ISBN: 978-0-478-33080-9 (online)

NOT GOVERNMENT POLICY

Note to Reader

The Minister for Infrastructure indicated in his recent speech to the ‘Building Nations’ Symposium that the National Infrastructure Plan “…will evolve through time. The first draft should be ready early next year. Areas not identified in the plan will not necessarily be excluded from future public investment. It will be updated regularly - and no doubt we will get better at doing it.”

This document is a precursor to the Plan. It contains a sector-by-sector description of ’s existing infrastructure, information about planned investment and a description of current policy settings. We would now like to answer a number of questions: 1. Base information: Is the sectoral analysis contained here an accurate and informative description of the sector? If not, what changes are required to make it so? 2. Missing issues: Are there important infrastructure issues not mentioned in this document? 3. Decision-making: This document suggests that for projects to contribute to community/national welfare and economic growth, they must have expected benefits (measured comprehensively) that are greater than their estimated costs (also measured comprehensively) – see the decision-making principles in the ‘Policy Context’ chapter. As well as considering distributional or equity considerations, are there other considerations that should be taken into account and if so, what is the case for that? 4. Cross-sectoral issues: What cross-sectoral issues are faced by operators/users of infrastructure in each sector? This document identifies a number of cross sectoral issues. Are there other cross-sectoral issues that should be included in a National Infrastructure Plan? 5. Regulatory reform: Are there important regulatory constraints on the development of infrastructure that are not being addressed by the government’s current regulatory reform programme? 6. Aspiration: For each infrastructure sector, is it possible or desirable to define the service level New Zealand should aspire to? If so, what should it be and why? 7. Link to economic growth: What additional investment would help New Zealand to increase its rate of economic growth? How can we be confident that this additional investment is a prudent use of scarce funds?

Both the private sector and the local and central government sector have a role in providing infrastructure. The National Infrastructure Unit of the Treasury is therefore approaching a number of private sector and local government organisations seeking information and views on these questions. We prefer submissions that, where possible, provide empirical or other evidence to support the views they express.

Submissions should be made in writing by 5 October 2009 and sent to: The Executive Director or by email to [email protected] National Infrastructure Unit The Treasury PO Box 3724

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | ii NOT GOVERNMENT POLICY

Contents

NOTE TO READER...... ii

INTRODUCTION ...... 1

INTRODUCTION TO THIS DOCUMENT ...... 1 PURPOSE OF A NATIONAL INFRASTRUCTURE PLAN ...... 2 WHAT WILL THE PLAN COVER? ...... 3 PREVIOUS RESEARCH ...... 4 STRATEGIC DIRECTION ...... 5

IMMEDIATE PRIORITIES ...... 5 Broadband ...... 5 Roads of national significance ...... 6 Transmission ...... 6 Rugby World Cup 2011 ...... 7 CURRENT POLICY WORK ...... 8 Electricity ...... 8 Water/Irrigation ...... 8 Improving effectiveness of government’s infrastructure spend ...... 9 LONGER‐TERM ISSUES ...... 9 Transport Planning and Urban Form ...... 9 Road funding and pricing ...... 10 POLICY CONTEXT ...... 11

ROLE OF MARKETS AND GOVERNMENT ...... 11 GOVERNMENT SERVICES ...... 12 CENTRAL VERSUS LOCAL GOVERNMENT FUNDING ...... 14 PROJECT EVALUATION, PRIORITISATION AND DECISION‐MAKING ...... 15 ASSET MANAGEMENT...... 16 SECTORAL ANALYSIS ...... 18

TRANSPORT: ROADS ...... 18 Description ...... 18 Analysis ...... 23 TRANSPORT: RAIL ...... 25 Description ...... 25 Analysis ...... 28 TRANSPORT: PORTS ...... 30 Description ...... 30 Analysis ...... 32 TRANSPORT: AIR SERVICES ...... 35 Description ...... 35 Analysis ...... 37 ELECTRICITY ...... 37 Description ...... 37 Analysis ...... 40 GAS ...... 41 Description ...... 41 Analysis ...... 43

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | iii NOT GOVERNMENT POLICY

DRINKING WATER ...... 44 Description ...... 44 Analysis ...... 45 WASTE WATER ...... 47 Description ...... 47 Analysis ...... 50 RURAL WATER INFRASTRUCTURE ...... 50 Description ...... 50 TELECOMMUNICATIONS ...... 58 Description ...... 58 Analysis ...... 62 PRIMARY AND SECONDARY EDUCATION ...... 65 Description ...... 65 Analysis ...... 67 HEALTH ...... 69 Description ...... 69 Analysis ...... 73 CORRECTIONS ...... 75 Description ...... 75 Analysis ...... 76 PLANNED INVESTMENT ...... 77

TRANSPORT: ROADS ...... 77 TRANSPORT: RAIL ...... 81 TRANSPORT: PORTS ...... 82 TRANSPORT: AIR SERVICES ...... 83 ELECTRICITY ...... 83 GAS ...... 86 URBAN WATER INFRASTRUCTURE ...... 87 RURAL WATER INFRASTRUCTURE ...... 87 TELECOMMUNICATIONS ...... 87 PRIMARY AND SECONDARY EDUCATION ...... 89 HEALTH ...... 91 CORRECTIONS ...... 94 CROSS‐SECTORAL ISSUES ...... 95

REGULATORY ISSUES ...... 95 FUNDING INFRASTRUCTURE: THE GOVERNMENT’S FISCAL STRATEGY ...... 97 FINANCING INFRASTRUCTURE: PPPS ...... 98 LOCAL GOVERNMENT FINANCES ...... 99 DEMOGRAPHIC TRENDS ...... 100 CLIMATE CHANGE ...... 102 INFRASTRUCTURE AND GROWTH ...... 104

iv | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Introduction

1. Recognising that commitment to particular patterns of infrastructure development is a key signal to private investment, the government has decided to develop a National Infrastructure Plan. The Plan is intended to present a high-level view of the state of New Zealand’s public infrastructure and to describe the principles and direction for future investment. The Plan will be reviewed and updated. It is intended that the quality, and in particular the specificity, of forward planning will improve in subsequent Plans.

2. The Plan is part of a series of initiatives aimed at improving New Zealand’s infrastructure. Others are:

• A step change in the level of public sector investment;

• An improvement in capital asset management processes for government infrastructure; and

• Legislative changes and regulatory reform to facilitate local government and private sector infrastructure investment.

Introduction to this document

3. This document is not the National Infrastructure Plan or even a draft Plan. It is however, a precursor to the Plan. The purpose of this document is to provide background and context for stakeholder engagement on the content and direction of the first Plan. It is being distributed now to facilitate that engagement.

4. To that end this document contains the following content:

• A description of the intended purpose and coverage of the National Infrastructure Plan (next section).

• A ‘Strategic Direction’ chapter that identifies the government’s immediate investment priorities and the areas of active policy development (‘medium-term priorities’). This chapter also identifies two examples of longer term priorities that may be incorporated into the first Plan.

• A ‘Policy Context’ chapter that suggests a set of principles that could aide infrastructure development and decision-making.

• A chapter considering existing infrastructure in the various sectors: transport; energy; water; telecommunications; primary and secondary education; health; and corrections. This chapter describes the current environment for each sector – background and history, assets, institutional arrangements, funding and pricing, and planning; and provides a brief analysis of the sector (or key issues in the sector).

• A chapter describing the planned investment in each sector. This is based on existing government commitments and sector plans, and publicly available information on local government and private investment plans.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 1 NOT GOVERNMENT POLICY

• A chapter considering a number of cross-sectoral issues that are important for New Zealand’s infrastructure landscape. These include: regulatory issues; funding infrastructure and the government’s fiscal constraint; financing infrastructure and the potential role of PPPs; and local government finances. This chapter also considers some of the underlying trends and assumptions that will inform the first Plan.

• The final chapter considers the link between infrastructure and growth and asks what additional infrastructure New Zealand would need to achieve or support more ambitious economic growth and quality of life.

5. We are seeking feedback on the chapters referred to above and in particular on the following questions:

a. Base information: Is the sectoral analysis contained here an accurate and informative description of the sector? If not, what changes are required to make it so?

b. Missing issues: Are there important infrastructure issues not mentioned in this document?

c. Decision-making: This document suggests that for projects to contribute to community/national welfare and economic growth, they must have expected benefits (measured comprehensively) that are greater than their estimated costs (also measured comprehensively) – see the decision-making principles in the ‘Policy Context’ chapter. As well as considering distributional or equity considerations, are there other considerations that should be taken into account and if so, what is the case for that?

d. Cross-sectoral issues: What cross-sectoral issues are faced by operators/users of infrastructure in each sector? This document identifies a number of cross sectoral issues. Are there other cross-sectoral issues that should be included in a National Infrastructure Plan?

e. Regulatory reform: Are there important regulatory constraints on the development of infrastructure that are not being addressed by the government’s current regulatory reform programme?

f. Aspiration: For each infrastructure sector, is it possible or desirable to define the service level New Zealand should aspire to? If so, what should it be and why?

g. Link to economic growth: What additional investment would help New Zealand to increase its rate of economic growth? How can we be confident that this additional investment is a prudent use of scarce funds?

Purpose of a National Infrastructure Plan

6. The purpose of a National Infrastructure Plan is to present a high-level view of the state of New Zealand’s infrastructure, describe the principles and direction of future investment, improve alignment between national and regional planning, establish greater discipline around infrastructure decisions, and increase public awareness about the role that infrastructure plays in supporting and raising the nation’s living standards. It should ultimately inform the reader on three topics:

2 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

• The state of infrastructure at present, and what kind of a challenge it poses;

• What improvement is likely to occur on the basis of currently committed projects and policies; and

• What sort of infrastructure New Zealand needs to achieve and support ambitious economic growth and quality of life targets, and how much of a gap there is between the committed improvements and what we would need to see to lift New Zealand to a higher level.

What will the Plan cover?

7. Infrastructure is usually defined as fixed long-lived structures that facilitate the production of goods and services, both physical and institutional. The National Infrastructure Plan will focus on physical infrastructure of national significance that has a direct impact on productivity and living standards. The capital-intensive sectors of government (health, education and corrections) will also be covered:

Infrastructure sectors to be covered by the National Infrastructure Plan

Market Quasi-market Social Services Investment and pricing Investment and prices more or Investment is determined decisions respond to market less respond to market signals but administratively, services are signals are determined administratively provided free of charge (or subsidised) Sectors: Sectors: Sectors: Electricity Roads Health Telecommunications Metered water supply Education Gas Corrections Ports Unmetered water supply Airports Waste water Rail Agricultural irrigation

8. The Plan will consolidate existing sector plans for investment in infrastructure as far as these have been developed. However, it will not:

• Provide an exhaustive list of infrastructure projects;

• Provide any more specificity or certainty about future investment than is already provided by sectoral plans;

• Be a funding or policy commitment set in stone – it will, instead, be indicative and provisional and be revised and renewed according to new information, technology, community preferences, demographics, economic performance, etc;

• Be directive; or

• Provide for any additional funding beyond what has already been allocated in the government’s annual budget.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 3 NOT GOVERNMENT POLICY

Previous Research

9. Though this will be the first 20-year Plan, the analysis of infrastructure builds on work previously carried out. In particular, an infrastructure audit was performed by PriceWaterhouseCoopers in 2003 for the Ministry of Economic Development1 and was updated by officials in 2008.

10. The government also recognises the work done by the New Zealand Council for Infrastructure Development (NZCID) and in particular, its booklet “Policy Priorities for Advancing Economic Infrastructure Development in New Zealand” as well as its reports “Comparing Infrastructure in Australia and New Zealand: Key Lessons for New Zealand” and “Meeting New Zealand’s Transport Infrastructure Needs to 2025”.2

11. Other notable previous research includes that enclosed with the various local government submissions on the Local Government Rating Inquiry; research undertaken by NZIER, including the report they prepared for NZCID “Summary Infrastructure Benchmarks: Comparing infrastructure provision in New Zealand and other countries”;3 and material prepared by and for the Growth and Innovation Advisory Board, such as “Generating Growth: Infrastructure” (prepared by Infometrics).4

1 That report and other related and follow-up work carried out for the Ministry of Economic Development can be found on its website: http://www.med.govt.nz/templates/ContentTopicSummary____5541.aspx 2 See http://www.nzcid.org.nz/ for this and other reports commissioned by NZCID on New Zealand’s infrastructure.

3 Available at: http://www.nzcid.org.nz/downloads/NZCID%20&%20NZIER%20(2005)%20Summary%20infrastructure%20be nchmarks.pdf 4 See: http://www.giab.govt.nz/reports-list/index.html

4 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Strategic Direction

12. Infrastructure is one of the priorities the government has identified in its aim to lift New Zealand’s economic performance. To support this, it has allocated $7.5 billion to new capital spending over the next five years. This is in addition to the transport spending funded by levies on users, business-as-usual spending by public sector entities and state-owned enterprises (typically around $5.3 billion capital expenditure annually), and the $30 billion that local authorities have indicated they will spend, predominantly on infrastructure, over the next 10 years. The government’s infrastructure priorities and strategic direction reflect this focus on economic performance, and therefore on infrastructure that is of national significance.

13. The four immediate priorities are: broadband; roads of national significance; electricity transmission; and the Rugby World Cup 2011. The Rugby World Cup represents an opportunity to lift the international profile of New Zealand. The unifying characteristic of the other three of immediate priorities is that they help to ‘make markets’. Roads enable the transport of goods to purchasers and workers to work. Transmission lines enable creation of a more effective market for electricity. And a national fibre optic network will allow ultra-fast transmission of information, creating a platform for new markets to emerge. These immediate priorities are the subject of current investment plans, as described below.

14. Three other priorities are in earlier stages of policy development. These are: the broader electricity market; water and irrigation; and the procurement and management of the government’s own ‘social infrastructure’ assets. The government has announced or is working on policy programmes in each of these areas. These will result in regulatory or other changes.

15. Finally, we identify two issues that the government expects may be nationally important over the longer term. The first is the relationship between Auckland transport planning and the urban form of Auckland. Second is the issue of efficient use of roads and the way we pay for them. These issues are raised in part as examples of the sorts of issues that the government wishes to identify as part of its infrastructure planning.

