National wants to create a new infrastructure bank to fund a big spend-up, saying our country has lagged behind on infrastructure investment
The National Party has announced a proposal to create a bank to scrutinise, finance, and advise on billions of dollars’ worth of local and central government infrastructure projects.
At an announcement at Forsyth Barr’s Wellington offices on Wednesday afternoon, National leader Judith Collins said the bank would add a further layer of scrutiny to government and unstructured spending.
“The National Infrastructure Bank will need to see that infrastructure proposals are robust, something that hasn’t been the case for shovel-ready projects, the Provincial Growth Fund, KiwiBuild or Light Rail.
“National’s approach will lift the quality of government spending and shift risk from the Crown to the private sector.”
The government would put in equity capital, and the bank would then borrow from institutional investors in debt markets to fund infrastructure projects.
A huge catch-up is required on infrastructure investment, with funding having long lagged behind population growth.
Local councils are responsible for paying for important parts of infrastructure like roads and water networks, but have been constrained by demands for lower rates and less debt. An Auditor-General report found many of their water assets were being “run to failure” as a result.
Infometrics figures show that while civil construction investment was ahead of population growth for five years out of six between 2008 and 2014, population growth vastly outstripped infrastructure spending after 2014.
National has said its proposed National Infrastructure Bank could raise the initial capital for toll roads, or loan money to fund infrastructure for housing that would be paid back to the bank through targeted rates and development contributions.
Infrastructure banks have a long history overseas. After World War II, they were used as financing vehicles to pay for reconstruction and development. They used government guarantees to source low-cost funds that were then lent on to public infrastructure projects.
Since the 1990s, the focus of these has changed. Such organisations have placed a greater emphasis on “crowding in” private funds to supplement public ones – including supporting public-private partnership (PPP) financing arrangements – and on encouraging green investment.
National has said its version of the concept would create investment opportunities for institutional investors, including public ones like ACC and the NZ Super Fund, with KiwiSaver providers and Australian pension funds also mentioned in the policy document.
The bank would also “unlock co-investment with the private sector” and take over the co-ordination of the country’s PPP investment programme. Schools are mentioned as a specific target for co-funding arrangements.
National hasn’t settled on a final design for the bank, but it would take over Crown Infrastructure Partners, Green Investment Finance, the residual holdings from Crown Irrigation Investments Limited, and all loans made by the Provincial Growth Fund.
The cost of private finance
The private “crowding in” element of Infrastructure banks are normally the most controversial parts of these sorts of proposals.
Critics argue the private capital they attract for “co-investment” often needs to be paid back at rates several times more expensive than straight government debt.
The stalled talks and controversy around the Transmission Gully PPP have also created doubt around the amount of risk the taxpayer offloads for the higher rate of return it grants private funders through these arrangements.
Meanwhile, public borrowing is showing no signs of getting more expensive. On the day of National’s announcement, 10-year government bonds had a yield of just 0.56 percent.
A similar proposal in Canada from Prime Minister Justin Trudeau’s Liberal Party attracted controversy when it morphed into a more expensive way of raising capital for infrastructure projects.
The Canadian Centre for Policy Alternatives (CCPA) argued the extra return required to attract private funds to the proposed bank’s projects could double the cost of some projects – relative to how much it would cost the government to borrow – over a period of 30 years.
National MP and former merchant banker Andrew Bayly said it wasn’t just a question of obtaining finance at the cheapest rate, but the kind of skills a private partner might bring to an infrastructure project.
He gave the example of a community housing provider who might bring specific skilled personnel to a housing project.
“This is not just a funding thing. Otherwise we could just go and keep borrowing in the markets.
“These things often bring with it people that are bringing other skills and other capabilities to the investment.
“So if you’re saying right it’s just outright debt funding of it – of course the government can fund that most appropriately and in the cheapest way, but if the investor is bringing in other skills and capabilities then that should be welcomed.