Investment principles

The preceding section describes the current investment priorities and work programme of the Government. These activities are driven by a mixture of legacy issues and new government initiatives. Beyond this programme, the Government believes that there is value in establishing a consistent and coherent infrastructure investment framework based on a set of published principles. These will improve transparency in Government decision-making and allow the private sector and territorial authorities to predict and understand the Government's responses when issues arise.

Market or government?

All things being equal, the Government will favour the distributed decision-making power of a competitive market for the provision of infrastructure. This is because the commercial disciplines that come from investors risking their own money are difficult to replicate in the public sector. However, the Government does have a role providing goods and services where:

• the goods and services have the characteristics of being ‘public goods’ in the technical sense[8]
• the service is a monopoly and there are advantages in regulating through direct ownership rather than through the Commerce Act or other regulatory vehicle, or
• distributional and equity objectives are better achieved through in-kind provision than through income support.

Central or local government?

Within the ‘government' sector, some services and infrastructure are a central government responsibility and others are allocated to territorial authorities, regional or local. This Government is not planning to change the fundamental balance of central and local responsibilities, or funding. It is however looking to work with local government on a number of issues of joint concern.

Tax-funded or user charges?

Where central government is the provider, its preference is to fund infrastructure through user charges. User charging makes users responsible for the costs of their actions. In the absence of charges, there are incentives for overuse and demands for an uneconomic level of services. The Government will apply user charges unless:

• the good or service is provided free for income redistribution or other policy reasons (e.g. health, primary education), or
• it is difficult or costly to exclude users and charging is therefore not feasible (e.g. national defence, law enforcement).

Prioritisation and decision-making

In a world of limited resources, we need to make choices. A choice in favour of one option means that something else misses out. It is therefore important to make good decisions. This is particularly true of infrastructure, as infrastructure investments are typically large, have environmental and social impacts, take years to build and are long-lived.

Given the importance of these decisions, decision makers need to be provided with high-quality analysis and they have an obligation to consider that analysis as objectively as possible. For publicly-funded projects, the aim of analysis is to determine how the project will impact on public welfare. The concept of welfare includes economic growth, environmental and health considerations. There are well-established methods to quantify these considerations in most situations.[9] The value of equity or distributional effects cannot be quantified objectively or empirically and needs to be considered separately. However, even where a policy is promoted for distributional reasons, decision-makers should have an economic welfare analysis to support their decisions and ensure they understand the costs of any distributional decision.[10]

To be eligible for funding in future, projects need to demonstrate that they are consistent with government strategy, that they have net welfare benefits and that these are greater than alternative projects.

Transparency in decision-making is a useful way of improving the quality of analysis. Publishing of analyses allows outside scrutiny and thereby encourages the public service to lift its game. It also creates pressure for the Government to justify its actions if it chooses a direction or investment not supported by the analysis. The Government is considering ways to increase the transparency of its decision-making and where it would be appropriate to publish the decision support analysis it receives.

Procurement

Having decided to provide a piece of infrastructure, and having identified who will pay for it, the Government must then decide how to procure the asset. Contracting out, rather than delivering the asset and/or services ‘in-house', allows those paying to benefit from the innovation and drive for efficiency that results from competition and strong contractual arrangements. The Government will take opportunities for contracting out where these can be shown to provide value for money.

Access to finance is not a fundamental determinant of procurement method, but private sector financing may be appropriate to create the right incentives around an out-sourced service.

Asset management

While public focus is often on new infrastructure projects and new spending, effective management of existing Crown (and local government) assets is also important if we are to realise our economic goals and deliver better public services. The Government expects greater efficiency from the management of existing assets at both central and local government levels.

Application of these principles by sector

Applying these principles to each sector, we reach the following conclusions:

• Road transport. Roads provide monopoly services and are therefore owned by central or local government.[11] New Zealand has a pay-go system in which all road user charges are directed to the National Land Transport Fund. Beyond commitments already made, the Government will look to fund any increases in investment from higher user charges.
• Rail. Rail freight is operated by a state-owned enterprise. Though it is not currently operating on a fully commercial basis, the Government expects it to move to a commercial basis over time. Metro rail is funded by users directly through the fare box, and by people who benefit indirectly from the service (ratepayers and road-users).
• Ports and airports. Ports and airports operate within a competitive market and their investment decisions respond to a combination of market signals and local interests. The Government encourages these sectors to carefully consider their investment decisions but does not see conditions that might justify government intervention.
• Energy. New Zealand has a market-based system for gas and electricity. This means that additional projects will be financed and provided by market participants.
• Telecommunications. New Zealand has a market-based system for investment in telecommunications infrastructure. Recently, the Government has decided that the roll-out of ultra-fast broadband is not occurring rapidly enough and has therefore decided to allocate up to $1.5 billion to make it happen. It is also considering a levy of users to fund a specific rural broadband initiative. This funding is targeted at the underlying ‘passive' network infrastructure rather than active services. Aside from this commitment, funds for additional projects will need to come from the market.
• Water. Though water services are the responsibility of local government, the provision of water for irrigation and electricity generation is generally driven from the private sector. This means that funding for projects also needs to come from the private sector. The Government recognises that there may be some regulatory and co-ordination issues that need to be better understood and addressed.
• Health, education and corrections. Government services such as these are public goods, but they are also most affected by the Government's fiscal constraint. Capital expenditure required by these sectors will need to be accommodated within available resources and prioritised appropriately.