Immediate Priorities

Broadband

16. Modern economies are characterised by high degrees of connectivity. The ability to rapidly transfer large amounts of information enables a host of business and leisure activities. A number of new business models are emerging. For example, on-line auction sites and software as a service model (a.k.a. “cloud” computing). On-line purchase of music and travel is now commonplace. These new business models have emerged rapidly as Internet access has become widely available. However, access is not yet ubiquitous and speeds in many areas are still very modest. As access speeds and connections increase, one would expect the exploitation of this medium for business purposes to increase rapidly.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 5 NOT GOVERNMENT POLICY

17. Recognising the current importance and future potential of broadband, the government has decided to invest in establishing the infrastructure for this. It is committing $1.5 billion to provide ultra-fast broadband, accessible to 75% of New Zealanders in the next 10 years. The investment will provide open access to a passive (‘dark’) fibre optic network. This infrastructure may then be used by commercial providers to supply high- speed network services.

18. This work programme is led by the Minister for Communications and Information Technology, Hon Steven Joyce, supported by MED.

Roads of national significance

19. While there is an increasing emphasis on virtual connections, physical connectivity will remain important. Highways provide the main links between our major business centres, facilitating the efficient transport of goods and people. Congestion creates inefficiency and makes it more difficult for businesses to operate and grow. The government has identified several highways as priorities for improvement over the next 10 years. These ‘roads of national significance’ are:

• Puhoi to Wellsford - SH1;

• Completion of the Auckland Western Ring Route - SH20/16/18;

• The Auckland Victoria Park bottleneck - SH1;

• The - SH1;

• The Tauranga Eastern Corridor - SH2;

• The Wellington Northern Corridor (Levin to Wellington) - SH1; and

• The motorway projects.

20. The National Land Transport fund has been reprioritised to reflect this list. The government is also increasing road user charges and fuel levies to fund additional investment. This reprioritisation will enable forecast investment of $10.7 billion for state highway development over 10 years.

21. This work programme is led by the Minister of Transport, Hon Steven Joyce, supported by the Ministry of Transport and the New Zealand Transport Association.

Transmission

22. Transpower owns and manages the national power grid. The national grid facilitates the transmission of electricity from the generation site to local distribution networks, where retail companies then provide power to their customers.

23. Transmission is crucial to the efficient functioning of New Zealand’s electricity market. Current capacity constraints limit the efficient operation of the market and reduce resilience to accidents and equipment failure.

6 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

24. Since 2005, Transpower has obtained approvals for around $2.7 billion of investment, and a further $2.3 billion of upgrades are planned5. Major investments include6:

• The North Island Grid Upgrade Project ($818 million);

• The HVDC Grid Backbone Projects ($672 million);

• The North Auckland and Northland Grid Upgrade ($420 million); and

• The Grid Upgrade Project ($82 million).

25. While significant investment is now underway, it is clear that grid performance has suffered from the undue delay of some work. This is in part due to structural and regulatory hurdles that resulted in difficulties in getting work approved. These issues are being addressed as part of the government’s electricity policy programme.

Rugby World Cup 2011

26. While projected demographic and economic growth generally provide the basis for identifying future infrastructure needs and investment, the Government is mindful of the need to ensure that significant national events such as the Rugby World Cup are also factored into infrastructure planning and provisioning by all infrastructure providers – private and government.

27. The Rugby World Cup will be one of the largest sporting events ever hosted in New Zealand. It will provide a significant boost to the international profile of New Zealand, and is expected to contribute over $500 million in additional GDP to the New Zealand economy. In addition to a significant television audience, a considerable influx of international tourists is expected. When combined with domestic interest in the World Cup, this will lead to pressure on transport and other infrastructure and provide a test of their capacity and resilience.

28. The government’s priorities are to ensure that New Zealand presents itself in the best possible light and that the event leaves a legacy for the nation by building our capability to host future major events, which in turn bring their own economic, social and cultural benefits. To this end the government has jointly purchased Auckland's Queens Wharf and is contributing $190 million to the significant redevelopment programme. It is also assisting with upgrades to AMI Stadium (Christchurch), Trafalgar Park (Nelson) and Okara Park (Whangarei) and the development of a new stadium in . It is also accelerating certain road investments (e.g. Newmarket viaduct upgrade) and upgrading the rail link to Kingsland and Morningside stations near Eden Park to cope with this increased pressure. This is in addition to costs incurred in developing the bid to host the RWC and in delivering the tournament with the NZRU.

5 Technical Electricity Advisory Group (2009) Improving Electricity Market Performance – Volume 1, p.35. 6 Transpower Business Plan 2009/10, p. 83/84.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 7 NOT GOVERNMENT POLICY

Current Policy Work

Electricity

29. Electricity plays a vital role in developed economies. To this end the Government has a critical interest in ensuring the market generates an adequate supply of power at a fair price. Constrained hydro-electricity generation (due to dry winters), and occasional transmission failures have led to perceptions of a sub-standard system. Actual system performance has been somewhat better than the public perceives, but perceptions matter when it comes to investment7.

30. The preliminary findings from the most recent review (August 2009) concluded that the price for electricity is roughly in line with the long-run marginal cost of generation investment. The review also concluded that generation safety margins are expected to increase in the next decade (see Sectoral Analysis). Transmission capacity is also expected to benefit from increased investment by Transpower. The review noted that supply vulnerability was likely to persist due to the dominance of hydro electricity, and concluded that improvements to the market could be made to better manage this vulnerability8.

31. The review made 29 recommendations to improve electricity market operation. These include measures to improve: • The management of dry years; • Downward pressure on generation costs; • Procedures for upgrading transmission services; • Retail competition and prices restraint; and

• Governance of the electricity sector.

32. The government will consider submissions on the review recommendations and make any required changes to the sector before the end of 2009.

33. This work is led by the Minister of Energy and Resources, Hon Gerry Brownlee, supported by the Ministry of Economic Development.

Water/Irrigation

34. Irrigation can potentially increase productivity in large tracts of arable land. The productivity improvements enabled by irrigation are often much higher than the financial cost of providing it. However, competing uses, environmental concerns and Treaty issues should also be considered. Farmers attempting to develop irrigation schemes face significant ‘collective action’ problems and must overcome a number of regulatory barriers. Clearing these hurdles typically takes 10-15 years.

35. The government wants to ensure that appropriate schemes are to be built. Tensions between competing uses for water will never be eliminated but the government believes that wasted effort and uncertain outcomes can be reduced. Cabinet has

7 World Economic Forum (2005) Global Competitiveness Report. 8 For more information see: www.med.govt.nz/templates/StandardSummary____41689.asp.

8 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

therefore agreed to a new strategic direction for fresh water. This includes a three- pronged approach to improvements to fresh water management:

• A stakeholder-led collaborative process run by the Land and Water Forum that will develop shared outcomes, goals and long-term strategies for fresh water;

• Engagement between Ministers and the iwi leaders group to advance discussions on resolving high-level freshwater issues, including iwi/Māori rights and interests, particularly in freshwater management and allocation initiatives; and

• Concurrent scoping of policy options on matters including freshwater allocation, quality and infrastructure.

36. This work programme is led by the Minister for the Environment, Hon Nick Smith, and the Minister of Agriculture, Hon David Carter, supported by their respective ministries.

Improving effectiveness of government’s infrastructure spend

37. The government’s spend on its own infrastructure is an important component of the economy. There have been a number of notable procurement failures and cost blow- outs in recent times. In addition, the public sector has a patchy record of long-term asset management. For the broader economy to perform to its potential, the public sector must do better.

38. This initiative has two components. First, the government is developing its asset management practices by improving up-front decision making and taking a whole-of-life approach to its assets. Second, for appropriate projects, performance will be improved by accessing the skills and expertise available in the private sector. This initiative may entail contracting out, public private partnerships, alliancing or other procurement methods where they will provide value for the tax-payer.

39. This initiative is about getting better use out of existing assets. In some cases this will avoid the need to invest in new assets. But it is also about getting innovation in design, construction and management of new assets. Private finance may be used where appropriate to pass the risk to those best placed to manage it. For example, the government is investigating whether more prison capacity could be delivered by use of a public private partnership.

40. This work is led by the Minister of Finance / Minister for Infrastructure, Hon Bill English, supported by the Treasury.

Longer-term Issues

Auckland Transport Planning and Urban Form

41. Auckland is our major city and the place most affected by traffic congestion. It is also the fastest-growing region. Some major Auckland transport investments have been completed or are in the construction stages (the Auckland Northern Motorway extension, double-tracking the western rail line, State Highways 20 and 18, electrification of the metro rail network, Newmarket Viaduct, Victoria Park Tunnel).

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 9 NOT GOVERNMENT POLICY

Other major projects are in early discussion stages. These include AMETI9, a third harbour crossing, a city to airport rail link, and a CBD rail tunnel.

42. Major transport projects of this type have a significant impact on the location and form of economic activity — they tend to shape urban development rather than follow it. For example, a third harbour crossing would likely lead to more development of the suburbs north of the harbour (in a similar manner to the growth facilitated by the existing bridge) while a CBD rail tunnel would likely result in greater intensification of the inner city, suburbs and town centres that lie along the rail network, e.g. New Lynn. Strategic decisions of this kind can lock in patterns of growth for many decades, whether good or bad.

43. While the government is concerned about the co-ordination and delivery of ‘follower’ infrastructure, it is more focussed on the need to ensure that the right strategic or ‘shaping’ infrastructure is delivered at the right time and in the right place, to ensure maximum productivity gains over the longer term. In terms of transport, this means choosing those strategic projects that will produce the most desired pattern of household and firm location, reduce aggregate travel times and enable connectivity.

44. It will not be feasible for New Zealand to fund several of the proposed multi-billion- dollar projects at the same time. Therefore, it is important that projects are prioritised. This will require the region to reach clear conclusions about how it wants Auckland to grow. The Auckland governance reforms provide an opportunity for the new Auckland Council — through the proposed regional spatial plan and regional infrastructure investment plan10 — to present a comprehensive and agreed vision for the shape of the city and the strategic infrastructure it will need to deliver the vision. But it will also require participation by central government, and therefore alignment between regional and national infrastructure investment and planning. Achieving this will go a long way towards creating the kind of planning certainty that will both facilitate private investment and ensure maximum value for money from public investment in Auckland’s infrastructure. Alignment between regional and national infrastructure planning and investment will also be important for other regions.

Road funding and pricing

45. Though increased transport investment will have a significant impact on traffic congestion, building our way out of congestion is unlikely to be an affordable or efficient strategy. An efficient level of use is most likely to be achieved when users pay for the full costs they generate. Current road pricing takes the form of Road User Charges (RUC) for diesel vehicles and Fuel Excise Duty (FED) for petrol vehicles. These charges (particularly FED) are relatively unsophisticated and weakly targeted. For example, they don’t discriminate on type of road or time of day.

46. The government considers that there is a need for a public debate on the long-term issues of affordability and efficiency facing the transport system, and the potential benefits in the medium to long-term of moving to new forms of charging and pricing that replace, rather than add to, the existing system.

9 Auckland Manukau Eastern Transport Initiative. 10 As recommended by the Royal Commission on Auckland Governance.

10 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Policy Context

47. A good National Infrastructure Plan would address the following questions:

• How projects should be selected;

• Whether the projects will meet the needs and opportunities of the future;

• If not, what will be done about it;

• How do we decide whether a project should be the responsibility of the private sector, local government or central government; and

• Where a class of infrastructure is not the direct responsibility of central government, what should Parliament do to ensure that the regulatory environment does not unduly inhibit the development of appropriate infrastructure.

48. In order to address these questions, it is useful to identify principles to guide government decision-making in respect of the selection of projects and the development of the regulatory environment. The purpose of principles is also to enable other parties to foresee how decisions are likely to be made.

Role of Markets and Government

49. New Zealand has a predominantly market-based economy in which the government plays an important supportive role in providing the legal framework for markets to operate efficiently. It also plays a role in providing goods and services in certain circumstances, as set out in the following box. Some infrastructure falls into this category.

50. It is therefore useful to clarify when a particular project should be the responsibility of government, and when it should be left to the market.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 11 NOT GOVERNMENT POLICY

Principle 1 The role of government is to provide goods and services where:

a. the private sector is unwilling to provide them (due to inability to exclude people and therefore charge a price, or due to excessively high transactions costs): or b. the service is a monopoly and there are advantages in regulating through direct ownership rather than through the Commerce Act: or c. distributional objectives are better achieved through in-kind provision than through income support.

In practice, this means: d. Transport: New Zealand has a pay-go system in which all road user charges are hypothecated to the National Land Transport Fund. This means that, beyond commitments already made, there will be no taxpayer funds to support road transport infrastructure. Any increase in investment would need to be met from higher user charges (FED and RUC).

e. Energy: New Zealand has a market-based system for gas and electricity generation. This means funds for additional projects need to come from the market. The government has a role in improving the regulatory framework.

f. Telecommunications: New Zealand has a market-based system, but the government has decided that the roll-out of fast broadband is not fast enough, and has therefore decided to inject $1.5 billion. Aside from this commitment, funds for additional projects need to come from the market. g. Urban water: this is the responsibility of local government. See principle 3 following. h. Rural water for irrigation and electricity generation: New Zealand has a private/sector driven system. This means that funding for additional projects needs to come from the private sector (although the Government recognises that there may be some co- ordination issues that need to be better understood).

i. Health, education and corrections: These are part of the government sector that faces a capital constraint (see section on “Funding Infrastructure: The Government’s Fiscal Constraint”). Capital projects including infrastructure required by these sectors will need to be accommodated within this fiscal constraint.

Government Services

51. Where the conditions in principle 1 for government provision are met, the question arises whether the government should itself supply the goods or services or whether it should contract them out, and whether they should be sold or provided free.

Contracting out

52. It is easier to provide private parties with strong financial incentives to perform, and to penalise them for non-performance. Private parties can also offer wider private sector experience or innovation. Competitive tendering allows the public sector to choose from a number of bidders and when the contract expires, any concerns about performance can be dealt with by replacing the incumbent with another provider.

12 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

53. However, contracting out is not always the best option. It is only suitable where measurable performance standards can be clearly specified. Where they cannot, for example, in the provision of policy advice to ministers, a “master-servant” relationship is more appropriate.

54. Whether clear measurable performance standards can be specified depends in part on the skill of those writing the contract. Services that have traditionally been provided by the public service may, on closer examination, be suitable for contracting out.

55. Contracting out needs to address questions about the best form of contract, such as whether it should be a “whole-of-life” contract (e.g., a public private partnership, or PPP), a time-limited contract, or a contract for certain kinds of services only (e.g., a lease, or a maintenance contract). The government is open to considering all forms of contracting, the only criterion being that it provides best value for money.

