Big Numbers and High Hopes

Categories: Engineering and science.

Seventeen billion dollars is being spent by central and local government on new infrastructure over the next four years. The numbers sound impressive: $7.6 billion on social assets like schools, hospitals, state houses and prisons over the next four years, $6.5 billion on roads and about $1.5 billion each on broadband and rail.

“In addition we’ve set aside $5.5 billion to rebuild Canterbury and state-owned enterprises are spending billions more upgrading their own assets,” Infrastructure Minister the Hon. Bill English says.

But there are no projects or money that had not been previously budgeted or announced, leading to a charge from Labour that National was simply re-announcing projects that had already been announced.

The Green Party says far too much money is being spent in the wrong places. The Council for Infrastructure Development, representing the major industry players and their advisors, argues there is still a shortfall of tens of billions of dollars across transport, health, education, public housing and water infrastructure sectors.

Government Ministers have been emphasising that the National Infrastructure Plan (NIP) is a key part of their medium term growth strategy.

“Unclogging the arteries of the economy,” is the way Prime Minister John Key describes it.

The NIP describes infrastructure as “fixed, long-lived structures that facilitate the production of goods and services and underpin many aspects of quality of life. ‘Infrastructure’ refers to physical networks, principally transport, water, energy and communications”.

The NIP sets out five priorities: rebuild Canterbury infrastructure to get the economy working; invest in Auckland in a way that is fair to all New Zealanders; improve the management of social assets – schools, hospitals and the like; focus land transport investment on supporting exporters, eg by Roads of National Significance and rail to ports; improve the ability to monitor performance.

Mr English says there are many benefits to be gained from more efficient use of capital, from building in more “resilience”, and from having a plan that itemises all the spending and investment in one place.

So what is the NIP? It’s not just a list of capital expenditure projects, although the first plan produced in 2010 was little more than that. The 2011 plan is more robust in its analysis but still falls short of the Council for Infrastructure Development’s expectations.

Chief Executive Stephen Selwood says “our overall impression is that this is a plan for a plan. Our long term aspiration for the NIP is that the many issues in the current plan are addressed and resolved especially for the publicly funded sector”.

Specifically he wants a capital intentions plan that stretches out at least 10 years, specifies the projects in the pipeline, and links funding to the projects.

“That would give certainty to the private sector to ensure that there are adequate human and capital resources to deliver the plan, rather than the on-off, short termism we have experienced in the past. That’s not useful and not great for the industry.

However the 2011 plan recognizes the key challenges by sector that must be addressed and that’s all to the good.” Does it deliver certainty? Mr Selwood doesn’t think so, “but it identifies the issues that need to be delivered on, and creates a work programme to resolve them, so that’s a strong tick in the box. Previously we have had successive government denial of the need for improved long term investment certainty”.

The plan is miles away from the Soviet-style five year plans, and is not like the Energy White Papers that were produced annually in the 1980s. The latter set out a regularly changing pecking order of projects, thus creating the very uncertainty the plan was designed to overcome.

Mr English describes the plan’s status this way. “The National Infrastructure Plan delivers on our promise to ensure stakeholders have a better sense of the Government’s intentions across a range of sectors so they can make their own decisions to meet future demand.”

Ministers say there is a deliberate emphasis on fostering economic growth and helping wealth producing industries such as exports, and that other areas have not been squeezed to meet Canterbury’s needs.

As Associate Infrastructure Minister the Hon. Stephen Joyce said at the NIP launch, “one of the biggest limitations to growth is the Auckland, Hamilton, Bay of Plenty triangle. Transport infrastructure is quite a limiting factor. We need to invest in rail as well as roading. These projects (in total) will have a big transformational effect”.

The 2010 NIP assesses the state of the various infrastructure sectors (transport, telecommunications, energy, water and social) according to six criteria: investment analysis, resilience, funding mechanisms, accountability and performance, regulation and coordination. Transport scores the best with four green ticks – green means “occurs effectively”.

Water fares worst with three red ticks – red means “does not occur or occurs ineffectively”. Transport has no reds and water has no greens.

