversing the trends of recent years.
There is no single policy that will achieve that. Instead, there are a large number of things – often unglamorous things – that the Government can do to give businesses the confidence to invest and create jobs.
New jobs and indeed New Zealand’s economic fortunes rest on improving that business confidence and investment – not on government spending.
To ensure that happens, the Government has identified six policy drivers that will form the core of our economic programme for the next three to five years. All of them will bring benefits to the economy and to the infrastructure sector in particular.
These policy areas, announced last month by the Prime Minister, are:
Reviewing regulation and red tape
Delivering better, smarter public services
Education and skills
Innovation and business assistance
Reviewing the tax system
And finally – but by no means least - investing in productive infrastructure. That’s what I would like to talk about today.
Investing in productive infrastructure
Before the 2008 election, we promised to unclog the economy’s arteries and address how New Zealand provides its infrastructure.
We have the opportunity to get the best from our limited resources by being smarter in planning, financing and executing our infrastructure projects.
Almost every modern, successful economy is served by first class infrastructure. The spill over benefits to other parts of the economy are large.
The New Zealand Institute of Economic Research recently noted that, with the exception of communications, investment in most sectors had been steadily falling since the 1960s and 1970s.
The costs of inadequate infrastructure are not too hard to find. Bottlenecks have become apparent and are now being addressed in roads, electricity transmission and telecommunications.
The infrastructure sector is complex. On the one hand, we have commercialised sectors, such as airports, ports, electricity and telecommunications, where the Government’s role is mainly about adequate regulation and promoting competition.
On the other hand, in less commercialised areas, the Government has to select the right level of funding, ensure that user charges are set correctly, prioritise its capital spending and monitor how the agencies concerned are operating.
In principle, infrastructure is no different from any other type of investment. It is about investing to provide users with excellent service and the country with worthwhile returns.
The challenge is to ensure that the right level of investment is made in the right places by organisations with the knowledge and incentives to invest.
New Zealand needs infrastructure that is properly selected, designed, built and maintained using modern, whole-of-life approaches.
Progress to date
The Government’s approach so far is two-pronged.
First, we have pushed ahead in areas where the need for investment was obvious, while simultaneously preparing for a longer term, more substantive programme.
By now you will be familiar with some of the early projects the Government has accelerated. A few highlights include:
$480 million to fast-track roading, schooling and housing projects in response to the recession.
$1 billion in extra spending over three years on state highways and Steven Joyce will discuss this in more detail tomorrow. This will accelerate key projects, for example the Victoria Park viaduct in Auckland has been brought forward a year.
Transpower is expanding its spending on grid upgrades. It will spend $3 billion over the next four years to improve security of supply.
We've committed $290 million and outlined initial arrangements for our $1.5 billion fibre-to-home broadband plan.
The benefits are already showing through. Research group Pacifecon estimates that 60 per cent of New Zealand’s medium and large construction projects in the early stage of planning are currently central or local government funded.
This is a good start and all of these projects will support jobs.
However, the Government’s longer-term programme is much more ambitious. This is the important second part of our approach.
In the Budget, we outlined capital spending of $7.5 billion over the next five years. Much of this will be used to build and upgrade schools, roads, housing, hospitals and telecommunications.
Because much of the infrastructure sector is publicly funded, one of our first steps was to establish a framework to handle this.
Earlier this year, we set up the National Infrastructure Unit within the Treasury. This will be the centre of Government expertise, covering areas such as major project evaluation, infrastructure-related regulatory issues and contracting with outside finance.
Almost all mature infrastructure markets we have looked at have a similar body.
One of the unit’s roles is to produce the first National Infrastructure Plan. This will be a stock take of current demands and planned investment.
The plan will serve two purposes.
From the Government side, it will allow us to take stock of our spending and relevant infrastructure-related regulations, ensuring this is appropriate and contributing to productivity.
From the industry’s viewpoint it will provide some direction and certainty about where the sector is headed. Private sector participants have long been calling for such a document.
That said, I would caution against expectations of the initial plan being too high.
First, the plan will not be a shopping list of projects. Many large Government investment programmes, such as those of the New Zealand Transport Authority or Transpower, are already well known.
The National Infrastructure Plan will not revisit or over-ride these programmes. It will bring together a lot of existing information - with a focus on identifying emerging bottlenecks and investment gaps.
Second, the plan will evolve through time. The first draft should be ready early next year. Areas not identified in the plan will not necessarily be excluded from future public investment. It will be updated regularly - and no doubt we will get better at doing it.
The National Infrastructure Unit is backed by an advisory board of private sector experts, who are assisting us with the plan as well as general policy.
The board is new and we expect it will exert growing influence over time. But it’s important to recognise that it is the Government, rather than the board, generating the National Infrastructure Plan.
The Government wants to see as much private sector expertise and discipline used as possible. We welcome engagement.
The New Zealand Council for Infrastructure Development has been particularly helpful, both with high-quality research and advice offered to the Government.