Principle 2a

Services that can be clearly specified should be contracted out to the private sector in a form that gives best value for money. Services that are not easy to specify in a contract should be delivered by a government agency.

The government will explore opportunities for contracting out more services and innovative contracting techniques where these provide value for money.

User charges

56. This includes taxes that are in the nature of user charges, such as the Fuel Excise Duty.

57. User charges are important to ensure that economically efficient levels of infrastructure are provided and used. They ensure that users demand a service only where they put a value on it that exceeds the cost of the service. Where the user charge is set high enough to also reflect indirect social and environmental costs, the amount of infrastructure that needs to be put in place to meet the resulting demand will not exceed a socially and environmentally sustainable level.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 13 NOT GOVERNMENT POLICY

Principle 2b

The government will apply user charges unless:

i. the good or service is provided free for income redistribution or other policy reason, e.g., health, primary education; or

ii. it is difficult or costly to exclude users and charging is therefore not feasible, e.g., national defence, law enforcement.

Charges should not exceed the cost of providing the service.11

In practice, this means that transport, energy, telecommunications, irrigation and to a limited extent drinking water are subject to user charges, while health, education and corrections are largely not.

58. In practice, there will be some situations where a hybrid approach is appropriate, e.g., subsidised housing.

Central versus Local Government Funding

59. There are three separate issues here:

• The allocation of ‘government’ responsibilities between central and local government;

• Which tax base should be used to pay for the central or local government services; and

• Which layer of government should be responsible for collecting which tax base.

60. An infrastructure plan is not the place to address the first and third of these issues. But given the existing allocation of responsibilities, and the fact that in New Zealand central government is responsible for the collection of income tax and GST while local government is responsible for collection of land-based taxes, there is a question whether there is a case for financial transfers from central to local government or vice versa. This principle addresses this point.

61. The economic analysis of taxation shows that land-based taxes are more efficient and cheaper to collect than income tax or GST. In short, land-based taxes are one of the most economically efficient taxes available. A land tax has no economic costs,12 avoidance is almost impossible and collection costs are very low. By comparison, the economic cost of GST and tax on labour income (part of the income tax) has been estimated at around 20c per dollar raised. Tax on capital income (the other part of the income tax) is likely to carry even higher economic costs.

11 For guidelines on setting charges in the public sector, see http://www.treasury.govt.nz/publications/guidance/finmgmt-reporting/charges/ 12 Known by economists as the deadweight cost of taxation.

14 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

62. The economic cost of a tax is also a function of the extent of exploitation of the tax. The exploitation of the rating base is very low. Local Authority rates comprise only around 2-3 per cent of GDP compared with core Crown tax revenue of around 30 per cent of nominal GDP on average.13

63. We conclude therefore that the local government property tax is an efficient tax that is cheaper to collect than income tax or GST.

Principle 3

Decisions to spend should be aligned with decisions to tax: Financial transfers from central to local government should generally be avoided.

64. One valid exception is the funding of local roads because the Funding Assistance Rate (FAR) is in effect a transfer of nationally collected user charges from the collecting agent (NZTA) to the local entities responsible for carrying out the works.

Project Evaluation, Prioritisation and Decision-Making

65. Prioritisation is necessary in a world of limited resources.

66. After identifying needs, problems or opportunities, a feasible and creative set of potential solutions is required. The potential solutions should be evaluated for their contribution to economic welfare. The best solution should then be prioritised against other projects in terms of its contribution to social welfare and the economy’s productivity.

67. The concept of welfare includes economic growth, environmental and health considerations, and is measured by a social cost benefit analysis (CBA). A full CBA is a systematic way of analysing a project’s benefits and costs, including wider economic development benefits and intangible social benefits and costs, and of determining whether the project is likely to add or detract from welfare. While it is necessarily an imperfect technique, it is the best tool available.

68. Because of the complexity of the analysis and the large numbers that are usually involved, bias can result from analysis being led astray by ‘intuition’, ‘common sense’ or ‘judgement’. Therefore, if the result of a CBA does not seem intuitively right, further inquiry or an independent review may be appropriate.

69. The value of equity or distributional effects cannot be quantified objectively or empirically and needs to be considered separately. However, even where a policy is promoted for distributional reasons, decision makers should have a CBA to support their decisions and ensure they understand the costs of any distributional decision.

70. All central government investments are also subject to confirmation and comparison across projects through the normal budget process.

13 Source: Treasury Budget 2009 document and Local Authority Statistics: March 2009 quarter.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 15 NOT GOVERNMENT POLICY

Principle 4

The decision-making process should include consideration of the following:

• Social cost benefit analysis;

• Distributional or equity effects; and

• Affordability (through the budget process).

71. A primer on carrying out cost benefit analysis can be found on the Treasury’s website.14

Asset Management

72. The Crown is the largest owner of built assets in New Zealand. The carrying value of government assets is in excess of $103 billion and each year, the public sector spends over $5 billion in capital and maintenance to support the delivery of government services to the community.

73. The government sees effective asset management as an important part of the agenda for modernising the delivery of public services, delivering value for money and minimising the risk associated with this significant commitment of budgetary resources.

74. In the foreseeable future, the case for obtaining cost-effective performance from the Crown’s physical assets is even stronger, given the tough economic outlook and ever- increasing service expectations of the public.

75. With this in mind, the government is putting in place new disciplines that will support the objectives of the National Infrastructure Plan in three main ways:

• Regular reports will provide it with a systematic, annual view of the long-run capital intentions of agencies responsible for managing large or critical parts of the Crown estate. This will enable the government to make better-informed allocative decisions through time and convey its priorities to external stakeholders;

• Decision-making processes will focus on whole-life cost-effectiveness, and reinforce the need for an analysis of the relationship between physical assets, service levels and outcomes, and the economic analysis of investment choices; and

• Standards, methods and language that underpin and enable good practice to be built and shared across the public sector, including local government, will be used.

76. In this context, construction contracts should:

• Maximise innovation: The Request for Proposal (RFP) should often be expressed in terms of needs, functions and operational performance requirements rather than describing requirements in design or descriptive characteristics;

• Minimise risk of cost blow-outs: Risks should be rigorously allocated to the party best able to manage them, and a contract should not be let until it is understood well enough to obviate the need for subsequent contract variations; and

14 See: http://www.treasury.govt.nz/publications/guidance/costbenefitanalysis/primer

16 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

• Minimise the risk of going over time: This can be achieved by making a single lump sum payment on completion of the project, rather than progress payments. This incentivises the contractor to trade financing costs against more expensive but faster construction methodologies, thereby finding a solution that is more economical (and likely faster overall) than if progress payments are made.

Principle 5

Crown agencies should demonstrate a strategic approach to asset management that allows government to better manage political, managerial and financial risks, as well as to obtain better value for money in the delivery of services to the community.

The government expects greater efficiency from the management of existing assets.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 17 NOT GOVERNMENT POLICY

Sectoral Analysis

Transport: Roads

Description

Background and history 77. New Zealand’s road network supports the delivery of freight and passenger movement services throughout the country as can be seen from a New Zealand road map.

78. Road infrastructure is partly owned by the Crown (state highways) and partly by local councils (local roads). Transit New Zealand was established in 1989 to take over the operational management of state highways from the Ministry of Works and Development (which was funded and guided by the National Roads Board). Funding for Transit came from nationally set user charges15 less an amount of petrol excise duty, which was retained for the Crown account. The funding arm of Transit was operationally separated in 1996 to form Transfund. Transfund and the Land Transport Safety Authority combined in 2004 to form Land Transport New Zealand. In 2008, Land Transport New Zealand and Transit merged to form the New Zealand Transport Agency (NZTA). Full hypothecation was introduced in 2008; it requires that user charges are fully dedicated to the National Land Transport Fund (NLTF)16. Provision of local roads has always been considered a core function of councils and the funding for this work comes from a mixture of rating revenue and funding from the NLTF.

79. Over the last decade it became apparent that New Zealand was under-investing in transport infrastructure. In 1999/2000, New Zealand was investing around $1.1 billion on roads (including public transport), which amounted to 1 per cent of GDP. This was less than the amount collected from user charges, as the Crown retained a portion of Petrol Excise Duty for the consolidated fund.

Assets 80. New Zealand has 90,783 kilometres of roads, of which 10,894 kilometres are state highways and 79,889 kilometres are local roads.17 As at 30 June 2008, 61,504 kilometres of the network was sealed, with 98.8 per cent of the unsealed roads being rural and special purpose local roads.

15 Fuel Excise Duty (FED), Motor Vehicle Registration (MVR) and Road User Charges (RUC). 16 For more information on full hypothecation, see http://www.transport.govt.nz/legislation/acts/LandTransportManagementAmendmentAct-QuestionsandAnswers/ 17 See: http://www.nzta.govt.nz/about/what-we-do.html.

18 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

81. Current stock of roads:

Road Type KMs % of Total Vehicle Kilometres Funding Source Roads Travelled (Billions)

State Highways 10,894 12 18 NLTF Local Roads 79,889 88 18 part NLTF / part Rates

Total 90,783 100 36

Source: New Zealand Transport Agency, 200918

Institutional arrangements in the transport sector

82. The New Zealand Land Transport Agency (NZTA) is a Crown Entity. Its main purposes are to collect FED and RUC, to build and maintain state highways and to contribute to the funding of local roads and public transport. Local roads are the responsibility of local government.

Funding and pricing 83. Different categories of projects have different funding sources. State highways are entirely funded from the NLTF. Local road expenditure and passenger transport are part-funded from the NLTF with the remainder predominantly derived from local rate revenue. NLTF funding provided to Local Authorities is subject to a funding assistance rate, which varies according to project and local authorities, but overall, the NLTF funds just under 50 per cent for local road activities. The regions each develop Regional Land Transport Programmes and as part of this process, individual local authorities identify and make requests to the NZTA to fund projects. NZTA assesses individual projects and makes funding decisions according to a multi-criteria analysis (strategic fit, efficiency and effectiveness). The efficiency measure is largely based on the benefit cost ratios.

84. Two notable features of the institutional arrangements in the sector are:

• The NZTA has statutory independence over determining whether particular roading activities should be included in the National Land Transport Plan (NLTP) and approving NLTF funding for roading activities. The purpose of the independence is to de-politicise decision-making about individual road projects.

• Funding of road infrastructure using the ‘pay-go’ system. Apart from local road expenditure, which is partly supported from rates, road infrastructure is essentially operated as a ‘pay-go’ system. In other words, operating and capital expenditure is substantially funded from current user charges, principally the Fuel Excise Duty (FED) and the Road User Charge (RUC). This contrasts with the more conventional business approach where investment is funded from the capital markets and operating expenditure, including the servicing of debt and equity, is funded from user charges.

18 See: http://www.nzta.govt.nz/about/what-we-do.html

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 19 NOT GOVERNMENT POLICY

85. Before 2007, some FED revenue was retained in the Crown account. From 2007 onwards, the Crown made a net contribution to land transport investment19, which contributed to the decision to reassess the institutional and funding parameters within the road transport sector.

86. Expenditure is forecast to reach $2.8 billion in 2009/10 and $8.7 billion over the next three years. This spending does not take into account Local Government contributions to the National Land Transport Programme, which will be between $550 million and $755 million20. The government policy statement for land transport (GPS) is a 10 year document with greater specificity in the first three years, which guides transport agencies in their planning and funding decisions to give effect to the objectives the government has for transport21. The GPS sets out the overall funding available to the sector (predominantly user charges revenue with supplementary Crown investment), sets funding ranges for different activities (such as state highway construction and maintenance, and public transport services and infrastructure) and sets out principles for funding decisions.

Planning 87. NZTA is responsible for the development of the three-yearly National Land Transport Programme (NLTP). NZTA has responsibility for the allocation of the National Land Transport Fund (NLTF), which is primarily used to purchase the NLTP. The NLTP must give effect to the principles and funding ranges set out in the GPS and must be developed within the overall funding available. The NLTP is an operational document which details the activities eligible for funding from the NLTF (see the diagrams that follow for more detail on the different roles and responsibilities within the sector).

19 The majority of historical funding was spent on roading, but a portion of the regional funding packages were allocated for rail projects. The forecast expenditure excludes rail expenditure which is outlined in the Rail section. 20 This assumes that local government funding matches the amount provided from the NLTF. Assuming a Financial Assistance Rate of 50%. 21 For more information on the GPS, see www.mot.govt.nz

20 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Funding Arrangements

Source: NZTA 2009-2012 NLTP

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 21

IN-CONFIDENCE IN-CONFIDENCE 22 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 SEPTEMBER 6 AND ISSUES FACTS INFRASTRUCTURE: | 22 Roles and Responsibilities in the Transport Sector

Land Transport Sector Planning

Developed Document Time Frame Output By

Land Transport States the high level Parliament Enduring Management Act objectives of the sector

Broad guidance for The Minister of Government Policy 3 years NZTA on how to give Transport Statement effect to LTMA

The New Zealand Regional Land Transport Identifies and Transport Strategies/State 3 Years prioritises projects for Agency/Regional Land highway forecast NZTA to consider Transport Committees DRAFT –NOTGOVERNMENT POLICY

The New Zealand National Land Transport Identifies projects for 3 Years Transport Agency Programme funding

Source: The Treasury, 2009

NOT GOVERNMENT POLICY

Analysis

88. Most critical assessments of the sufficiency of road infrastructure in New Zealand have been based on anecdotal evidence and have been concentrated on sections of the roading network, rather than on the entire network. The work of Ernst & Young in 1997 on the cost of congestion in Auckland was the first attempt at quantifying the cost of infrastructure adequacy, and established an annual cost of congestion in Auckland of $755 million per annum22. This is illustrated by the following comparison with Brisbane, a city of similar size:

Source: NZCID, Meeting New Zealand’s Transport Infrastructure Needs to 2025, 2006

89. Since the 1997 report, the cost of congestion in Auckland has been inflation adjusted, and further research has largely focused on infrastructure adequacy in urban areas, rather than taking a national perspective.

90. Measuring the adequacy of roading infrastructure is inherently difficult. The percentage of expenditure as a portion of GDP is unhelpful as prior investment is not taken into consideration. Measuring congestion is not entirely useful or at least sufficient. Congestion may be induced by the incorrect setting of user charges, or may not provide an accurate indicator of network performance as it may be concentrated in certain areas and certain times of the day. Moreover, a significant amount of additional funding is currently going into the road sector but because of construction lags it will take some years before the full effects are visible.

