Maria Rampa: Hi I’m Maria Rampa and welcome to this episode of Engineering Reimagined.
It’s widely recognised that the effects of rising costs are impacting the delivery of new infrastructure.
Globally, and in Aotearoa New Zealand specifically, there is a long-standing infrastructure deficit that many governments are trying to address in inflationary environments.
Today’s episode of Engineering Reimagined looks at the role that alternative funding can play to prioritise and pay for assets, enabling us to bring those benefits forward for communities now.
Cameron Law – Director, People, Movement & Place at Aurecon – speaks with Laura Harris, Partner at Mafic Partners.
In this conversation Laura provides examples of how alternative funding models used successfully across the world could be utilised to solve some of New Zealand's infrastructure challenges – also potentially providing a blueprint for other countries.
Cameron Law: Kia ora Laura. Lovely to catch up with you again.
Laura Harris: Thank you for having me.
Cameron Law: So we always talk about financing and funding. Or often I think it rolls off people's tongues as funding and financing as if they're the same thing. But they are in fact two different concepts. And there's a reason for why we've chosen in this podcast to focus on funding. So do you want to explain what those two terms actually mean and how they’re different, which leads to why we're focussed on funding?
Laura Harris: They are used interchangeably, as you say, but do two mean two very different things. Funding is used for the payment for use of the infrastructure. So you and I as taxpayers, rate payers or paying fees or tolls for a specific use of infrastructure, whereas financing refers to the method that covers the upfront cost of the infrastructure. So, typically this is debt and equity, whether it's banks, global infrastructure funds or from a New Zealand context, the New Zealand Green Investment Fund that provides financing for infrastructure assets. There's a plethora of finance and capital available for infrastructure in New Zealand and the value of financing is it spreads the cost of infrastructure over the useful asset life of that infrastructure, as well as across the beneficiaries that actually get to use that infrastructure now and into the future.
Funding really is the key focus. Given there's a plethora of finance available, unfortunately the gap often comes from the funding source and that's where the Government's using funds, whether that's central or local government. There are examples of readily available funding, for example, emergency response funding. We saw last year after the floods a great amount of funding go into restoring infrastructure from a resilience perspective, so funds can be readily made available when needed. But from a long-term planning perspective, there hasn't been enough funds set aside for infrastructure in New Zealand historically, which is why we've got a deficit and we need to better prioritise how we setting those funds aside in the future to continue to invest in infrastructure.
Cameron Law: So, the alternative funding models that we're talking about, if we're going to ask ourselves, how are we going to fund these projects, where is that funding going to come from? What are some of the examples that we're actually talking about here?
Laura Harris: I'll touch on a handful that the Minister for Infrastructure is prioritising at the moment and give a little explanation of each. So the first one is the Infrastructure Funding and Financing Act. That's an act that was established a couple of years ago and is managed by Crown Infrastructure Partners whereby they have the ability to levy a specific beneficiary base by charging a specific rate. That rate revenue can then be used to finance infrastructure. Importantly those transactions are off local government balance sheets. And that's a real key consideration for local authorities, many of whom are debt-constrained. Another area the Minister's looking at is tolls and other levies. So things like road user charging, time of use charging, general tolls on roads. There is some legislation already in place that enables this, but with only three toll roads in New Zealand, it's not only a legislative and political change, but really more of an educational change from the general public's perspective as well. Value capture, is often discussed and probably after projects announced, which means it's too late. So value capture being where the procuring authority, whether it's the Crown or the local authority, is able to capture value of land increases that result as a development occurs and that land price goes up.
All of those tolls I've talked about right now are also included in what I term an umbrella type of funding tool that’s discussed a lot at the moment, which is ‘city and regional deals’. And that's really to my mind that umbrella term I use where it's an aggregation of funding tools. So whether it's specific levies, specific tolls or user charges, value capture, whether it's council incentives like GST hypothecation, it's a mixed bag of funding tools available that central and local government can use to work together. And then the last funding and financing tool I’ll touch on is PPPs or public private partnerships. In New Zealand to date, we've delivered eight of them. All of those have been availability-based, meaning the private sector that delivers, manages and maintains the asset is paid simply for having the asset available.
Cameron Law: What do you think the opportunity is in New Zealand to solve some of our infrastructure challenges using some of these funding models?
Laura Harris: The benefit really is acceleration of the infrastructure rather than waiting for the Crown to have all the funds available themselves to pay for, say, a large capital outlay for an infrastructure project. Financing spreads the cost of that infrastructure over the life of the asset. So utilising these types of funding and financing tools means you can accelerate the infrastructure being available. As we know, infrastructure is incredibly important from a broader productivity perspective. So the sooner we have that infrastructure online and we can attain those productivity improvements, then actually the more revenue and funds the Crown will have to fund future infrastructure. So really the acceleration is a real positive. Another element too, is just the crown being able to access alternate funds other than just Crown appropriations, for example.
