There’s a delicate balance between state-run and private sector involvement in large infrastructure projects. New Zealand’s got it wrong in both directions in the past and needs real care over Auckland light rail, argues Peter Dunne.

The announcement on the Government’s long-promised but previously hopelessly stalled Auckland light rail project raised a few eyebrows. There were those who decried the announcement as a return to Muldoonist style intervention while others sneered at the level of risk involved and the Prime Minister’s acknowledgement that private sector investment might be required to advance the project.

Both sets of reactions are understandable, although not entirely justified, given the nature of government involvement in major infrastructure developments over the years. The record is at best a patchy one, which gives every reason to be cautious about this latest announcement.

In large part this is because successive governments of the left and right have struggled with the concept of partnership with the private sector in such matters. They have either wanted to do everything themselves, or conversely have expected the private sector to do it all alone, but to follow exactly the Government’s instructions as they do so. More often than not, this has meant the Government doing everything itself, bearing all the risk, and then attempting unsuccessfully to socialise any profits in the public interest.

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Only on rare occasions has it been able to strike the right balance with the private sector and carry out a major infrastructural project successfully on that basis.

The most obvious example over the years, still cherished fondly in the hearts of Labour supporters, was the state house building programme under the First Labour Government from 1937. Under this scheme, Fletcher Construction built several thousand homes in the pre-war years, creating a New Zealand icon in the process. The key to its success was that Sir James Fletcher was able to persuade the government his company could carry out the project and build 5,000 standard designed homes within two years, albeit with the backstop of a substantial government-guaranteed overdraft. For its part, the government, despite having far more lavish and unaffordable dreams for what state housing might look like, was shrewd enough to recognise Fletcher’s capability and experience, so let the company get on with it.

However, since those heady days, (which lasted from 1937 to 1939 only) things have not been quite the same. Infrastructure development in the aftermath of the command economy brought about by World War II became the prerogative of the state, with the labour-intensive construction of highways and hydro-electric dams coming under the purview of the infamous Ministry of Works. This enabled not only the construction of much of our necessary industrial infrastructure between the 1940s and the late 1960s, but also provided jobs for many thousands of New Zealanders, skilled and unskilled, shielding New Zealand from significant levels of unemployment through to about 1967.

Environmental issues were not a factor then, as the damming of South Island rivers and the consequent flooding of some historic towns showed. The Ministry of Works, flush with intent and government capital, was a virtual law unto itself in its quest to develop national infrastructure.

However, by the 1970s, the situation was changing, and the Ministry of Works monolith was more frequently being challenged as New Zealanders started to become environmentally aware and concerned. The successful “Save Manapouri” campaign of the early 1970s to stop the raising of the levels of lakes Wanaka and Manapouri as part of the Manapouri power project was a turning point. Thereafter the days of unbridled government-led development at the expense of the environment drew to a close, with the Muldoon government’s blunt use of Parliamentary power to drive through the Clyde Dam project in the early 1980s marking the effective end of the period of post-war, government-led infrastructure investment. Attempts by the Ministry of Works in the mid-1980s to promote low dams at Mossburn and Luggate as the final stages of the Clyde project were rejected by the Labour government caucus.

At the same time, during those years, government attempts to encourage substantial private sector industrial investment to facilitate regional development were largely unsuccessful. The saga from the late 1950s to the early 1960s over a proposed cotton mill in Nelson divided both National and Labour governments of the time, before being finally abandoned in 1962. The establishment and subsequent failure of Matai Industries on the West Coast under the Third Labour government was even more dramatic. These, and the failures of a number of private sector large investment and development companies from the early 1960s to the early 1970s (Standard Insurance in 1961, JBL, and the Perpetual Trustee in 1972, Cornish Lamphouse in 1974 and Securitibank in 1976, to name a few) led governments to become even more wary of dealing too closely with the private sector when it came to national development.

The consequence of all this was that during the time of the Muldoon government from the mid-1970s – which also coincided with the consequences of the 1974 and 1979 Oil Shocks, and the loss of our guaranteed markets for agricultural exports to Britain after her entry into the European Common Market in 1973 – the “Fortress New Zealand” mentality built up since the Depression became even stronger. When, in the late 1970s the government nobly sought to develop our natural energy resources to boost our self-sufficiency, through the so-called “Think Big” projects, the developments were predicated on the government bearing all the upfront risk, in the hope that not only would we achieve national energy self-sufficiency, but also that the eventual profits to be derived would be returned to the New Zealand taxpayer. In the event, neither eventuated and the projects became costly “white elephants” with the government of the mid 1980s having to dismantle them and write off millions of dollars of debt in the process.

The long-term consequence of the 1940s-1980s period of New Zealand’s attempts at industrial and infrastructural development was a new period of wariness which basically held that it was not the government’s role to become involved in these types of activity. Rather, they were to be best left to the market to resolve. There was generally a dearth of government-led development from the mid-1980s (with some limited government-funded road and rail infrastructure projects only). By the early 2000s it was clear that New Zealand was facing a significant and mounting infrastructure deficit. But, as usual when the pendulum swings from one extreme to the other, it often takes time to find its equilibrium and settle once more near the middle. Since about 2010 governments have been looking again at ways of overcoming the infrastructure deficit.

The Auckland light rail project fits onto this category. There is nothing wrong with the government proposing a new major infrastructure project like light rail for Auckland, for example. Nor is it a return to Muldoonism (micro-managed intervention in the operation of the domestic economy) to do so. Indeed, given that Labour campaigned on the plan in 2017 and 2020, it could more than reasonably argue it has a public mandate to proceed.

The real point at issue here is not the concept of light rail for Auckland, per se – voters ,who so far seem to like the idea, will judge its long-term fate in due course – but rather how the development is managed from this point on. Given its scale, this is where things could become problematic. If the Government is smart, it will heed the lesson of Sir James Fletcher and engage early with the light rail experts and developers to design the best system for Auckland’s actual needs, which may differ from what the local and national politicians might imagine them to be.

From there, it will proceed to a development model, a major part of which will be how the project is to be funded. Here is where the Prime Minister’s comment about the possible involvement of private sector capital becomes critical. The government cannot afford to end up bearing all the financial risk because it simply does not have those resources at its disposal. It therefore needs to develop a funding package that has significant private sector input, perhaps along the lines of allowing the developer certain rights of ownership and operation for a specified period after the completion of the project.

Such an approach would instil strong financial discipline in the project from the outset and would ensure that it would only proceed if the financial numbers stacked up, and taxpayers were unlikely to be left to carry the losses.

With so many “shovel-ready” projects looming as a response to Covid19, Auckland’s light rail project becomes something of an early test case. Given the country’s level of future debt already incurred because of Covid19, getting the light rail project underway on a sound footing becomes vital, not just for its future, but also for the future of the other smaller scale projects being lined up. We cannot afford failure or ongoing losses on top of the debt already incurred to establish them. Otherwise, public confidence will quickly evaporate.

So, as the Government contemplates the best way forward for projects like light rail in Auckland, it should take some time to study the relevant lessons of the past – something it has not always shown any interest in doing in other policy areas to date. It needs to make sure it does not succumb like so many well-intentioned previous governments to the challenges of first building then successfully operating such important major projects, and that future taxpayers are not left carrying the can for expensive failure.

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