Private sector expertise
The potential for private sector involvement in financing and operating New Zealand’s infrastructure has attracted much interest – including from many of you here today.
The Government’s basic position is clear: We want to maximise economic efficiency, help the economy grow faster and get better value for money for taxpayers. In that sense, New Zealand is open to good, innovative ideas from business.
From overseas experience, it’s apparent that, with some projects, private sector innovation can provide a better asset for a cheaper whole of life cost.
We can get some idea about how the New Zealand market might evolve by looking across the Tasman.
The Australian infrastructure industry is deep, well developed and vibrant. Most of your organisations will have Australian connections, and will no doubt expect New Zealand to become somewhat integrated, with similar players and practices. That is our expectation as well.
It is interesting to examine Australia’s record. The first private public partnership projects were completed more than 20 years ago. All states have participated, with Victoria being the acknowledged leader.
Since 2000, around 50 major PPP projects worth about $30 billion have been completed in Australia. They range from the traditional road, rail, water and energy, through to areas such as defence facilities, hospitals, schools, prisons and radio networks.
These totals are impressive. Total Australian infrastructure spending is running at around A$50 billion a year, or almost 5 per cent of gross domestic product.
Less than 20 per cent of total Australian spending is financed privately. Most infrastructure remains traditionally funded. I’m sure this will also be the case in New Zealand.
I believe the Australian experience can usefully help a more sophisticated discussion in New Zealand.
Let me turn to Public Private Partnerships. The term PPP is misleading, as it tends to be used for a wide range of procurement arrangements.
The accepted wisdom is that all investments contain a bundle of activities. They include forecasting demand, designing facilities, obtaining regulatory approval, construction, financing, operating and maintenance.
Public-private arrangements are about unbundling these activities, so that each side undertakes the parts it does best.
For some projects, this is complicated. Even so, the gains can be worth it.
The important lesson is that every investment carries risk, regardless of how it is financed.
Our intended $7.5 billion of capital spending over the next few years contains a great deal of design, patronage and construction risk – it’s just that they are seldom separately identified.
From a taxpayer perspective, the fact that these risks exist is an argument for, not against, some private sector involvement. The private sector generally remains better at assessing and managing risks than the public sector.
In a sense, New Zealand already uses the private sector more than it might first appear. The Government does not build infrastructure, it mostly designs and finances it. The private sector undertakes construction.
Likewise, few Government operations own their premises. Most rent or lease them, and are happy to contract out property maintenance.
For example, AMP is the landlord for many Wellington ministries and departments, Ngai Tahu owns a number of police stations around the country, and groups such as Southern Cross are well integrated into supplying facilities and services to District Health Boards.
The Government will enter in to PPPs only if they work and deliver value for taxpayers. Our interest is in increasing the performance of public assets across the board.
I have been impressed by the level of interest from the market in working with the Government.
But let me be clear – this is not about ideology: Private sector involvement will happen only where it makes sense, period.
Done properly, the benefits should be better whole-of-life management of infrastructure, and a better deal for both users and taxpayers.
There is further work to be done to develop this market in New Zealand. A strong message from other countries is the need for a clear policy framework, with stable rules and relative certainty.
Because we are late starters, we want to pick up the best practices from overseas. Even so, it will take some time for the New Zealand public sector to catch up after a decade of lost time.
Next steps
Looking ahead, I can see the potential for wider application for these types of disciplines.
For example, in response to prison population forecasts, the Corrections Department is investigating building more prisons.
There is a range of opportunities for more private sector participation in this process — from the current approach where private sector input is limited - through to designing, financing, building, operating and maintaining prison facilities.
We’ve asked Corrections to look at alternatives to conventional procurement for delivering extra capacity – including a new prison. We’re happy to proceed with that if the case stacks up. We expect to be in a position to make decisions about that early next year.
We want to see options genuinely considered and appraised — not simply ruled out on the basis of some ideological knee-jerk response or for political expediency.
But no one approach should be presumed to be more efficient than another. The key is determining which form of delivery provides the best value for money in meeting Government and public objectives.
We want to allow Government operations to get on with what they are good at, educating for example, rather than activities such as property maintenance that they would prefer to avoid.
In summary, these are exciting times.
We have the opportunity to get the best from our limited resources by being smarter. The challenge is to get to the forefront of world practice.
In the age of the internet, that is something we should be able to do relatively quickly. The legacy will be a better, more productive and more competitive New Zealand.
That is a goal worth pursuing.
Conclusion
Can I finish by reiterating that the Government is clear about what needs to be done to turn this economy around. We have a balanced, targeted and effective plan to achieve that.
I particularly look forward to working with the Council for Infrastructure Development and others in the sector to implement the important infrastructure component of that plan.
Despite our considerable economic challenges, I’m confident about New Zealand’s prospects because of the resilience demonstrated by many New Zealanders.
By backing ourselves as a country, we have a real opportunity to emerge from the recession stronger and more competitive than other countries.
Thank you.