91. Compared to other OECD countries, New Zealand has a relatively high rate of road fatalities per head of population (see the graph that follows). Based on 2007 results, has a road fatality rate of 10 deaths per 100,000 population. This compares with 7.7 deaths per 100,000 population for Australia. Our fatality rate is double that in the Netherlands, Sweden and the United Kingdom.

22 Ernst & Young 1997 Report "Alternative transport infrastructure investments and economic development for the Auckland region".

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 23 NOT GOVERNMENT POLICY

Source: Ministry of Transport, 2009, based on data from the OECD 92. To help inform which road safety measures are appropriate, the government has released the road safety 2020 discussion document for public consultation.23

93. The best indicator of infrastructure sufficiency (including safety features) is likely to be the benefit cost ratios of road projects for which there is insufficient funding. The existence of a significant number of projects with high expected benefit cost ratios that cannot be funded could indicate that there is, or will be, insufficient infrastructure.

94. Officials are currently endeavoring to establish whether there are many projects with significant benefit cost ratios that remain unfunded, and hope to have this information in time for the first National Infrastructure Plan.

Local roads

95. Much of the local road network and structures were developed in the 1950s and 1960s. It has been suggested that many of the structures (namely bridges) are now reaching the end of their useful life and are nearing replacement. Proposed changes to the vehicle mass and dimension rules (allowing heavier and longer trucks on certain routes) will compound the challenges for councils as well as NZTA, which is trying to establish the adequacy of state highway bridges for this purpose. Preliminary analysis suggests that there will need to be increased investment of around $85-100 million to strengthen or replace bridges on candidate routes for heavy vehicle permits.

23 See www.mot.govt.nz.

24 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Efficient use of existing infrastructure

96. Congestion and empty roads could both be indicators that road infrastructure is not being used efficiently. The latter might be a legacy of overbuilding in the past, or the result of changed circumstances. Congestion can be addressed either by building more road space or by taking demand management measures, for example some form of time or location-specific road pricing.

Climate change

97. Transport accounts for an estimated 19 per cent of all New Zealand greenhouse gas emissions. The Emissions Trading Scheme (ETS) will create a price for carbon in New Zealand which, in the transport sector, will be included in the price of fuel. Whether the ETS will lead to a significant reduction in greenhouse gas emissions from the transport sector is not yet known. This is due to the ETS being configured to use prices to achieve emissions reductions in the sector which can achieve these most efficiently.

Communications – why should people travel to work when they can work from home?

98. If the technology is such that the costs of having staff working from home is less than the costs of work-based premises, it is conceivable that communications may to some extent substitute for transport. But this substitution will not be possible for all firms, and even for firms which can provide working from home services, the need for human interaction may limit the extent to which substitution occurs. Ultimately, if transport user charges are set to reflect all social costs, then the market will decide if or how much substitution will be optimal. The users’ decisions will be reflected in travel demand patterns and recognised in the measurement of the benefits of individual road projects when undertaking cost benefit analysis.

Transport: Rail

Description

Background and history 99. Like roads, New Zealand’s rail network supports the delivery of freight and passenger movement services (an overview of the network is provided in the Analysis section that follows).

100. Rail has a history that involves periods in private ownership, as a government department, and as a government corporation. The first railway in New Zealand was opened in 1863. Lines were initially built by provincial governments and tended to be fragments of rail connecting ports to the hinterland. In 1876, these fragments were brought under central government control, and a century-long process began of joining them together into a single national network. Initially, moving people between urban centres was the primary motivation for creating this national network, while moving freight long distances was only a complementary use. Even today the most heavily- used parts of the network involve relatively short distances (e.g., Auckland to Tauranga, or the West Coast to Christchurch), rather than the entire main trunk lines.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 25 NOT GOVERNMENT POLICY

101. New Zealand’s difficult topography, together with budget considerations, resulted in the adoption of a narrow-gauge track standard, which has constrained the average speed of rail services ever since. In addition, the country’s small and highly dispersed population has mitigated the formation of economies of density (running more trains on existing tracks). Since rail has high fixed costs (the tracks, formations, signalling systems) and low variable costs, it tends to benefit more from economies of density than economies of network size (creating more tracks to attract more freight).24

102. As New Zealand’s road network grew in parallel with the rail network, the former began to offer better connectivity and economies of scope. Road transport can provide door- to-door delivery and a speed of delivery that rail struggles to match. In addition, the majority of freight movements (73 per cent) are over shorter distances within regions and thus not a natural market for rail25, which becomes economic only over long distances.

103. In 1980, rail carried approximately 30 per cent of all goods but following deregulation, its market share dropped significantly. It now carries about 6 per cent of freight tonnes (but 15 per cent of net tonne kilometres).26

104. A period of restructuring in the 1980s in response to rail’s reduced role led to significant changes in the business: staff numbers reduced dramatically between 1983 and 1991, and productivity doubled. Private ownership from 1993 resulted in further improvements and, nominally at least, operating profits. From a government department of some 20,000 people in the 1970s, KiwiRail now runs a similar level of freight operations with around 3,500 employees. Despite these efficiency improvements, successive owners (whether private or public) have still failed to generate sufficient revenue to cover the long-term capital costs of the rail network. This has resulted in the running-down of physical assets through reduced investment in maintenance, renewals and upgrades of both the track infrastructure and the rolling stock. Because rail assets are long-lived, the business can continue for some time, albeit unsustainably.

105. Political and public concern about under-investment in the rail network resulted in government ownership of the track network in 2004, and consequent subsidisation of the private rail operator (through public investment in the track network) led to full public ownership of the entire rail business in 2008.

106. Government ownership has resulted in a renewed effort to improve capital assets through a government subsidy and capital grants, although the level of investment is still not enough to meet the long-term asset replacement rate.

Assets 107. The size of New Zealand’s national rail network has changed little since the early 1990s, and is approximately 4,000km.

24 For further discussion, see: Heatley, D. (2009) The History and Future of Rail in New Zealand, New Zealand Institute for the Study of Competition and Regulation. 25 Source: KiwiRail Group (2008) Business Overview and Review of Strategic Issues for Shareholding Ministers. 26 Ibid.

26 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

108. There are four main parts to the rail network:

• A national freight network, carrying a range of goods but with a comparative advantage in the transport of bulk commodities such as coal, milk, logs and steel. It also has a role in moving containerised import/export goods to and from major ports, long-distance transport of containerised goods, and general (inter-modal) freight between major cities;

• An interisland ferry service, which is part of the KiwiRail business primarily because of its strategic role in transporting rail across the Cook Strait, acting as a link in the national rail network. However, the bulk of interisland ferry revenue (79 per cent) comes from commercial road freight, passengers and their vehicles, rather than from rail;27

• A long-distance passenger service, the primary focus of which is providing a domestic and international tourism experience; and

• Two metropolitan passenger networks, in Auckland and Wellington, which are supported by ratepayer, taxpayer and road-user subsidies on the basis that reduced congestion and/or increased mobility of commuters brings social, economic and environmental benefits.

109. While the four parts of the business have some common costs and share parts of the track network they can, for the most part be viewed quite separately. For example, the metro rail services are predominantly contracted out by the two regional councils, and utilise special-purpose infrastructure not needed by freight rail operations. In addition, at peak times, metro services actively compete with and crowd out freight services on the parts of the network they share.

Institutional arrangements 110. The rail network is currently owned and managed by the New Zealand Railways Corporation (trading as KiwiRail Group), a State-Owned Enterprise (SOE).

111. Urban passenger trains in Auckland and Wellington are subsidised by the respective regional councils, who also effectively control the level of service provided. Rolling stock in Auckland is mostly owned by the regional council while, in Wellington, the rolling stock is mostly owned by KiwiRail.

Funding and pricing 112. Urban passenger rail fares are determined by the regional councils. Freight rates are determined by KiwiRail.

113. KiwiRail funds its operations in part from a government subsidy, in part from borrowings and in part from Crown equity.

27 Source: KiwiRail Group (2008) Business Overview and Review of Strategic Issues for Shareholding Ministers. Available at: http://www.ontrack.govt.nz/aboutus/resources/publications/Pages/Publications.aspx

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 27 NOT GOVERNMENT POLICY

Planning

114. KiwiRail is responsible for all planning of rail capital works.

Analysis

Rail Traffic Flows

28 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

RAIL FACTS AND FIGURES

Track length (km) 4,000 KiwiRail Staff 4,000 Freight carried (Net Tonne Kms) 4,500,000,000 Bridges1 1,656 Locomotives 180 Weekly Freight Services 900 Tunnels 149 Freight wagons 4,200 Metro Passengers (p.a.) 18,500,000 Culverts 12,000 Diesel Metro Units3 38 Long‐distance Passengers (p.a.) 500,000 Sleepers 6,000,000 Electric Metro Units3 125 Ferry Passengers (p.a.) 947,000 Land (ha)2 18,000 Passenger Carriages3 135 Ferry Traffic, Road and Rail (p.a.) 331,000

KiwiRail Equity Value $12,000,000,000 KiwiRail Revenue (07/08)4 $615,000,000 Capital Grants (08/09)5 $287,000,000

1 5 owned by KiwiRail 3 owned variously by ARC, GWRC & KiwiRail includes metro upgrades 2managed by KiwiRail 4excluding grants and subsidies

Source: KiwiRail

115. A report in 2008 by the Rail Development Group28 noted that “the relative economics of rail vs. road and sea mean that relieving the business of deferred capital expenditure will only go some way to enabling it to be financially sustainable on a stand-alone basis”, and that if the national rail network is to retain its current size, an ongoing government subsidy would be required.

116. The argument for ongoing public subsidisation of the network tends to rest on the premise that rail offers positive externalities (e.g., reduced congestion, emissions and accidents) and that road transport does not pay for its full social costs, reducing the ability of rail to compete. There is little current evidence to support this.

117. Much of the New Zealand rail network is uneconomic, even when taking into account the environmental value of rail’s greater fuel efficiency. While there may be a case for subsidising rail up to a certain point, based on its social and environmental contribution, it is an unresolved question about whether this would be sufficient to cover the full capital costs of the entire rail network. It is also possible that road freight prices are on average close to the economically correct level across the country (or at least there is no contrary evidence). If this were the case, there would be less justification for subsidising rail freight on this basis. Nevertheless, further work is being undertaken to determine the relationship between current road prices and optimal prices, and will be used to inform future government rail funding policy.

118. The National Freight Demands Study undertaken for the Ministry of Transport, Ministry of Economic Development and the New Zealand Transport Agency in 200829 indicated that there is likely to be increased demand for the transport of bulk commodities in the future (an increase of 70 per cent by weight to 2031), where rail has a comparative advantage. It is also likely that rail will continue to be competitive in general freight and container transport in certain parts of the country where economies of density are exhibited, such as between Auckland and Tauranga. This implies that rail will continue to be an important part of New Zealand’s transport infrastructure. At the same time, this growth is only likely to be in specific parts of the network, and many other parts of the network will remain under-utilised and uneconomic.

28 The Rail Development Group was established following the 2008 purchase of Kiwirail by the government to advise the Minister of Finance on the further investments that would be required. Reports are available at: http://www.ontrack.govt.nz/news/2009/Pages/RailDevelopmentPapersreleased.aspx 29 Available at: http://www.transport.govt.nz/research/NationalFreightDemandsStudy/

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 29 NOT GOVERNMENT POLICY

119. The government has difficult but important policy decisions to make about what size rail network it wishes to support with taxpayer funds. Its decisions are unlikely to be finalised before publication of the Plan. This work is led by the Minister of Transport Hon Steven Joyce.

Transport: Ports

Description

Background and history 120. New Zealand’s ports support both domestic coastal and international freight movement services.

121. New Zealand had over 100 ports in the 19th Century. This number had approximately halved by 1935 and has continued to decline since. The following graph shows the change in volumes of trade over the last decade:

Source: Statistics New Zealand

30 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Assets 122. Fourteen exporting ports and a fewer number of other ports service trade or fishing vessels:

Exports Exports Imports Imports 2007 provisional (tonnes) ($ million) (tonnes) ($ million) Whangarei 1,156,500 273 5,242,347 3,692 Auckland 2,518,128 7,355 3,876,030 15,665 Tauranga 6,022,908 7,539 3,878,882 4,659 Taharoa 682,200 14 - - Gisborne 589,041 119 7,029 1 1,374,968 1,848 488,717 452 Napier 2,078,702 2,253 484,236 585 Wellington 818,456 917 1,217,135 2,208 Nelson 1,243,919 850 124,273 327 Picton 377,947 40 2,433 8 Christchurch (Lyttelton) 3,273,518 2,624 1,344,764 2,613 517,266 1,116 314,842 382 Dunedin (Port Chalmers) 1,530,084 4,130 264,727 350 (Bluff) 648,011 1,230 1,125,054 553 New Zealand various (sea) 49,990 8 24,411 2 All seaports 22,881,638 30,315 18,394,880 31,499

Source: Statistics New Zealand

123. Further background on the New Zealand port sector can be obtained from reports by Rockpoint30 and CRA31.

Institutional arrangements

124. Despite the removal of ownership restrictions almost two decades ago,32 all our ports feature a substantial proportion of local government (LG) ownership, with 100 per cent ownership common.

Funding and pricing

125. Port companies are unregulated and are therefore able to set their own prices. They fund their operations from capital markets by raising debt and equity.

Planning

126. Port companies are fully responsible for planning their own capital investments.

30 Rock the Boat. The New Zealand Port Sector. Rockpoint Corporate Finance. 2008. 31 Port Companies and Market Power – A Quantitative Analysis. Charles River Associates 29 April 2002. Report for MoT/MED. 32 Port Companies Amendment Act 1990.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 31 NOT GOVERNMENT POLICY

Analysis

Port performance

127. There are several aspects to port performance. Individual dimensions, as follow, need to be considered.

Financial performance

128. The previously mentioned report by Rockpoint concludes that, on average, the financial performance of the port sector is lower than that which commercially-motivated owners would demand. Some of the listed ports appear to operate quite successfully (at least within the normal range of companies subject to the vagaries of economic cycles and management performance). Others are failing to provide a return on investment and are struggling to survive.

Operational performance

129. It is hard to find good operational performance data for ports. Some parameters, such as container movements per hour, are easily measured and well reported. However, others, such as handling costs, are regarded as commercially sensitive and are seldom available for scrutiny. Anecdotal reports suggest that ports that allow competition of stevedoring services feature substantially lower handling costs than those that are ‘closed shops’.

Supply chain performance

130. Ports are one small part of a much larger supply chain. It is possible that maximising the efficiency of any specific part of the chain can reduce overall performance. For example, more efficient capital investment from a port’s perspective may result in ships having to wait longer to load or unload.

