Cameron Bagrie: Plenty we need to get right in infrastructure

Reminder, this is a Premium article and requires a subscription to read.
Cameron Bagrie. Photo / Alex Burton
THREE KEY FACTS:
Cameron Bagrie is principal of Bagrie Economics.
OPINION
We constantly hear the need for more infrastructure spending, given the important role it plays within an economy.

But what if we are losing
sight of the forest for the trees? We need more discussion on the cost efficiency of any spend, maintenance and management of assets and ability to drive revenue from any asset, as a proxy for the asset’s perceived value.

It is inevitable society will end up paying more for infrastructure, it’s just a question of the mechanisms.
It is well documented in the economic literature the important role infrastructure plays in supporting growth and productivity, particularly in the long run. If you can’t get from A to B efficiently, or unlock land for affordable housing, you will have problems.
Infrastructure investment can have a positive effect on growth that goes beyond what you build. It can drive economies of scale, create positive externalities (i.e. a road unlocking a region) and enhance competition. There is also a flipside; over-investment can lead to a bust.
There is debate over the use of infrastructure to support growth in the near-term. Time-to-spend and time-to-build delays, which are common in infrastructure projects, dilute its effectiveness.
Minus 0.4%. That is the average decline in capital productivity per year since 2000. Capital productivity reflects how well the capital stock is allocated, managed, and utilised to generate value. It is an indicator of the return on investment and affects the competitiveness of New Zealand in the global market.
Minus 7.7%. That is the decline in the level of New Zealand capital efficiency since 1996. That is the market sector alone which excludes health and education. You only need to jump on the motorway and drive to Taupo from Auckland to realise the pickle we are in, and the inefficiency that weighs on the transport sector. In the long run insufficient infrastructure will defer private investment and lead to firms avoiding New Zealand as a place to do business. Money is returned to investors via dividends in New Zealand as opposed to invested for growth.
If we accept that we are not going to materially raise living standards unless we address negative capital productivity, we should not shy away from some hard truths.
If you want some humorous reading, consider the state of infrastructure now, with what was said in the 2016 National State of Infrastructure Report. “Wellington Water is demonstrating the benefits of increased capability and an integrated approach, especially in resilience thinking.” Really? The Ministry of Education launched a new asset management system, Helios, in April 2016. How has that worked out? The New Zealand energy system was described as “in a sound overall condition”.
It is easy to accept the need for better infrastructure but the issues are complex and funding will be a rising challenge. According to the Infrastructure Commission, New Zealand spends an average of 5.8% of GDP on public and private infrastructure.
The commission points out: “International comparisons show that our infrastructure investment levels are higher than Australia and the median OECD country. However, New Zealand ranks near the bottom 10% of high-income countries for the efficiency of that spend.”
The commission estimates infrastructure demand is 9.6% of GDP. The gap between that and status quo (5.8% of GDP) is an average of 20% more income tax per taxpayer. If the Treasury follows the lead from the data, Reserve Bank, and other forecasters, the 2024 Budget projected deficit numbers for 2025 to 2027 will be revised lower and debt higher.
Recessions lower the level of activity as you lose a couple of years. Worse fiscal numbers will mean more demands for savings. Infrastructure is an area where projects are often pushed out beyond forecast horizon to support debt metrics.
Treasury included a downside scenario in the 2024 Budget forecasts we are tracking below. This weak domestic demand scenario had 0.6% GDP growth in the 12 months to June 2025 then spring-boarding to 3% and 3.8% over the next two years. The Reserve Bank is projecting 0.2%, 2.7% and 3.1%. New Zealand is now also past an inflection point where the fiscal costs of an ageing population is rising fast. We spend more on NZ Super than education and the gap will widen.
The Infrastructure Commission has been doing some good research bringing to attention key issues which relate to poor capital productivity.
We need to build our infrastructure cost effectively to achieve economic growth.
Infrastructure that costs too much will not lift growth. New Zealand’s cost base has risen significantly in recent times. An example is bridge costs (+40% in five years). Poor approaches to land protection or how we manage resources like aggregates, just inflate costs.
Can we understand the real value proposition in a project by testing whether people will be prepared to pay for it or the growth with fund it? A recent paper by the commission noted that:
“Local government undertook sustained periods of infrastructure investment from 1920 to 1936 and 1950 to 1970. During these periods, their revenues grew in line with debt, which prevented debt-to-revenue ratios from rising and preserved their ability to make future investments.
“Our current investment cycle – from the mid-1990s on – appears to be the first where local government has significantly increased debt to finance investment without increasing revenues at a similar rate.”
However, “Today, a much larger share of investment is directed towards renewal of existing infrastructure than to growth infrastructure” so times are different.
A paper on depreciation and maintenance notes that the business sector is reasonable when it comes to keeping up with depreciation. Local government invests about 74 cents in the dollar. Central government numbers are opaque.
Ultimately, if you don’t maintain your assets, you end up with deteriorating infrastructure, productivity and growth over time. This is another area an Independent Fiscal Institution would be helpful.
The OECD’s most recent survey on NZ pointed the finger at poor management. An emerging issue is security and managing risks. What price do we, or should we, put on security of energy?
Sean Sweeney, departing CEO of Auckland’s City Rail Link, made a key point on TVNZ’s Q&A that we “require a commitment and a discipline to building in a certain way, and an agreed list of projects”. Can we get a cross-party accord?
The bottom line is that while we are all aware of the need for better infrastructure, more infrastructure will not address declining capital productivity unless we get a lot of other things right that will deliver efficiency and value.

Reminder, this is a Premium article and requires a subscription to read.