One really constrained fund the government uses for major infrastructure at the moment is the National Land Transport Fund, funded by fuel excise tax and other transport related taxes. But as cars become more efficient or as we're switching water, electric cars and other modes of transport, then those taxes that are used to fund that fund are reducing. And therefore the crown has less of those funds available to maintain the infrastructure that we've got or build new infrastructure. So having access to alternate funding models would be really beneficial for both NZTA and KiwiRail, as well as our government and central local authorities.
Cameron Law: And that's part of what makes this such an important conversation to be having at this point in New Zealand's history, right? That we are at this junction when that sort of fund, in particular in the transport world, which is my background, where that NLTF is looking increasingly sort of fragile. You talked about the opportunity cost, which is something we tend to forget. The issue that we've seen, particularly with the changes in projects between governments and not wanting to pick on a particular government there because it happens in both. It seems every time we change a government.
Laura Harris: Absolutely.
Cameron Law: Not only do we lose the investment that we've made in that infrastructure, but we lose the opportunity cost of having solved that problem. Whether or not we got the right solution or the best solution.
Laura Harris: And with inflation, construction just costs more and more every day. Nothing costs more than the asset we haven't yet built. So, we need to make sure we're making the right decisions about what infrastructure we're prioritising to fund and finance, because there is a limit of how much we can do from the funding and financing as well as the actual physical delivery perspective. But the longer we wait, the more expensive it's going to become.
Cameron Law: What are our constraints and obstacles to using some of these funding mechanisms, and I guess with a particular focus on what are our real challenges in New Zealand?
Laura Harris: So some of that is actually the government appetite that chopping and changing or the fact that infrastructure in particular is such a long-term nature of asset class and yet we don't have a long-term vision for what we want as our plan for infrastructure in New Zealand. We're always going to have different political views on provision of social services. But whether you need a school to provide education or a hospital to provide healthcare shouldn't change depending on which party we've got running the country. So that vision and that plan, so that we don't have that chop and change, I think is really important. We have Te Waihanga, the National Infrastructure Agency has been in place for a number of years now. They're obviously working on a 30-year pipeline and plan. But what we really need is that bipartisan support to believe in that vision.
Ultimately, some of the projects are going to change over 30 years. That's completely understandable. But that appetite and willingness to maintain that momentum is really key. Another issue is Australia. So we're competing with Australia for resource all the time. So the states there have more clearly prioritised pipelines and funding available. That means there's project investment opportunity and job creation for people looking to work either in the infrastructure sector in New Zealand or Australia. With that more certainty around the pipeline and number of projects. That's a real constraint that we're going to continue to face in New Zealand for resourcing in particular. And that opportunity cost of lost productivity from underinvestment often isn't measured in New Zealand. And that's a real challenge. That kind of gets missed in the conversation.
Cameron Law: So given some of these some of these constraints and challenges, are there some projects that you think would be more or less suitable for alternative funding?
Laura Harris: Size is important for infrastructure projects and that's because of these funding and financing tools aren't always that simple. There's a cost of documentation and due diligence that comes with alternate financing because it is specific and specialised financing. And so those costs are better spread over a larger project. So, for example, where a capital cost of a project is over $100 million, we saw that, for example, historically on the schools PPP projects where, say, a single school might only cost $30 to 50 million, depending on how large the school is. By bundling a number of schools together, you can get that critical mass to get the total cost of capital over $100 million, and you can really then reap the benefit from those. Where the PPP program in particular in New Zealand has been really successful is where it started very much with an outcomes-based approach. So projects weren't just focussed on the lowest cost but actually delivering real innovation in service and delivery.
For example, the first prison constructed Auckland South Correctional Facility really focussed on reducing re-offending and recidivism and those learnings were realised by the Department of Corrections and able to be applied across the rest of the estate. So finding projects where it's not just about delivering a cheaper cost of infrastructure, but where you can leverage the private sector for innovation and international expertise, is a really good type of project. And one last thought in terms of ones that are suitable, is where you can really easily identify the beneficiaries of the infrastructure is really important. So when we're talking about these alternate funding models, whether it's specific targeted rights or tolls or what have you, actually knowing who the beneficiaries are and making sure they're benefiting from the infrastructure, helps to make it an equitable toll or charge.
Cameron Law: Which comes back to the point about user charges as a form of alternate funding models, so the tolls, the levies, time of use charging, is that something that we should be taking into account, the extent to which, as you said, that we can identify beneficiaries, but also that there is a potential revenue stream so that we can move beyond just the Crown funding?
Laura Harris: We have seen the Infrastructure Funding and Financing Act transactions with Crown Infrastructure Partners where they can identify the beneficiaries there, where it's been with the upgrade in Wellington for a wastewater treatment plant, they could identify not only the beneficiaries connecting to the plant that got value from their waste being processed by the plant, but also the greater Wellington community that benefited because their water treatment plants now weren’t having to process as much of that waste. When we're looking at tolls in particular, that's a slightly more emotive topic. We've only got three toll roads to date, but they have been used in New Zealand historically as well.
When we look at the Harbour Bridge, for example, when we built the clip-ons in the 80s, that was an existing asset that was told to fund the expansion of the asset and users were willing to use that. From an equitability perspective, it's important that there's an alternate route that's available. Where you have an alternate route that you can use for a new toll road as that route becomes less congested if people are moving onto the toll road, then that supports those that actually don't want to pay the toll, they've still got a route they can use without the toll and hopefully some less congested route that reduces the travel time as well. So, these alternate funding and financing tools, using a number of them in combination, I think is going to be the way forward.
