Financing Infrastructure

The section on financing infrastructure describes:

• New Zealand’s long-term fiscal outlook and how the Government’s infrastructure intentions fit within this
• the potential role of public private partnerships (one of a number of innovative models to be considered in certain circumstances), and
• local government finances.

The long-term fiscal outlook

In October 2009, the Treasury released its second Long-term Fiscal Statement.[43] That document looked 40 years into the future. It included a projection of government debt as shown in the following graph:

Figure 12: Debt projections

Source: The Treasury's Long-term Fiscal Statement

Given demographic changes such as population increases and population ageing, this graph shows that if historic spending patterns continue, then net debt would rise to over 200% of GDP. As the document stated, this is a projection not a forecast. It is a ‘do-nothing' scenario.

There are several things the Government could do to ensure this will not happen. Options include increasing taxation, reducing government spending or increasing economic growth.

The goal of the Government's fiscal strategy is to reduce net public debt to 20% of GDP. This is depicted by the green line in the graph. Its focus is on achieving this by lifting economic growth and it has a clear plan to do that, as outlined in the introduction of Part 1 of the National Infrastructure Plan.

Nevertheless, a tight rein will need to be kept on government spending. Efficient use of its infrastructure is clearly part of that, but equally important is prioritising new infrastructure in areas that maximise growth.

The Crown manages around $110 billion worth of plant, property and equipment:[44]

Source: The Treasury

Around half of the assets (the state highways and SOEs) are serviced from dedicated revenue sources; however around $2.5 billion-$3 billion is required annually from general taxation sources for maintaining, operating and renewing the other half of the asset base.

In aggregate, that level of activity can be accommodated within the existing level of government spending. However, there is ongoing pressure to refresh, upgrade or expand some of these assets.

The Government is investigating the adjustments that will be needed to manage these pressures. Given other pressures on the operating account, the Government will need to find ways to improve the ways they operate their business so that services can be delivered more cost-effectively over time and with less capital. One new delivery mechanism the Government is actively pursuing is public private partnerships. These are discussed next.

PPPs and fiscal strategy

The Government intends to use public private partnerships (PPPs) where they represent value for money to taxpayers. However, PPPs do not change the fiscal position (unless they generate additional revenue, such as tolls). Both the underlying economics and New Zealand accounting treatment of PPP arrangements mean that “off-balance sheet” considerations are not a factor in the Government's choice of procurement option.

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).

The choice between these depends on how the Government wishes to conduct its long-term fiscal strategy. The decision between direct borrowing and using private finance depends on incentive effects and transaction costs.

While private finance is usually provided in a PPP, the potential advantages of PPPs are not about finance. 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.