So what accounts for the differences between transport and water? Brian Hallinan of Treasury’s National Infrastructure Unit says there are a variety of views and a multitude of agencies involved in the water sector. “There is more certainty in transport where the NZTA is the dominant party.

“Water is the sector where we see most issues across the board. We are not trying to solve the water issues by ourselves,” he says referring among other things to the recent work of the Land and Water Forum reporting to the Minister for the Environment the Hon. Nick Smith.

“With water, local councils primarily focus on their own infrastructure, so how do we manage water assets nationally in this context?” Mr Hallinan asks. One answer might be stronger national legislation, but Treasury says water is “an asset where we need to improve our information.”

Infrastructure providers such as energy companies have found that even under the new Resource Management Act legislation national guidelines issued by the Ministry for the Environment don’t necessarily overcome local priorities.

“Of all the sectors analysed in this plan, the management, regulatory settings and governance relating to water infrastructure will require the most attention in the next three years,” the NIP says.

Murray Gibb from Water New Zealand, says water infrastructure operates under a “plethora of confusing, sometimes outdated and often poorly understood legislation”.

He notes there is no central government agency with overall responsibility for water policy. Rather there are eight government departments and eleven regional councils all with different needs, views and priorities.

So is the NZTA model – a dominant centralised government agency – a paradigm for how we should manage water? While Mr Hallinan says “Treasury doesn’t have a preference for a specific model, but is interested in accountability and performance”, Water New Zealand says yes, for urban water services at least.

“There should be an integrated approach to policy and planning of drinking water and sanitation services, all within one government department, or with a designated lead department having the authority to lead and co-ordinate,” Mr Gibb says.

He quotes Michael Rouse, an acknowledged expert on best practice in water management to back his view.

“We look to other jurisdictions where infrastructure is performing well and compare that with New Zealand. If there is not one agency responsible,

then there should be.”

Mr Gibb believes New Zealand has a long tail of poorly performing infrastructure, and much deferred investment in water. “Stormwater in Auckland needs between one billion and eleven billion dollars depending on which assessment you follow. Reticulated drinking water in smaller communities needs another $330 million according to a report commissioned by the Ministry of Health.

“And if you look at the current state of water infrastructure, capacity is variable. The bigger urban centres are doing quite well, but in smaller centres the burden is increasing to the point where the capacity of some of the smaller providers is highly questionable.” Mr Gibb says he takes some comfort from the Government’s recent decisions about rural water policy. There’s $35 million over five years to accelerate irrigation and the promise of up to another $400 million after that.

“Secondly there’s a work stream on governance options in the water sector which is to report to Cabinet next February, and then a further work stream on water limits which is due to report in October 2012.”

Mr Selwood has an even larger shopping list. He estimates the shortfall of investment at between ten and twenty billion dollars. The NIP does not rate financing transport infrastructure as a problem – it gets a green tick. Mr Selwood sees it differently.

“The Government is putting up more funding for roads and rail which is good, but when you look at the transport investment need there is a huge deficit.

“Just looking at Auckland alone the major transport projects that will form the backbone on the Auckland Plan – the central rail loop, the additional harbour crossing and arterial upgrades such as the Auckland Manukau Eastern Transport initiative – gross up to $10 billion more than the land transport budget can fund. To address this kind of deficit we will have to look at new funding mechanisms, like network tolling.

For example, variable tolls on the Auckland motorway system – higher at peak and lower at off peak – could raise substantial amounts of money for investment in new and better transport and enable better use of the existing asset through demand pricing.”

According to the Treasury, the NIP’s overall purpose is to improve investment certainty for businesses by increasing confidence in current and future infrastructure provision.

The NIP says “getting more from the current stock of infrastructure is about looking at how assets are used, identifying opportunities for improved management, finding better ways of managing demand and ensuring users’ expectations are understood”.

So does getting more suggest some kind of mandated rate of return is expected? “Return is not just a commercial return. We do want information on performance, and that’s not just about return in a fiscal sense,” Mr Hallinan says. He referred to stronger investment statements, clearer performance measures which already apply to entities like the stateowned enterprises, and to knowing more in the water sector.