Cameron Law: One area where we don't see an alternative so much might be if we look at land value uplift mechanisms and we're saying, well, we should apply some sort of capital gains tax or other form of land value uplift around, say, a station or a new piece of infrastructure. And in that sense, we've certainly got some public education to do, but we don't have the alternative so much, do we? It creates a more of a challenge.
Laura Harris: And I think capital gains tax becomes more politically charged from a broader tax base perspective than just for infrastructure delivery. A slight tweak on that value capture is whether it's the Crown or local authority acquiring some of that land in advance of the development. Unfortunately, it's typically the opposite where it's been sold to raise funds in advance of the development, whether it's able to be acquired and whether we have the funding available for that, and then it can be sold at a premium once the infrastructure is delivered, that might be slightly more appealing from a political and public perception way.
Cameron Law: What's working well globally that we could that we could learn from?
Laura Harris: PPPs continue to evolve globally. Another area in particular is the city and regional deals. It's a partnership between central and local government to deliver necessary infrastructure. So, the Greater Manchester City Deal, for example, was collaboration across a wide range of councils. It has earn-back mechanisms and additional tax revenues from economic growth and a real range of tools within it over and above some of the funding tools that we've described. That was quite a unique transaction in that there was already a partnership amongst those ten councils in order to deliver that infrastructure. But I think there’s still parts or components of that that we could leverage in New Zealand. Another one is a learning that came out of the US where they have municipal utility districts where they charge a targeted rate to a specific beneficiary set to help deliver that infrastructure. There was an Infrastructure New Zealand delegation a number of years ago that went in and viewed a number of those MUDs. And from there those learnings would go back to New Zealand and the IFF legislation and act created.
Cameron Law: One of the awesome things I'm seeing is that it appears that we've finally hit the point where we all seem to agree that we need a plan of prioritisation and we need to explore some of these tools, otherwise we are just going to get further and further behind. So it's really encouraging that there are so many options available to us.
Laura Harris: One question that often comes up around financing in particular is with the benefit of financing spreading the cost of infrastructure across a number of years and across future generations. But ultimately that has to be repaid by the funding. And that funding at some point, is a finite pool. Ultimately the transactions that we're choosing now for prioritisation will still be requiring funding in 10, 20 years’ time, which reduces funding available in the future for alternate infrastructure projects. And that's often a concern. But ultimately, money is fungible. If the Crown has over the next, say, 30 years, $100 billion to invest in infrastructure. They can either do it year by year and deliver infrastructure over that 30-year time frame. The benefit of financing is you don't have to wait for those moneys to be available over that 30 years. You can still use that 100 million of funding to support financing that delivers that infrastructure on an accelerated pace. So ultimately, it's the same amount of funding coming in, but the financing spreads the cost and accelerates the infrastructure.
Bringing on board that infrastructure more quickly means you're not paying an inflated cost as the cost of infrastructure keeps growing over decades, you're bringing on board those productivity gains earlier. And so actually you are creating more funding capital for the future. Still there is a limit on funding and financing available. We can't do all of the projects we want to do in New Zealand in that rapid succession. It really does come back to prioritisation, but ultimately it's you, me and everyone listening to this as taxpayers funding regardless of what funding and financing total is used. And so, what are the infrastructure assets that we want to see prioritised that can unlock that economic productivity for future generations? Because continuing to wait and continuing to underinvest obviously isn't the answer.
Cameron Law: It's the worst of all worlds, in fact. Thank you so much for your time, Laura. I learnt heaps. Always good to catch up with you.
Laura Harris: You too. Thanks very much.
Maria Rampa: We hope you enjoyed this episode of Engineering Reimagined.
In a world where cost increases continue to dominate the headlines, it’s good to know there’s a range of options available to fund and accelerate major infrastructure projects.
If you enjoyed this episode, hit subscribe on Apple or Spotify and don’t forget to follow Aurecon on your favourite social media platform to stay up to date on future episodes.
Until next time, thanks for listening.
New tools in the toolkit to help address Aotearoa New Zealand’s infrastructure needs
Globally, and specifically in Aotearoa New Zealand, there is a long-standing infrastructure deficit that many governments are trying to address within inflationary environments.
In this episode of Engineering Reimagined, Cameron Law, Aurecon’s Director of People, Movement & Place and Laura Harris, Partner at Mafic Partners, discuss how alternative funding models used successfully across the world could help solve some of New Zealand's biggest infrastructure challenges.
“With inflation, construction costs just costs more and more every day. Nothing costs more than the asset we haven't yet built. So, we need to make sure we're making the right decisions about what infrastructure we're prioritising to fund and finance, because there is a limit on how much we can do from both the funding and financing, as well as the actual physical delivery perspective. But the longer we wait, the more expensive it’s going to become.”
Cameron and Laura provide practical examples of alternative funding models in action and discuss common challenges faced in funding major projects.
