Billions of dollars worth of infrastructure investments have been announced, but is it all as real as it sounds?
Our governments and councils have a long tradition of backing out of already-announced infrastructure investments, but such u-turns could set the country back years if history repeats itself.
A new report commissioned by the Association of Consulting and Engineering (ACE) shows there is reason to doubt the country has enough of a pipeline to stem job losses and cutbacks in construction even though billions of dollars worth of infrastructure spending have been promised.
Sense Partners economist Shamubeel Eaqub – the economist who led the research – said plenty of investment had been announced, but there were still questions over whether it would roll out fast enough or happen at all.
Successive governments have dramatically changed tack on infrastructure at little notice while local councils haven’t been willing to raise rates high enough to meet their long-term infrastructure promises either.
“We can’t be confident that the pipeline will be delivered if there isn’t a mechanism to ensure that the politics and other bits don’t get in the way – whether it’s central government or local government.”
The report also argues the country may need to make up an infrastructure deficit of up to $75 billion (25 percent of GDP) based on past underinvestment.
The infrastructure spend-up that wasn’t enough
Government promises of infrastructure spends to offset losses during economic downturns are nothing new.
During the Global Financial Crisis (GFC) the Key government’s speech to the throne in 2008 signalled a major infrastructure investment that it claimed would “in the short-term create much-needed jobs and economic stimulus, while in the medium-term it will help unclog the arteries of the New Zealand economy and improve economic productivity”.
However, Eaqub said the spend-up then wasn’t enough to stem a major downturn in private sector investment which saw the whole construction sector downsize and shed staff, leaving it ill-equipped to rebound once the world emerged from the financial crisis.
The industry took six years to recover to pre-GFC levels. When it did prices for construction had risen, but profit margins hadn’t. The lost capacity had cost us $2.7b over 10 years with no benefit to construction firms or the public.
This time the announced spend is many times larger, but there are there were reasons to doubt it would roll-out at the right time.
“I don’t think there’s any particular criticism from my end in terms of the size of the spend,” Eaqub said.
“It’s more around are we sure the money’s going to get out soon enough so we don’t have the impact on the capacity?”
ACE CEO Paul Evans noted infrastructure projects announced well before lockdown – like the NZ Upgrade Programme – haven’t gone out to tender yet, which he sees as a sign delays have already begun.
“There’s all of this theoretical work out there and firms are saying ‘we’re going to need lots of people to deliver that’.
“It’s been said ‘oh it’s coming, it’s coming’…they’re saying we can’t continue to hold these people in perpetuity unless that work comes.”
“There was $7b worth of work which was announced back in February. Here we are seven months on and the vast majority of that is some way off.
You don’t have to look far for evidence of why constructors might be nervous to hold onto staff and capacity before government infrastructure work has been put out to tender.
Evans said the construction sector had a bad experience with this during the Government’s attempt to build light rail this term.
“They got the constructors and the engineers and said ‘we’re building this you need to gear-up’ so they went out and acquired a whole lot of rail expertise.
“We went out and acquired it [talent] on the global market. It’s really expensive. Those people get paid a lot because we’re competing against Australia.
“And, you know what? Those people have been sitting around twiddling their thumbs.”
The construction industry thought light rail was a sure thing. Auckland Transport had been working on plans to build it since 2009, Prime Minister Jacinda Ardern had promised it on the campaign trail, and market briefings were held early on in the Government’s term.
“It had actually started down the tender process and it completely evaporated and that is kind of the case in point of political backpedaling interference actually undermining an entire sector.”
Councils in big trouble
Another reason for the sector to worry is that councils could cut back on their own infrastructure investments too.
Council spending had traditionally held up better than central government infrastructure spending – which was pared back massively after the 1980s.
However, even during normal times Eaqub’s analysis showed most councils typically spent less than 80 percent of the capital spending budgeted in their long-term plans (which set priorities for 10-year periods).
“There are places like Horowhenua where the money has been allocated, but they can’t spend it because the size of the spend is just too big relative to the capacity and the capability to spend it,” Eaqub said.
“In other times they don’t actually get to allocate the funds because they decide during the actual budgeting process not to raise the rates and make the capital available.”
Now council books are under major pressure due to Covid-19 which will require them to make a choice between raising debt, raising rates – or cutting infrastructure spending.
Evans said while the Government had introduced significant amounts of spending, that wouldn’t be enough to compensate for council spending cutbacks – especially in regions like Auckland which had large CCOs like Watercare which regularly spent large amounts of money on infrastructure, design and construction.
“Where the alarm bells started to be raised was Auckland Council sending out notices to all of their professional services providers saying ‘hey, you know all of this work that we had planned…that’s all on hold’.
“That’s just created a massive amount of uncertainty.”
Finance Minister Grant Robertson’s response to Auckland Council’s woes has been to ask them to borrow more through the Local Government Funding Agency (LGFA).
“You’ll find that most councils would prefer not to piss-off their constituents.”
Auckland Council still has headroom to borrow more without breaching LGFA’s debt covenants.
However, Eaqub argued this request was not realistic.
“It’s very unreasonable. You can’t say ‘local government go out and borrow and we’ll sort it out later’. I don’t think that’s reasonable.
“A lot of the high-growth local councils are at the edge of how much they’re able to borrow and I think they have lost their social licence to keep increasing rates as they have.
Faced with the choice most councillors wouldn’t push debt caps to the edge or raise rates. They’d simply cut back on infrastructure spending.
“You’ll find that most councils would prefer not to piss-off their constituents,” Eaqub said.
“Because right now that’s really what the trade-off is: say to your constituents ‘oh look ratepayer we’re going to increase rates by 5 or 7 percent in the middle of the biggest recession in 100 years’.”
Strengthening the Infrastructure Commission
The report suggests one solution is to fund more local government infrastructure projects directly with central government money.
We could also follow Australia’s example and take some of the politics out of infrastructure by strengthening the Infrastructure Commission’s powers to pick projects across central and local government so there could be greater certainty around the pipeline of work expected.
This would have the added benefit of allowing infrastructure decisions to be based on Benefit-Cost Ratios (BCRs).
Sometimes an infrastructure or construction solution might not be needed at all.
An empowered Infrastructure Commission might be able to select demand management methods like congestion charging to extend the usefulness of assets rather than build new ones.
It could also help tackle another multi-billion dollar infrastructure problem lurking in the wings: climate change.
Local government assets worth $5.1b are at risk from a one-metre rise in sea level according to a 2020 National Climate Change Risk Assessment.
Evans said we shouldn’t put ourselves in a position where we might not be able to use a piece of infrastructure because of its impact on emissions – or which might lock us into greater future emissions.
“We’ve got some pretty significant climate change commitments.
“We don’t want to be locking ourselves into infrastructure – which is really long-lived – which is actually going to be really counterproductive and in the future could potentially become a stranded asset.”
Local Government NZ President Stuart Crosby acknowledged there was always room to improve when it came to infrastructure investment.
“Events such as Covid-19 certainly highlight the need to be more strategic in our approach, and we’re keen to work with central government, whose planning horizon is only four years long, on how to achieve this.”