One problem readily apparent in the NIP is there are big gaps in information.

The available data is inconsistent and some is not very reliable.

The NIP cautions, “Valuation data is incomplete in some sectors, notably private healthcare and education, ports and airports. Values have not been adjusted to account for missing data […] valuation methodologies vary and may not be consistent and comparable. All data should be treated with caution.”

Put simply analysts and decision makers don’t know as much as they should, and this is one of the factors that has limited more robust analysis and better decision making.

Arguably there are other factors too – un-coordinated decisionmaking, fragmented responsibilities and a lack of alternative funding to government or local government capital. However in deciding how to better manage an asset portfolio of $115 billion the quality of information is a significant issue.

The NIP also says that “across infrastructure sectors, asset performance is either variable or not reported. Therefore providing a national snapshot of our infrastructure assets is not as simple as it should be.”

The next edition of this NIP must be based on better information about asset condition and performance to allow more informed decisions and efficient and effective investment.

Mr Hallinan says “we don’t really know enough across the sector. That makes it harder to arrive at strong conclusions. We need to understand the asset base better. We have had general endorsement from stakeholders to pursue this.

“Ways to improve our understanding would include having a common methodology across all sectors. We need greater performance information but whether these would be common would depend on the owner’s willingness to share data.”

The NIP is described as “directional but not directive”. It places infrastructure in the context of New Zealand’s broader economic goals and is anchored in the reality of its fiscal outlook. It sets a clear course for the future so infrastructure providers from all sectors have a common understanding of national level expectations and policy settings.

So how far away is that common understanding? Is the Government clear about its own investment intentions? “This is a high-level strategy rather than a 20 year capital expenditure plan,” Mr Hallinan says.

“Nor is it only a statement of the Government’s intentions, as local Government and the private sector own significant infrastructure assets.”

Indeed as the NIP admits, “There is a tension between the need for national direction and the numerous autonomous decision makers. The NIP provides a high level strategy which reduces uncertainty for decision


This is a strategic document rather than a plan of what to build, when and why. It sets out investment principles and identifies what the Government wants to achieve long-term. With the NIP the Government

is deliberating choosing a growth path, and investing in the types of infrastructure – transport, telecommunications and improved asset management – that will enable the tradable sector to grow and export more efficiently.

Mr Hallinan says the NIP is “not just a list of projects. It sets out how Government is going to do business.

It gives confidence by setting out the Government’s thinking about infrastructure in a strategic and systematic way”.

The Greens see it differently. Green Party co-leader Dr Russel Norman says the NIP shows the Government is not meeting the challenges of the 21st century. “We have an opportunity to develop a smart green economy that will help us meet all the challenges of this century.

“The plan states that we need to consider global trends that will affect the economy, including climate change, but then it prioritises fossil fuel production and irrigation to expand dairy production, both of which will increase our greenhouse gas emissions.”

Rather than expand infrastructure, “if we don’t plan to reduce our fossil fuel use, our economy and our environment will suffer,” Dr Norman says.

Mr Selwood says his members’ reaction to the NIP have been generally supportive. “We certainly see this plan as progress but we would like to have gone further sooner. However we are confident that we are heading in the right direction.”

For Mr Hallinan, much remains to be done to improve the analysis and planning processes. “The first plan (in 2010) was a good start – it was the first time infrastructure had been looked at all in one place. The reaction was, well that’s a good start but we want to see more. Now we have developed a 20- year vision and guiding principles. The 2014 plan will seek to answer more of the questions that this plan raises.

“The information gap is a major defect. We need a better understanding of the various scenarios about development and we need to examine the effect of potential changes.”

So, given the range of ideas in the plan, can the infrastructure industry manage the future work flow? Mr Selwood says it’s a “business as usual plan” so there will be a business as usual response.

“There’s no new money here – all the projects being funded have already been announced, so the impact on the economy will not be greater than what is already known, and this can be easily managed by the infrastructure industry.

“Can we deliver – yes, and I say that without reservation.”