Part 3 - Facts and Issues

Introduction

Part 3 of the National Infrastructure Plan is designed to complement Part 1. It provides more detail on the information underlying the positions reached in Part 1 and describes current arrangements for each of the sectors covered in the Plan.

Infrastructure and Growth

To permanently raise New Zealanders' living standards we need to increase productivity. The Government has identified six policy drivers that will form the core of its economic programme for the next three to five years:

• reviewing regulation and red tape
• delivering better, smarter public services
• improving education and skills
• offering innovation and business assistance
• reviewing the tax system, and
• investing in productive infrastructure.

These policy drivers will help to achieve a sustainable increase in productivity. The inclusion of infrastructure as a policy driver indicates the Government's view that infrastructure plays an important role in facilitating economic growth. This view is supported by the economic and international evidence described below.

Econometric evidence

There is a large volume of literature on the link between infrastructure and productivity/growth, starting from the work by Aschauer.[27] Infrastructure Canada recently reviewed this literature, examining the methods used to investigate this link. It found evidence that the link is typically positive but that estimates of the magnitude of the effect depend on the estimation method used, the country and time period being investigated and, in particular, the existing level of infrastructure provision.[28] One conclusion was that “most authors agree that core infrastructure, such as roads and railways, tends to exert the most influence on productivity.”

In addition, according to the World Economic Forum's latest Executive Opinion Survey, inadequate supply of infrastructure is the second most problematic factor for doing business in New Zealand, behind access to finance but ahead of other factors such as regulatory, tax and labour force issues.[29]

The OECD's “Economic Policy Reforms: Going for Growth 2009”,[30] discusses infrastructure investment and suggests (based on previous empirical research) that investment in infrastructure can boost long-term economic output more than other kinds of physical investment. However, it also notes that “gains have been larger for countries with comparatively poorly developed energy and telecommunications networks” and that gains from additional investment decline as networks mature and the level of provision expands.

In its latest New Zealand country survey, the OECD stated that:

When public expenditures were restrained during the reforms of the mid-1980s to the early 1990s, infrastructure investments were particularly affected because delayed impacts made them attractive targets for cuts. Deferred maintenance has since accumulated, and infrastructure bottlenecks are starting to show up, particularly in electricity transmission and roads in and around Auckland. Public expenditures on infrastructure have risen significantly in recent years, but it will take some years before the impact is visible.

Infrastructure … is an important focus of public policy ... [because of the] … strong presumption from economic theory that infrastructure investments can have positive effects on growth that go beyond normal additions to the capital stock. This is because investments in network industry infrastructure are thought to yield positive externalities on other sectors. For instance, better communications infrastructure can facilitate collaboration among workers and raise their productivity. This last characteristic makes achieving optimal levels of infrastructure in network industries especially important. Empirically, however, the link between infrastructure investment and growth has traditionally been difficult to pin down. The direction of causality is hard to determine convincingly and appears to depend on the country, sector and existing level of provision. Recent cross-country studies have used sophisticated econometric techniques to untangle these effects and have confirmed that greater provision of broad measures of infrastructure is associated with higher subsequent growth rates ….

Recent OECD work[31] also finds that the contributions of infrastructure to long-run output levels and growth go beyond normal additions to the capital stock (ie, they generate positive externalities) and that they are not homogenous across countries. In New Zealand's case, this work indicates that past investments in road infrastructure have yielded the greatest growth benefits. [32]

Microeconomic evidence

The OECD work and the findings of the Infrastructure Canada review are consistent with a microeconomic analysis. In particular, the conclusion about roading investment is consistent with the observation that during the 1990s, new road projects in New Zealand needed to have a benefit four times the cost to achieve funding.

More generally, microeconomic considerations suggest that infrastructure projects contribute to economic welfare if the benefits exceed the costs, where benefits and costs are interpreted widely to include all social, economic and environmental benefits and costs, including positive and negative externalities.