131. No New Zealand port suffers the congestion problems faced by some ports in Australia, South-East Asia and elsewhere. Truck traffic congestion has occurred at the Port of Auckland, but the recently developed on-line traffic scheduling system and the new Wiri inland port should substantially alleviate this problem. Customer complaints about service, where they exist, are addressed out of the media spotlight. There is active solicitation of new shipping lines to service customer needs, with consequential benefits to New Zealand’s exporters and importers from increased competition among international shipping.

132. A report released by Beca on 31 July 2009 showed that assuming 1.8 per cent traffic growth per annum over the next 12 years (which is considerably lower than the 2.7 per cent average growth per annum over the last 10 years), committed and planned road improvements will result in an overall deterioration in access times to and from the Port of Auckland.33

33 The Beca report can be accessed at http://www.poal.co.nz/news_media/speeches_presentations/090731_Transport_Briefing_ %20BecaPOALSurveyPresentation.pdf

32 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Change in Access Times between Now and 2021 (Port of Auckland)

Role in regional development

133. One explanation for continued local government ownership in the face of relatively low returns on investment is that LGs regard their ports as strategic assets owned to promote regional development. If so, below-market returns may reflect an implicit subsidy from rate payers to freight owners. A port could be considered as a direct subsidy or as a cost centre, similar to a tourism bureau that is not expected to cover its own costs but that provides value through the business it generates or facilitates elsewhere in the region.

Changes in international shipping

134. International shipping lines often change their schedules in response to world market conditions. This can affect New Zealand in terms of services to exporters and importers, and visits to New Zealand ports. This can have dramatic short-term effects on the efficiency and viability of port infrastructure, especially when visits to some ports might cease. However, international shipping lines face the commercial risk that any such ‘vacuum’ might be filled by their competitors, who have to weigh the trade-offs between gaining new cargoes versus larger volumes of cargo at ports. Given that ports are mainly long-term infrastructure, short-term changes by shipping lines are not necessarily a long-term problem.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 33 NOT GOVERNMENT POLICY

Larger ships

135. The last decade has featured a significant increase in the capacity of new vessels, driven by increasing trade volumes and the lower per-unit operating costs of larger vessels. The largest container ships now carry 11000 TEUs34. However, these vessels are being committed to the major trade routes and are unlikely to visit New Zealand in the foreseeable future. The largest vessels currently visiting New Zealand are around 4100 TEU capacity but some ports are preparing for 6100 TEU ships. There is debate about the costs of accommodating these ships. Several ports claim they already have this capability, or could be made compliant with readily achievable levels of investment35. However, some commentators suggest that the costs could reach into the hundreds of millions and that duplication of this investment in competing ports would be wasteful from a total New Zealand perspective.

136. The Chief Executive of Maersk New Zealand recently commented that the chances of larger ships visiting New Zealand in the near future are relatively small36.

Hub and spoke shipping

137. There is an increasing trend towards the hub-and-spoke model in overseas markets, with major ports (the hubs) aggregating freight from smaller centres (the spokes). This model uses economies of scale in both the shipping and port-side facilities. From the customer perspective hub and spoke models are a trade-off between speed and cost. The ideal service is low-cost and runs from the port nearest to the freight owner to the port nearest to the customer (‘point to point’). Hub and spoke reduces cost but usually at the expense of speed or complexity.

Supply chain integration

138. There is a global trend towards increasing integration of supply chains, with service providers seeking to provide more comprehensive ‘supply chain solutions’ covering more of the span between the freight owner and the final customer. This creates competition to control more of the supply chain. Three directions are apparent within this trend. Trucking companies are expanding into warehousing and stevedoring (e.g., the Toll group in New Zealand and Australia), shipping companies are expanding into port services (e.g., Maersk/APMoller), and specialist port operating companies are taking over port operations from local authorities (e.g., Hutchison Whampoa).

139. Port companies have found themselves squeezed in this contest. They face a choice of accepting the trend (and therefore a role as a passive landlord) or competing to hold on to ‘their share’ of the supply chain.

Future freight demands

140. It would in theory be possible to look at past trends and future projections, and then form a view about the likely size and location of the future freight task. Such a view could then inform port planning. However, such analysis may not give a robust result.

34 TEU stands for Twenty-foot Equivalent Unit, a standard size container. 35 Auckland and Tauranga both claim their shipping channels are sufficient for these vessels, subject to tides. Tauranga already has three ‘post Panamax’ capable cranes. 36 Quoted in NZ Transport Intelligence Briefing, 11 June 2009.

34 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

The speed and unpredictability of past commodity cycles suggests that long-term central planning is unlikely to be helpful. Twenty to thirty years ago few would have foreseen the current export volumes of dairy products, coal or wine. Conversely meat and wool volumes have declined substantially. Imports of CKD cars for assembly in NZ have been replaced by second-hand Japanese imports and Asian-manufactured goods have replaced many local products. Overall, globalisation has created a huge surge in freight volumes. It is difficult to predict whether these trends will continue or be replaced by new trends.

Transport: Air Services

Description

Background and history

141. A variety of institutions support the delivery of air services (freight and passenger movement/services) including airports, air traffic control, and air safety and security (including police, customs and immigration). This section focuses largely on airports themselves as the main physical infrastructure that supports air services.

142. The main business of airports is handling international and domestic flights. International passenger movements—inbound and outbound leisure, business and migration trips—are of tremendous value to the New Zealand economy. Over the past 10 years, international passenger movements have grown as follows:

International passenger movements by airport (thousand passengers)

Source: Statistics New Zealand

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 35 NOT GOVERNMENT POLICY

143. Airports—principally Auckland and Christchurch—handle a relatively small volume of freight (0.6 per cent of total imports and 0.5 per cent of exports by volume), though these are of relatively high value (21 per cent of imports and 15 per cent of exports by value).37

Assets

144. New Zealand has 41 airports with paved runways varying from about 900 m to over 3 km in length:38

Over 3,047m: 2

2,438 to 3,047m: 1

1,524 to 2,437m: 11

914 to 1,523m: 26

under 914m (2007): 1

145. There are also 80 unpaved airports.

146. The airports are located throughout New Zealand39 and vary in age and condition.

147. Auckland airport is New Zealand’s largest gateway, but Christchurch and Wellington play significant roles, especially with traffic to and from Australia.

148. In addition to the physical airports themselves, airports require appropriate infrastructure (e.g. road links) in order to support efficient passenger and freight movements.

Institutional arrangements 149. New Zealand airports feature a range of ownership structures. Many are owned by local government; Auckland Airport is a publicly listed company (with some local government shareholding); Wellington Airport is 66 per cent owned by Infratil and 34 per cent by Wellington City Council. The Crown has minority shareholdings in Christchurch and Invercargill airports, holds a 50 per cent shareholding in Dunedin and Hawke’s Bay airports, is a joint venture partner in six regional airports and operates Milford Aerodrome. There are also some privately owned airports serving commuter, tourist or general aviation markets, and military airports.

150. The operation of airports is subject to the requirements of regulation, set out in the Civil Aviation Act 1990, aviation rules and the Airport Authorities Act 1966. The latter defines the functions of airport companies and their obligation to consult major customers over capital investment and pricing.

37 Source: Statistics New Zealand. 38 Source: CIA Factbook. 39 http://www.aircraft-charter-world.com/airports/oceania/newzealand.htm provides limited information on many (but not all) of New Zealand’s airports (including usage and runway length).

36 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Regulatory issues

151. Amendments to the Commerce and Airport Authorities Acts in 2008 gave the Commerce Commission new responsibilities with respect to the three major airports which, between them, account for 74 per cent of total passenger throughput. The Commission will specify information disclosure requirements for these airports, monitor and analyse that information, and report to the Ministers of Commerce and Transport on the effectiveness of the regime as soon as practicable after 2012.

152. The process, including consultation for reviewing landing charges for these, as for all other airports, remains subject to the Airport Authorities Act.

Funding and pricing

153. Funding and pricing arrangements vary but almost all airports (and certainly the larger ones) provide both contestable and non-contestable services. For non-contestable services (those making use of the runway itself), airports charge airlines in order to recover a proportion of their weighted average cost of capital, which depends on the value of the underlying airport assets. Airports charge on a per passenger per flight basis. However, for contestable services (such as parking and shopping facilities), airports tend to charge the operating businesses a fee for the lease of the premises as well a percentage of revenue from their till.

Planning 154. Current planning varies from airport to airport, as each airport manages its own capital investment.

Analysis

155. Compared with overseas airports, New Zealand’s are relatively free of congestion. However, airlines have complained of monopoly pricing, in particular by Auckland and Wellington airports. To the extent that airports have been extracting monopoly prices, it might suggest that establishing competing infrastructure in regions could provide benefits. But airports argue that they are low-cost in comparison to overseas airports, and the case for second airports within regions has yet to be demonstrated.

156. There are opposing views about whether airports have been overinvesting. Airlines have complained of having to bear the cost of “gold-plating” in some cases, while airports are of the view that the investments are necessary to attract travellers.

Electricity

Description

Background and history 157. Electricity is an important input for energy-utilising/energy-intensive services. In order to sustain such services, it is important that there is sufficient infrastructure to support electricity generation and transmission.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 37 NOT GOVERNMENT POLICY

158. Electricity was produced and distributed by a government department until 1986. This became a corporation under the State Owned Enterprises Act, the Electricity Corporation of New Zealand (ECNZ). In 1999, the ECNZ was split into one transmission company (Transpower, an SOE) and four separate generating companies, one of which was sold (Contact Energy), the other three becoming individual State Owned Enterprises (SOEs). Some power stations were sold to other companies such as Trustpower. As a result, arrangements for the production of electricity have changed from a state-owned monopoly to a mixed-ownership competitive market.

159. Recent additions to generation capacity are as follows:

Capacity Year Plant/Location Owner/Operator Fuel MW GWh

2004 Huntly-P40 Genesis Energy Gas 50 110 Whirinaki MED/Contact Diesel 155 339 Te Apiti Meridian Wind 91 358 Tararua II TrustPower Wind 33 124

2005 Wairakei Binary Contact Energy Geothermal 14 118 Pan Pac Cogen Pan Pac Biomass/steam 13 70 Mokai Tuaropaki Power Company Geothermal 40 287

2006 Southdown OCGT Mighty River Power Gas 50 110

2007 Mokai expansion Tuaropaki Power Company Geothermal 17 122 White hill Meridian Energy Wind 58 220 Huntly e3p CCGT Genesis Energy Gas 385 2867 Tararua Wind Farm 2 TrustPower Wind 93 349

2008 Kawerau Mighty River Power Geothermal 100 832 Ngawha II Tai Tokerau Trust / Top Energy Geothermal 15 125 Ohaaki exp. Contact Geothermal 23 191

Source: Ministry of Economic Development / Electricity Commission, 2009 (based on information supplied by generation companies)

160. The sufficiency of generation capacity can be judged from the winter energy margin graph further below.

Assets 161. New Zealand has five main suppliers of electricity. The location, source and total generation capacity is outlined in the graphic that follows. Renewable energy sources are a dominant feature of the market, accounting for nearly 60 per cent of total capacity.

38 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Source: Ministry of Economic Development, 2009

Institutional arrangements

162. Transpower owns and operates the national electricity transmission system.40 The national grid is an AC transmission system, incorporating a DC connection from the southern South Island (Benmore station on the Waitaki River) across Cook Strait (by undersea cable) to the southern end of the North Island (the HVDC system). Transpower uses high-capacity and high-voltage transmission lines to supply regional distribution companies and provide electricity directly to some large industrial companies.

a. System Operator/Clearing Manager: This function is carried out by Transpower under contract with the Electricity Commission. Transpower is responsible for the real-time operation of the electricity system.

b. Distribution: 28 lines companies own the local distribution networks throughout New Zealand. Distribution companies are a mix of public listings, shareholder co- operatives, community trusts and local government ownership, with most lines companies owned by trusts. Lines companies differ in size with one (Vector) making up one third of the sector (by number of connections) and the largest four (Vector, Powerco, Orion and Unison) supplying 66 per cent of all connections.

c. Retail: The five main retail companies are also the main generating companies. These companies compete with each other to meet consumers' electricity needs and often provide bundled services for consumers. The retailers' charges to the

40 This includes switchgear (substations), high-voltage cables, transformers and overhead lines for transmitting high-voltage electricity from generating stations to distribution (lines) companies.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 39 NOT GOVERNMENT POLICY

end users include the cost of the electricity supplied to the consumer as well as charges for transmission and distribution services.

163. The diagram below outlines how the price for electricity is set.

Funding and pricing

Source: Ministry of Economic Development, 2009

Planning

164. Current planning is specific to electricity companies that invest in generation capacity based on market opportunities. Planning for transmission investment is performed by Transpower under the supervision of the Electricity Commission.

Analysis 165. The New Zealand electricity sector has some unique characteristics that lead to increased volatility in market outcomes. These include the inability to import electricity and a long history of non-commercial decision-making that has led to a hydro- dominated system (hydro represents around 60 per cent of annual generation), with limited hydro storage due to the small sizes of the reservoirs. There is also limited ability for demand response from the residential sector. New investment will reduce the proportion of hydroelectricity and improve the transmission system, while metering developments may improve the responsiveness of the domestic sector to electricity shortages. These factors will reduce the risk of blackouts, but it will take time before they have a significant impact. The dominance of South Island-generated power

40 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

creates a heavy reliance on the capacity of the North South Island transmission link to ensure security of supply and the market to function properly.

166. The Ministry of Economic Development predicts that the supply margins (which are a measure of security of supply) will either remain constant or increase in the future (see below).

Winter energy margin 1985 - 2015

Source: Ministry of Economic Development, 2009

167. Security of supply is also significantly affected by the configuration of the transmission system. Under-investment has been a feature of transmission over recent decades. However, significant new investment is now underway under the new regulatory arrangements under Part F of the electricity governance rules. These arrangements give Transpower greater power to pass on costs for grid upgrade projects approved by the Electricity Commission.

Gas

Description

Background and history 168. Gas is also an important input for the provision of energy-intensive and energy-utilising services. This section focuses on the infrastructure that supports the production and transmission of gas.

169. The discovery of natural gas at the Kapuni gas field in Taranaki in 1959 was the first commercially viable find in New Zealand. In 1969, a pipeline was constructed from Kapuni to Auckland and Wellington, which has now been extended as far as Gisborne and Hastings in the east, and Kauri in the far north. Also in 1969, the major Maui offshore field was discovered.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 41 NOT GOVERNMENT POLICY

170. Natural gas became an important fuel for residential, commercial and industrial uses. In particular, it became a large resource for electricity generation and the petrochemical industry.

