Funding Infrastructure: The Government's Fiscal Strategy
348. The Infrastructure Plan will include specific sections on Transport, Corrections, Education and Health.
349. Central government is projecting operating deficits until 2015/16. Therefore, without policy changes, the unconstrained spending intentions of the above would result in continually increasing debt levels. The government has decided that projected levels of net debt above 40 per cent of Gross Domestic Product (GDP) would not be fiscally responsible. Therefore, in Budget 2009, the government indicated that actions will be taken to keep projected net debt below 40 per cent of GDP and reaching 30 per cent no later than the early 2020s.
350. In the transport sector, state highway assets are worth around $21 billion (20 per cent of overall Crown fixed assets) and require funding of around $1 billion per annum to meet current levels of infrastructure maintenance and new builds. Essentially, land transport sector expenditure is a ‘pay-go’ system funded from user charges, so the sector generally poses no fiscal burden unless government wishes to pursue other priorities than those set out in the National Land Transport Fund.
351. By contrast, the level of asset-related activity in core Crown and other Crown entities (including Corrections, Education and Health) is more directly influenced by the Crown's fiscal situation. These sectors manage around $72 billion worth of fixed assets and are projected to spend on average around $2.5 billion - $3 billion annually on those assets. In aggregate, existing baselines can sustain that level of activity. However, there is ongoing pressure to refresh, upgrade or expand some of these asset networks. A Treasury survey in September 2008 revealed a potential funding gap of at least $10 billion over 10 years between the aggregate capital intentions of the capital-intensive agencies and their current baselines. The main driver of pressure relates to the interplay between demographic changes and current government policies.
352. These figures do not include any Crown funding pressure that may arise from SOE activity or other investments such as broadband networks.
353. The government is investigating the adjustments that will be needed in order to manage pressures within this constraint. Given other pressures on the operating account, the implication is that the government will need to find ways to improve the models of business operation so that the necessary levels of service can be delivered a) more cost-effectively over time, and b) with less capital than current unconstrained agency projections.
354. There may also be some scope for further funding through increased user charges, but in the absence of a significant change in public appetite for user charges this is unlikely to make more than a minor contribution.
Financing Infrastructure: PPPs
355. Government infrastructure can be funded either from:
- Current income (taxation or user charges); or
- Future income (which can be financed either from direct borrowings or with private finance).
356. The choice between these depends on how the government wishes to conduct its long-term fiscal strategy. The choice between direct borrowing and using private finance depends on incentive effects and transaction costs.
357. Private finance is usually provided through public private partnerships (PPPs). PPPs typically allocate all construction and operating risks to a private sector party. This not only reduces the risks faced by the Crown but provides stronger incentives to minimise whole-of-life costs and improve service quality than is possible within the public sector. The main disadvantages of PPPs are the reduced flexibility due to the long-term nature of the contract, and the cost that arises from unanticipated contract variations. This cost is not usually recognised at the time the PPP is evaluated. PPPs may therefore be attractive, compared with other types of contracts, provided the likelihood of unexpected contract variations is low.
358. The government intends to use PPPs where they represent value for money to taxpayers. The NZ accounting treatment of PPP arrangements means that "off-balance sheet" considerations are not a factor in the Government’s choice of procurement option.