171. The gas industry comprises: • Fields; • Producers; • Wholesalers; • Transmitters; • Distributors; • Retailers; and • Consumers.

Assets

Production

172. There are 14 fields and wells that produce gas in New Zealand, all in the Taranaki region, with production dominated by the Pohokura (40.6 per cent) and the Maui (29.8 per cent) fields, as shown in the following figure.

173. Shell-and Todd Energy-owned subsidiaries control the majority of the gas production market.

Gross Gas Production by Field for 2008

Note: 1. Rimu/Kauri includes the Manutahi well. 2. Kaimiro/Ngatoro includes the Goldie and Moturoa wells. 3. Other includes the Tariki/Ahuroa, Waihapa/Ngaere and Cheal fields, and Surrey well.

Source: Ministry of Economic Development: New Zealand Energy Data File 2008

Transmission

174. There are more than 3,400 km of high-pressure gas transmission pipelines in New Zealand. There are more than 2,800 km of intermediate, medium and low pressure distribution pipeline networks in the North Island, which are connected to the high-pressure system.

42 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Institutional arrangements 175. The natural gas industry in New Zealand has undergone considerable reform and restructuring since the mid 1980s. In 1992, a new Gas Act deregulated the gas sector, abolishing exclusive area retail franchises for gas utilities and price controls on gas.

176. The impending depletion of Maui gas41 and transition to future reliance on a wider range of gas sources, environmental and sustainability requirements, the need to facilitate competition, and a requirement to establish a fair and open industry governance framework led to a government review of the sector in 2001.

177. This resulted in the establishment of the Gas Industry Company. This is a co-regulatory body, which can make recommendations to the Minister of Energy on a wide range of industry matters, including the making of rules and regulations regarding the wholesaling, retailing, transmission, processing and distribution of natural gas42.

Analysis

178. The New Zealand gas market is in transition from a heavy reliance on one gas field and producer to a situation where gas comes from an increasing number of fields and producers. As a result, substantial new market arrangements — instruments and institutions — are being designed, developed and put in place.43

Consumption

179. 54.5 per cent of New Zealand’s natural gas produced during 2008 was used for electricity generation (as depicted in the following figure). Total observed gas consumption decreased by approximately 8.0 per cent in 200844. This was due to a drop in the demand for gas to be used for electricity generation and a drop in consumer energy demand.

Gas Consumption by Sector for 2008

Note: Electricity Generation includes cogeneration. Source: Ministry of Economic Development: New Zealand Energy Data File 2008

41 As per the Gas Association of New Zealand’s website: www.ganz.org.nz 42 As per the Gas Association of New Zealand’s website: www.ganz.org.nz 43 From The New Zealand Gas Industry in 2006: Review of its State and Performance Report by the Allen Consulting Group, p.v, November 2006. 44 According to the Ministry of Economic Development: New Zealand Energy Data File 2008: Gas consumption decreased by approximately 167 Picojoule (PJ) to almost 154 PJ in 2008.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 43 NOT GOVERNMENT POLICY

Projected gas production and demand

180. The graph that follows below projects a delivery profile of New Zealand's estimated gas reserves as at 2007. Production from the Maui field has declined but has been partially replaced with production from alternative fields. Because of Maui’s projected exhaustion, the government has put in place some exploration subsidies.

Projected Gas Production and Gas Demand45

Source: Ministry of Economic Development website: www.med.govt.nz

Drinking Water

Description

Background and history 181. We are currently seeking further information on this.

Assets 182. The estimated replacement cost of (territorial authority-managed) drinking water- related infrastructure in New Zealand is $11 billion.46

183. Metropolitan councils have far fewer individual water schemes than provincial and rural councils, but have a much greater length of reticulation. This reflects the more intense development in metropolitan areas. The table that follows indicates these differences.

45 This projected gas supply/demand outlook fails to take into account the 2008 reserve downgrades. It is likely that this gap has widened. 46 Source: Draft Department Internal Affairs report "Information on local government water network infrastructure 2009"

44 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Metropolitan Provincial Rural Average number of 4 (max 12) 8.4 (max 24) 7.4 (max 23) schemes Length of reticulation 17,400 14,500 4,500 (km) - extrapolated

Source: DIA Water network infrastructure report

184. The estimated capacity of the surveyed water supply systems totals 668 million cubic metres per annum. The capacity utilisation rates range from 22 per cent to 92 per cent and, on average, is 56 per cent. This is the average utilisation over the year. There are seasonal peaks for both water supply and water demand.47

Analysis

185. Most of the country's largest urban areas have reliable, quality water supplies. For example: 48

• The new supply pipeline from the Waikato River should be adequate to provide the foreseeable needs of Auckland city, although there are some distribution problems due to the location of growth nodes in the northern part of the region.

• Wellington city and Hutt city are well served by supplies from the Wainuiomata catchment, the Hutt River (run-of-river as well as storage at Te Marua) and the Hutt aquifer.

• Christchurch city has an excellent high-volume management supply from groundwater.

• Dunedin's municipal water take comes from a number of small surface streams that tend to dry up in summer and that have minimum flow requirements to protect instream values. This suggests that further supply infrastructure may need to be developed in the future.

186. Water supplies in provincial and rural councils are more variable.

187. There are some areas of New Zealand where population growth pressures and increased demand from other users are creating pressure on drinking water supplies, particularly during drought periods. The 2009-2019 Long Term Council Community Plans (LTCCPs) indicate a number of areas where water supply has been identified as a significant issue. Examples include:

• Pressure on the municipal supply from both domestic and industrial users in the Tasman district has prompted the commissioning of a feasibility study on a pipeline

47 Source: 2004 Ministry of Economic Development Stocktake. Available at: http://www.med.govt.nz/templates/MultipageDocumentPage____9031.aspx?&MSHiC=65001&L=0&W=water+ infrastructure+&Pre=%3cb%3e&Post=%3c%2fb%3e 48 Source: 2004 Ministry of Economic Development Stocktake. Available at: http://www.med.govt.nz/templates/MultipageDocumentPage____9031.aspx?&MSHiC=65001&L=0&W=water+ infrastructure+&Pre=%3cb%3e&Post=%3c%2fb%3e

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 45 NOT GOVERNMENT POLICY

from the Motueka Plains through Tasman, Ruby Bay and Mapua to the Waimea Plains, eventually linking into the Tasman District Council reticulation system;

• The Kapiti Coast District Council has a history of water supply issues and is currently considering various water storage and pipeline49 options; and

• Councils indicating that they are looking to increase capacity through the construction or enlargement of existing reservoirs. 188. Many territorial authorities introduce either voluntary or active hosing restrictions in drought period to control water use. Volumetric charging is also used by a number of councils.

189. In some regions, tourism has a sizable seasonal impact on drinking water demand (and conversely, on the need to treat wastewater). As a consequence, higher infrastructure capacity is required than would otherwise be needed to meet the requirements of the local community. Some councils indicate the population in some of these areas may increase by over 200 per cent during peak times. For example, the population of Whangamata increases by 650 per cent from 2145 to 21000 in the peak season, and the population in Tekapo increases by 250 per cent from 300 to 1050. The absolute numbers may not be large, but the potential cost impact on small residential towns in the peak season, could be significant.

190. A demand management project involving the Ministry for the Environment, the New Zealand Water and Wastes Association and Local Government New Zealand is now under way to assist water utilities throughout the country to introduce appropriate demand management measures.

Drinking water quality

191. The 2004 Ministry of Economic Development Stocktake50 noted that new drinking water standards (DWSNZ) proposed at that time by the Ministry of Health would require many territorial authorities to upgrade their water supply infrastructure and management systems. This was particularly an issue for many smaller rural councils and a small number of metropolitan councils, where surface water sources were subject to minimal treatment.

192. Progress has been made in improving the quality of drinking water and wastewater infrastructure. In 2003, 68 per cent of New Zealand’s population received water that was known to comply with the bacteriological requirements of the drinking water standards. By 2008, this had increased to 80 per cent. The graph that follows shows the increasing levels of drinking water supply registration, and improved levels of compliance with drinking water standards (with respect to bacteria).

49 Ibid. 50 Available at: http://www.med.govt.nz/templates/MultipageDocumentPage____9031.aspx?&MSHiC=65001&L=0&W=water+ infrastructure+&Pre=%3cb%3e&Post=%3c%2fb%3e

46 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Trend in bacteriological compliance at the distribution zone

4.5 New Zealand population 4 (census estimate) 3.5 3

illions) Population in registered 2.5 drinking-water supplies 2 1.5 Complied with the DWSNZ:1995 but not 1 DWSNZ:2000 Population (m 0.5 Complied with the then 0 current standards

96 1994 1995 19 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006/7 YEAR

Source: Ministry of Health, Annual Review of Drinking-Water Quality In New Zealand, 2006/07(reproduced)

193. Despite the availability of a government subsidy, the substantial cost of new infrastructure to meet the increased water quality standards mandated by the Ministry of Health remains a significant issue for many councils. Small rural-based councils typically have the greatest issue with the standards as their smaller water schemes (of which they may have a large number) may supply as few as 10 to 50 properties.

194. There is some debate about the appropriateness of the drinking water quality standards. The costs and benefits of the standards are currently under review.

Waste Water

Description

Background and history

195. We are currently seeking further information on this.

Assets 196. The total volume of wastewater produced approaches 345 million cubic metres per year for the surveyed territorial authorities. Many large industrial sites also have private discharge arrangements with regional councils, rather than discharging to a reticulated system. The percentage of waste water can be broken down by source and is shown in the diagram that follows.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 47 NOT GOVERNMENT POLICY

Current Wastewater Volumes by Source

Source: PricewaterhouseCoopers Surveys of Territorial Authorities (reproduced from the MED Infrastructure Stocktake 2004)

Institutional arrangements 197. The ownership and responsibility for the delivery and maintenance of water network infrastructure varies across territorial authorities. Many provincial and rural councils retain full control over all aspects of their water networks. A number of large councils use council-controlled trading organisations to deliver bulk and/or reticulated supplies to one or more councils (e.g. Watercare Services). A number of arrangements also exist for maintenance and operation.

198. In Papakura, management and operation of the water and wastewater networks are contracted out to a private firm (United Water).

199. There are a large number of discrete wastewater systems, although a lower proportion of the population is connected to the wastewater system than is supplied by water reticulation systems. This is particularly the case for rural councils that tend to have more water than wastewater schemes. As with drinking water, metropolitan councils also have far fewer individual wastewater schemes than provincial and rural councils and a much greater length of reticulation, again reflecting more intense development. The table below indicates the differences.

Wastewater Metropolitan Provincial Rural Average number of 3.3 (max 10) 6.4 (max 17) 4.6 (max 14) schemes Length of reticulation 14,160 8,290 2,300 (km) - extrapolated

Source: DIA Water network infrastructure report 200. Wastewater systems are not interconnected across the country. Each reticulated system has assets to collect untreated wastewater from customers and transport it to facilities for the treatment and disposal of wastewater effluent, which includes liquid, solids and gas.

48 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

201. Wastewater reticulation capacity is measured by assessing the number of recorded overflows that are related to either wet weather or dry weather overflows. For the majority of the country, this is not an issue. Some systems have designed overflows, which enable the system operator to control system overflows. The Auckland region has the highest proportion of wet weather overflows (largely due to stormwater inflow), particularly (but not solely) in the part of the system that combines wastewater and stormwater flows. The separation of wastewater and stormwater systems to prevent overflows is an ongoing issue for many local authorities.

202. As noted above, the peak day capacity in most areas is determined by high inflow and infiltration in wet weather and, as a result, treatment plants have a much higher peak day capacity than average day capacity. This is due to the high water content on peak days diluting the wastewater and enabling resource consent requirements to be met. A number of councils are also providing for wastewater storage to enable better control of discharge and a capacity to respond to breakages.

203. Estimates of asset condition suggest that in general, wastewater systems appear to have more life remaining than drinking water assets, especially in rural areas.

Funding and pricing 204. Local authorities fund water network infrastructure from a variety of sources including rates (directly and indirectly), loans, subsidies (where available) and through development contributions. The latter are levied to cover the impact of increased demand on existing infrastructure. The graph below indicates that, of the territorial authorities using development contributions, a significant proportion of this revenue is used for drinking water, wastewater and stormwater.

Source: Department of Internal Affairs: Analysis of 2007/08 Development Contributions

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 49 NOT GOVERNMENT POLICY

Planning

205. Water infrastructure plans are set out in LTCCPs.

Analysis 206. The level of wastewater treatment varies from council to council. In contrast to drinking water quality, which is monitored centrally by the Ministry of Health, resource consents for discharge of wastewater are managed by regional councils (based on guidelines set by the Ministry for the Environment). These consents are valid for a number of years, and decisions to upgrade often coincide with the need for a council to renew its consent (together with public pressure).

207. Wastewater is treated using a mix of primary, secondary and tertiary treatment. Many systems produce “good” quality outflow. However, around 23 per cent provide only primary treatment. While these will probably meet their current resource consents, increased requirements mean that capital upgrades may be required on expiry. Some small communities may face financial difficulties meeting these costs, especially if they also have to upgrade their water supplies.

208. In recent years, local authorities have made significant capital investments in wastewater collection, treatment and disposal infrastructure. Many larger plants have been (or are being) substantially upgraded, and a large number of upgrades have been identified in the 2009/10 LTCCPs. This is reflected in the fact that forecast capital expenditure for wastewater is greater than for water for the next 10 years (see the chapter on Planned Investment).

Rural Water Infrastructure

Description

Background and history

209. Large-scale irrigation in New Zealand began in Otago and Canterbury in the late 19th century and consisted only of small-scale, private irrigation schemes. During the Great Depression of the 1930s, many large-scale storage and irrigation projects, such as the Rangitata Diversion Race, were built using government funding. The graph that follows shows areas of irrigation that were committed at the date of scheme approval:

50 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Areas of irrigation that were committed at the date of scheme approval

Source: Ministry of Agriculture and Forestry (MAF)51 210. Most schemes were constructed after 1960 in the Canterbury and Central Otago regions. The following map shows government-owned irrigation schemes prior to 1989, and the number of hectares they irrigated. It excludes on-farm irrigation owned by private individuals or entities52.

51 This graph only includes information as of 1987. More up-to-date information is being sought. 52 Selwyn District Council and Christchurch City Council; 2000: ‘Appendix 4: Social Impact of Irrigation: Literature Review’, quoted in Internal MAF background paper “Water in New Zealand Agriculture: Resilience and Growth” (2004), by Morgan, M., Harris, S. & Smith, W., of Lincoln Environmental; Harris Consulting; University of Auckland.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 51 NOT GOVERNMENT POLICY

New Zealand Irrigation Schemes Formally Government-owned Schemes only

Source: Selwyn District Council and Christchurch City Council; 2000: ‘Appendix 4: Social Impact of Irrigation: Literature Review’, quoted in Internal MAF background paper “Water in New Zealand Agriculture: Resilience and Growth”, (2004), by Morgan, M., Harris, S. & Smith, W., of Lincoln Environmental; Harris Consulting; University of Auckland.

211. In 1988, central government began to transfer ownership of the Crown schemes to commercial operators. It was left with only one scheme, the Beggs Scheme in Central Otago, on which no offers of purchase were made. 212. Major irrigation schemes developed since the 1980s include the Opuha schemes (1998, 16,000 ha), Waimakariri (1999, 18,000 ha), North Otago Stage 1 (2006, 10,000 ha), and the Wai-iti Valley Augmentation (800,000 m2 dam opened 2006).

52 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

213. Rural water infrastructure is economically beneficial to New Zealand’s farming and food production industries, and energy production. Used for water capture, storage, distribution, and drainage, it can play an important role in increasing rural land productivity and in maintaining our competitive advantage. It does this by:

• smoothing the variability of water supply (due to intermittent rainfall and seasonal snow melts), which increases the amount and reliability of production per hectare, and allows exporters to take advantage of higher-value markets that require a reliable supply of high-quality products; and

• helping New Zealand adapt to climate change, as some areas are subject to increasing frequency and intensity of droughts and others become wetter.

214. Since their environmental and social costs can be significant, irrigation projects need to be carefully planned and managed in order to maximise benefits and minimise and mitigate negative impacts.

215. Irrigation projects support a variety of agricultural industries such as horticulture, dairying, sheep, beef and cropping. They are often used in conjunction with, or are dependent on water capture and storage infrastructure. Examples of which range from large-scale dams and reservoirs to smaller-scale water tanks (on-river and off-river) and groundwater extraction facilities.

216. Irrigation accounts for the largest proportion of water use in the country. Of all the resource consents for water takes in New Zealand in 2006, 77 per cent of allocated water was used for irrigation, as is illustrated in the chart below53.

Use of allocated water in New Zealand, 2006

Source: Ministry for the Environment, 2007

53 Ministry for the Environment, Wellington, 2007. http://www.mfe.govt.nz/environmental- reporting/freshwater/demand/pie-data.html

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 53 NOT GOVERNMENT POLICY

217. Irrigation schemes exist in Northland, Auckland, the Waikato, Bay of Plenty, Hawke’s Bay, Taranaki, the Wairarapa, Nelson, Marlborough, Canterbury, Otago, and Southland54. Most are on the east coast of the North and South Islands, as New Zealand’s mountainous topography means more precipitation falls on the west coast55. Around 500,000 hectares of land is irrigated in New Zealand, approximately 350,000 hectares, of which is in Canterbury56. The following table illustrates the area of irrigated hectares across regions as at 2000, according to a Nimmo-Bell report57.

Region Irrigated areas (ha) in 2000

Canterbury 347,022 Waikato 4,500 Hawke’s Bay 23,241 Tasman 7,920 Auckland 6,500 Marlborough 12,087 Gisborne 5,000 Manawatu Wanganui 8,000 Southland 1,500 Northland 4,040 Bay of Plenty 9,341 Taranaki 2,000 West Coast 0 Wellington-Wairarapa 9,029 Otago 65,088 All regions 505,268

218. The majority of irrigation water is taken from surface water sources: rivers, lakes and streams. Around 41 per cent of irrigation water is extracted from groundwater sources, stored naturally in aquifers.

219. There are several types of irrigation which vary in terms of efficiency of water distribution, water wasted as run-off, or of energy consumed. Over time, more efficient technologies have evolved with the development of border dyke, spray and micro

54 Internal MAF background paper, 2004 (Water in New Zealand Agriculture: Resilience and Growth, by Morgan, M., Harris, S. & Smith, W., of Lincoln Environmental; Harris Consulting; University of Auckland.) 55 Gudgeon, J., Physical stock accounts for Water, Key Statistics, Statistics New Zealand, August 2004 http://www.stats.govt.nz/reports/articles/phsyical-stock-accts-for-water.aspx 56 White, P.A., Sharp, B.M.H., and Reeves, R.R. 2004. ‘New Zealand Water Bodies of National Importance for domestic and industrial use IGNS contract report 2004/12 prepared for Ministry of Economic Development, Wellington. 57 Nimmo-Bell report (2000) cited in internal MAF background paper, 2004 (Water in New Zealand Agriculture: Resilience and Growth, by Morgan, M., Harris, S. & Smith, W., of Lincoln Environmental; Harris Consulting; University of Auckland.

54 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

irrigation. The most efficient irrigation technique for a particular region depends on a variety of factors, such as soil type and density, topography of the region, and the surface or groundwater take. The use of computers and technology advancements have also allowed greater specificity in water use, reduced waste, and diminished the labour demands on end users.

Institutional arrangements 220. Historically the Crown played an extensive role in developing, subsidising and maintaining community irrigation schemes, initially through the Public Works Department and then the Ministry of Works, eventually owning 50 odd community irrigation schemes. The rationale for government involvement changed from period to period:

• Between 1910 and 1935, New Zealand government involvement followed the history of government assistance of irrigation by colonial governments in Australia. It aimed mainly to prevent drought, take advantage of existing water rights and reclaim mining land;

• After 1935, the first Labour Government expanded the irrigation programme to boost employment, and make greater use of the water resource;

• In the 1950s, while concerns were raised about the financial implications of the schemes, a Select Committee concluded that direct government intervention was necessary because individual farmers could not obtain the required finance, technology and labour; and

• From the 1960s to 1980s, community schemes were increasingly viewed as a farm management tool to intensify agricultural production and new irrigation schemes were justified as being in the national interest by virtue of having economy-wide benefits (Audit Office58 1987).

221. In 1989, the national benefits started to be questioned, along with central government’s ability to set and recover realistic costs. It also became apparent that the assistance was causing inefficiency in resource allocation in the agricultural sector, for example by favouring pastoral farming over other forms of agricultural development such as horticulture, or subsidising particular irrigation methods over potentially more efficient ones.

222. Under the Resource Management Act 1991, local government is now responsible for approving the development of rural water infrastructure. Central government has focused its efforts on funding science and technology development, and on facilitating the planning and proposal development process, through initiatives such as the Sustainable Farming Fund and the Community Irrigation Fund.

Funding and pricing 223. The Crown operated most of its schemes using user-charges to recover operating expenses and some capital costs (the Audit Office 1989). During most periods,

58 The Audit Office (1987) Report of the Audit Office: Ministry of Works and Development: Irrigation Schemes (Wellington: Government Printer).

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 55 NOT GOVERNMENT POLICY

affected land owners were required to enter into contracts of up to 50 per cent before a scheme could proceed. In 1987, the Audit Office estimated $60-$80 million was owed to the Crown from accumulated losses, because charges were insufficient to recover the operating, maintenance and capital costs of the schemes. (Audit Office 1987) 224. Today, most schemes are funded on a commercial basis by farmers, power companies and other shareholders, and where there are local public benefits, local government.

Planning 225. Demand is growing for more reliable irrigation, particularly in Canterbury, but also in the Hawke’s Bay, Wairarapa, Marlborough, Tasman and Otago, where there are potential risks to supply in times of drought. By 2012 it is projected that water will be fully allocated in most of Canterbury, Waikato, Marlborough and Northland, as indicated in the map that follows. Furthermore, existing older infrastructure is limiting the ability of irrigators to become more efficient.

Source: Sustainable Fresh Water Management – Towards an Improved New Zealand Approach Report prepared for NZBCSD by Aqualinc, 2008 (reproduced).

226. In 2008, MAF was aware of 22 prospective irrigation schemes, both storage and non- storage based, in Canterbury, Otago, Tasman, Marlborough, Hawkes Bay and the Bay of Plenty. More details on planned investment is being sought.

56 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

227. A range of strategies will be required to meet this growing demand. Part of the answer will be to use more efficient technology to reduce waste, capture and store more water such as snow melt, and free up the allocation system so irrigators can access water where they can make the best use of it. Better understanding of the sustainable yield levels of key aquifers will also be required.

Analysis

228. Since central government ended its direct involvement in schemes, private investment has funded some successful ventures in major rural water infrastructure. Since 1985, irrigation in the Canterbury region has more than doubled, from 150,000 hectares to 438,000 hectares in 2001.

229. Lately, however, several rural water infrastructure projects have failed to reach their final construction stages. Reasons for this appear to include:

• Issues around regional planning (clear strategic plans at local government level are necessary to address the integration of infrastructure, new and existing, with the management of effects and impacts on the environment, the allocation of water amongst competing uses and community engagement processes);

• Failure to co-ordinate or obtain sufficient support from stakeholders (end-users must co-ordinate and agree on funding, design, consenting and construction aspects of a project before it can begin, and obtain buy-in from stakeholders throughout the process);

• Issues around obtaining consents (time lags, consultation requirements, appeal rights, or previous allocation of available consents within environmental limits mean rural water infrastructure projects may be delayed);

• Lack of finance (end-users of the water, such as farmers, may have difficulty raising equity or debt for rural water infrastructure projects and can be cautious about involving outside investors. Many potential irrigators already have sunk costs in on- farm individual water takes, e.g. groundwater wells, and many are at a stage of life personally or financially that does not support investment); and

• Unviable projects (some projects are simply not viable, in that the benefits they will provide do not outweigh the costs to build them). This may be for geographic, logistical or other reasons.

230. There is little consensus on the relative importance of these factors, and it is likely that each individual project faces a number of different hurdles that it is not able to overcome. It may also be that the more straightforward schemes have already been built.

231. To address these barriers, the government has expanded regional council access to the Community Irrigation Fund. This will help them to complete strategic water plans that address water infrastructure issues. Two major regulatory reforms should also help with rural water infrastructure:

1. Regulatory reform Existing and upcoming amendments to the Resource Management Act and Public Works Act will simplify the consent process for rural water infrastructure projects and designation provisions. A National Policy Statement on Freshwater

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 57 NOT GOVERNMENT POLICY

Management is being consulted on, which will make it compulsory for local councils to have water management plans in place that set sustainable limits and allocate within those limits to the most valuable use.

2. New start for fresh water Two processes relevant to rural water infrastructure are being established under the government’s New Start for Fresh water reforms:

• The Land and Water Forum collaborative process. This aims to bring together

• water allocation, iwi interests in water and rural water infrastructure.

232. Through these processes, the government will be ensuring it has correctly understood the regulatory and market barriers to developing rural water infrastructure, and the extent to which current proposals will address them, and if not, what else might be needed.

Telecommunications

Description

Background and history 233. Telecommunications services include fixed line (landline and data services such as cable broadband) as well as wireless services.

234. The telecommunications services market in New Zealand was fully opened to competition in 1989 with any entity with at least 10 customers being able to register as a network operator. Since then, telecommunications planning and product advances have developed in the market place, with the government’s role largely confined to that of regulator. A number of new telecommunications players entered the market over this time, including Internet service providers. The two biggest entrants were Vodafone and TelstraClear.

235. In 2006, due to concern at Telecom’s dominance over the infrastructure, the Crown decided that there needed to be more regulation to deliver better competition in the telecommunications market. Local loop unbundling in 2006 and the operational separation of Telecom in 200859 are the most visible outcomes of this regulatory approach.

236. Trends in the major categories of telecommunications retail revenue over the 2005/06, 2006/07 and 2007/08 financial years are as follows:

59 On March 31 2008, Telecom was operationally separated into three divisions – Telecom Retail; Telecom Wholesale; and Chorus, the network infrastructure division.

58 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Total Retail Telecommunications Revenues

Source: Commerce Commission 2008 Telecommunications Market Monitoring Report

237. Commercial investment in telecommunications is often “lumpy”. However, assets are scaleable to an extent not seen in other infrastructure sectors – for example, once the ducting is in place, it is becoming increasingly easier to exponentially increase the available data capacity.

238. As shown in the next figure, surveyed retail carriers reported total capital expenditure of $918 million in 2005/06, $1,069 million in 2006/07 and $1,184 million in 2007/08. Capital expenditure across the whole telecommunications industry is likely to be significantly higher than this because of investment by firms who were not surveyed because they were not Telecommunications Carriers Forum (TCF) members with a retail business. This would include investment by telecommunications wholesalers such as Kordia, FX Networks, CityLink (now owned by TeamTalk), Vector, and new mobile entrant NZ Communications (2degrees).

239. Kordia reported that in 2007/08 it spent $38 million on the acquisition of property, plant and equipment.60 This was up from $27 million in 2006/07 and $17 million in 2005/06. Vector reported capital expenditure on its communications business of $18 million in 2006/07, up from $13 million in 2005/06. For 2007/08, Vector reported a combined capital expenditure on communications and metering of $28 million.61

60 Kordia Group Limited Consolidated Financial Statements for year ended 30 June 2008. 61 Vector Limited Shareholder Review 2008.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 59 NOT GOVERNMENT POLICY

240. Total capital spending is significant, as shown in the following:

Industry Capital Expenditure

Source: Commerce Commission 2008 Telecommunications Market Monitoring Report

241. However, much of the reported investment, particularly in the case of Telecom, would not have added to the net stock of telecommunications infrastructure because it would have been spent on replacing existing capital assets at the end of their economic lives. For example, Telecom reported depreciation and amortisation totalling $529 million in 2005/06, $570 million in 2006/07 and $617 million in 2007/08.62

Assets

242. As at September 2008, retail fixed line connections totalled about 1.9 million compared to retail mobile connections of 4.6 million. The graph that follows shows how the numbers of mobile and fixed line connections have changed over the last 13 years.

62 Telecom Corporation of New Zealand Annual Report for Year Ended 30 June 2008.

60 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Mobile Connections versus Fixed Line Connections

Source: Commerce Commission 2008 Telecommunications Market Monitoring Report

243. Broadband coverage is now universal, with fixed-line (Digital Subscriber Line-based) broadband available to approximately 93 per cent of all lines, and either wireless or satellite-based broadband available to the remainder.

244. There are now three privately owned cellular networks.

245. In Wellington and Christchurch, TelstraClear provides consumers with an alternative to the Telecom network using hybrid fibre-coaxial (HFC) cable. Both TelstraClear and Telecom have comprehensive nationwide backhaul networks which comprise the intermediate links between the core, or backbone, of the network and the small subnetworks at the "edge" of the entire hierarchical network. A number of other players provide regional and urban backhaul in various parts of the country.

Institutional arrangements

246. The New Zealand telecommunications market is one of the most liberalised in the world, with no statutory or legal barriers to entry. Telecom Corporation of New Zealand Ltd (Telecom) was established as a state-owned enterprise in 1987 after the break-up of the New Zealand Post Office, and privatised in 1990. The Kiwi Share agreement was written into Telecom’s constitution, naming the Minister of Finance as the ‘Kiwi Shareholder’ and safeguarding the ongoing interests of the Crown in Telecom’s assets through the various protections listed as ‘Rights of the Kiwi Shareholder.’ (This was at a time when there was little alternative network or technology to Telecom’s).

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 61 NOT GOVERNMENT POLICY

247. With few exceptions, the major infrastructure assets associated with each of these service areas are in private ownership. In the fixed-line telephones service market, Telecom remains the dominant provider, owning network assets throughout the country. However, competition in the broadband market has increased markedly in the last two years. Telecom currently shares the mobile market with Vodafone (which has the majority market share of 53.7 per cent), and is the largest single owner of data communications infrastructure.63 A third mobile provider, NZ Communications (trading as 2degrees), entered the market in August 2009.

248. Multiple residential and business communications companies have been taking advantage of local loop unbundling and using Telecom infrastructure, which has resulted in more competition for land line services with cheaper prices.

249. The Commerce Commission regulates telecommunications under the Telecommunications Act 2001, which is designed to promote competition in telecommunications markets for the long-term benefit of end-users. This gives the Telecommunications Commissioner the right to make determinations on price and non- price terms for a range of designated services sold by Telecom to competitors.

Funding and Pricing 250. Recent benchmarking exercises have identified New Zealand’s broadband pricing to be highly competitive, consistently ranking in the top third of OECD pricing for all categories of broadband usage.64 Improvements in coverage, performance and pricing are also leading to an increase in broadband uptake.

Planning 251. Apart from the Government’s proposed roll-out of fibre-optic cable (worth $1.5 billion), planning is the responsibility of the various market participants.

Analysis

252. In terms of broadband uptake, the diagrams that follow demonstrate that New Zealand is catching up with the OECD average, and our overall ranking in uptake (measured by broadband subscribers per 100 inhabitants) has increased from 22nd out of 30 OECD countries in 2003 to 19th out of 30 in 2007. The number of broadband subscribers in New Zealand now exceeds the number of dial-up subscribers.

63 Source: Commerce Commission 2008 Telecommunications Market Monitoring Report. Available at: http://www.comcom.govt.nz/IndustryRegulation/Telecommunications/MonitoringandReporting/DecisionsList.aspx 64 See 2007 Telecommunications market Monitoring Report. Commerce Commission, March 2008.

62 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

New Zealand's broadband uptake, 2003-2007

25.00

20.00

15.00

10.00

5.00

Broadband subscribersBroadband inhabitants per 100 0.00 2003-Q2 2003-Q4 2004-Q2 2004-Q4 2005-Q2 2005-Q4 2006-Q2 2006-Q4 2007-Q2 2007-Q4

Date of OECD update (biannual) New Zealand OECD

Source: OECD

OECD Broadband subscribers per 100 inhabitants, by technology, December 2007 40 Other

35 Fibre/LAN

Cable 30 DSL 25

20 OECD average 15

10

5

0 l a m y s d ic nd e da o e lia a d a ce nd l ey a r en an t tri n taly e a o d na gd ta tra s I e l ub rk nmark rlands K e a n rm s Japan relan Spain o p e Iceland Finl w i France Au eala I ortug Gr P e Tu Mexico D Norway S C K Belgium d S Z P Hungary R xembourg d Ge e Au u e ch Republic Nethe Switzerland L it e n Unit New lovak Source: OECD U Cz S

253. The relationship between investment in ICT and growth is one that has been widely considered. The Economist Intelligence Unit (EIU) published a report “Reaping the Benefits of ICT”65 in 2004 identifying three specific areas in which ICT impacts GDP:

• ICT investment;

• ICT production; and

• Increased productivity arising from ICT usage.

254. The EIU considers that the biggest pay-off from ICT is from sustainable boosts to productivity growth throughout the rest of the economy in the ICT-using sectors.

65 Available at: http://www.bsa.org/eupolicy/upload/Reaping-the-benefits-of-ICT.pdf

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 63 NOT GOVERNMENT POLICY

255. In its 2006 World Telecommunications Development Report,66 the International Telecommunications Union (ITU) observed that the most important economic impact of the spread and use of ICT is in transforming the way individuals, businesses and other parts of society work, communicate, and interact. It notes that measuring the economic impacts of the spread and use of ICT is particularly difficult given the nature of ICT as “enabling” or “General Purpose Technologies”. While the extent of the impact differs across countries, there is a general consensus that ICT has a positive impact on economic growth by increasing productivity.

256. Although ICT has different impacts across countries, the impacts are most visible in those countries and areas that have the highest ICT penetration levels. Some examples of the benefits include:

• E-commerce – this allows companies to reduce production, administrative and sales costs and increase revenues;

• Teleworking - saving people and businesses time and money, and reducing traffic congestion and its environmental impacts - Over 10 per cent of the 100,000 employees at British Telecom (BT) worked from home during 2006. BT estimates that ICT-enabled telework allows the company to save over GBP £60 million per year; and

• E-government services - A 2005 study by the EU confirmed that e-government services were producing real benefits for EU citizens, governments and businesses by saving time and increasing flexibility. Online income tax declarations save European taxpayers an estimated 7,000,000 hours per year. When generally available and widely used in all member states, such e-services have the potential to save over 100 million hours each year.

257. Because of the link between ICT and growth, the government has decided to invest $1.5 billion in rolling out fibre-optic cable to homes, as detailed in the Planned Investment chapter later in this document.

66 Available at: http://www.itu.int/dms_pub/itu-d/opb/ind/D-IND-WTDR-2006-SUM-PDF-E.pdf

64 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Primary and Secondary Education

Description

Background and history

258. Primary and secondary education services are supported by not only teaching and teaching support services but also the physical school facilities (which are the primary focus of this section).

259. The last major education reform was “Tomorrow’s Schools” introduced in the late 1980s. This moved the administration and management of schools and their property from the then Department of Education and its Education Boards to Boards of Trustees to enable schools to become self-managing. From a school property perspective, schools became custodians of their property responsible for operational decision- making, while the Ministry of Education (Ministry) remained the steward, policy setter and funder of school property.

260. From 1999 to 2004, the number of students increased considerably. However, there has been a decline since:

Total Student Numbers 1999-2008 (July figures)

Data source: www.educationcounts.govt.nz

261. In July 2008, actual enrolment was 758,094, which was 0.2 per cent less than in 2007. Primary and intermediate school rolls accounted for most of this decrease (0.6 per cent reduction), while there were roll increases for the Correspondence School (up 4.1 per cent), composite schools (up 1.5 per cent), and special schools (up 0.5 per cent).67

67 Source: www.educationcounts.govt.nz

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 65 NOT GOVERNMENT POLICY

Assets 262. At 1 July 2009, there were 2,178 state, 327 state integrated and 96 private schools in New Zealand.68 These are located throughout New Zealand, with schools varying in age and condition.69

Institutional arrangements 263. The Ministry is responsible for the regulatory arrangements for the education system as a whole, the provision of public schooling, and for over $10 billion of Crown assets.

264. Under the Education Act 1989, New Zealanders aged between 5 and 20 have the right to a school-based education, and the Ministry has the power to set:

• National education goals (reflecting government policy objectives for the school system);

• Administrative guidelines for schools (set out in codes and principles of conduct); and

• Terms and conditions for land and buildings occupied by school boards (including standards of maintenance, capital works, and minimum health and safety requirements). In addition, all school property must comply with the building code at the time of its construction, and with legislation related to the use of public buildings.

265. Each state school has a school board, which reports a Ten-Year Property Plan (TYPP) to the Ministry. School boards are responsible for the planning and day-to-day management of school property, including maintenance and project management of property projects.

Funding and pricing 266. The Vote Education operating budget is $10.8 billion for 2009/10 (with similar levels in future years), a large component of which is for non-property costs such as teacher salaries and school operational grants.70 The capital charge is levied on school land and buildings through the Ministry.

267. Funding is provided to schools in five-year increments (through the Five-Year Agreement process) in line with their priorities set out in the TYPP.

268. The property funding provided to each state school is largely determined by the number of children attending it and the condition of the property. The majority of capital funding is allocated on formula-based budgets through a school’s Five-Year Agreement, with additional funding available in exceptional circumstances. Schools have discretion around the priorities for spending property capital and operating

68 Source: Ministry of Education. 69 http://www.schoolzones.co.nz/enrolmentzones/Index.aspx allows users to search schools by location. 70 It should be noted that the $10.8 billion funding for Vote Education covers not only primary and secondary education but also early childhood education and tertiary education (which are not discussed in this paper). However, it does not include student support funding that is provided through Vote Social Development and Vote Revenue.

66 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

funding (subject to some considerations, such as prioritising health and safety and building within space entitlements).

269. New school site purchases and construction are managed directly by the Ministry, which sets up the Establishment Board of Trustees and provides a Governance Facilitator to work with the Board to develop the school’s education programme. For the construction, the Ministry has an approved budget which provides the design/build tender contract. Other procurement options are also being investigated. The Ministry employs a Client Representative to ensure construction is within Budget, and to work with the Board and Contractor to ensure that the educational design features desired by the Board are, where possible, included within the design and construction.

Planning 270. The Ministry prepares 10-year capital asset management (CAM) plans for Core Crown CAM purposes, and will prepare these with a 20-year horizon. In addition, the Ministry annually develops its School Property Capital Plan, which looks ahead 3-5 years.

Analysis

271. Demand for schools is mainly driven by growth in the school-aged population and the student:teacher ratio policy. From 2006-2031, the population aged between 5 and 19 years old is projected to grow by 0.85 per cent. The total population is projected to grow by 21.63 per cent over the same period. 71

272. These aggregate population growth projections suggest relatively modest pressure in the education sector compared to some other core government services. However:

a) There are short lead-in times for investment in the education sector72;

b) When disaggregating, there are different patterns of population changes in different locations, which particularly affect the demand for schools. For example, a significant increase in demand for schools is projected in the Auckland region73 (see the graph that follows) and in pockets elsewhere; and

c) Changes in migration patterns and birth rates (from projections) also influence demand in the education sector.

71 Source: Statistics New Zealand National Population Projections, Medium Series, 2006 base. 72 Differences in birth rates or migration figures from earlier projections affect the demand for schooling with either no, or little, time to respond in terms of increasing investment to meet the demand. 73 The school-aged population in Auckland is projected to grow 18.6% between 2006 and 2031 with an annualised compound growth rate of 0.68%.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 67 NOT GOVERNMENT POLICY

School-age population growth - National and Auckland comparison

Projected population change from 2006 at a national level (excluding Auckland Regional Council)

5,000

0

6 7 5 9 0 7 8 0 0 1 14 1 6 1 2 4 5 26 2 2 0 10 1 0 0 1 0 023 2 2 0 0 031 2 20 2008 2009 20 20 2012 2013 2 2 20 2017 2018 2 20 2021 2022 2 20 20 2 2 20 2029 2030 2

-5,000

-10,000 Age 5-12 Age 13-17 Change -15,000

-20,000

-25,000

-30,000 Year Source: Ministry of Education School Property Capital Plan 2009/10

Projected population change from 2006 in Auckland Regional Council

35,000

30,000

25,000

20,000

Age 5-12 15,000 Age 13-17 Change

10,000

5,000

0

9 0 1 2 7 8 9 0 6 7 8 9 0 06 07 13 14 15 16 21 22 23 24 31 0 0 01 01 01 0 0 0 0 01 02 0 0 0 0 02 02 03 0 2 2 2008 200 2 2 2 2 2 2 2 201 201 2 2 2 2 2 2 2025 202 202 2 2 2 2 -5,000 Year Source: Ministry of Education School Property Capital Plan 2009/10

273. Given these areas of population growth, there will be a need for further schools to be built and therefore, a continuing demand for net additional capital.

68 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Health Description

Background and history 274. New Zealand’s health and disability system provides a number of health-related services, and features a mix of public and private ownership and funding that has increased in complexity over time.

275. The government element of the health system has evolved from Area Health Boards in the 1980s (which had bulk funding of hospitals and other services in one entity) through the Crown Health Enterprises/Hospital and Health Services and Regional Health Authorities/Health Funding Agency of the 1990s (where hospitals were set up along business lines and Authorities were purchasers of services) to the current District Health Boards (where hospitals are integrated into a funding body), established in the early 2000s. The main area of interest for government asset management today is the 21 District Health Boards (DHBs), which manage assets with a net book value of $3.8 billion.74 Note that the replacement cost is higher than this (and is used in the regional breakdown shown in the diagram below).

Assets

Asset values by category and region , Northern 1,600 Midlands 1,400 Central 1,200 Southern 1,000 800

$ Millions $ 600 400 200 0 Buildings and Clinical Land IT Equipment Other Non- Plant Equipment Clinical Equipment

Source: The Ministry of Health

276. Taken together, the current asset base is highly varied in age, quality, and fitness-for- purpose due to the patchwork nature of past asset planning and changing standards (e.g., seismic) and service requirements.

74 Source: The Ministry of Health’s 2008 Capital Asset Management submission.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 69 NOT GOVERNMENT POLICY

Institutional arrangements 277. There are a large number of organisations that make up New Zealand’s health and disability system (for example, rest homes, general practices, private hospitals, labs, imaging, Maori and Pacific providers), some with substantial assets, especially when considered cumulatively. The following diagram provides an overview of the structure of New Zealand’s health and disability system.75

Structure of the New Zealand health and disability system

Source: “The New Zealand Health and Disability System: Organisations and Responsibilities - Briefing to the Minister of Health”, November 2008.76

75 For more information, refer to “The New Zealand Health and Disability System: Organisations and Responsibilities - Briefing to the Minister of Health”, November 2008, available at: http://www.moh.govt.nz/moh.nsf/indexmh/nz-health-disability-system-briefing-to-the-minister-of-health-2008 76 Available at: http://www.moh.govt.nz/moh.nsf/indexmh/nz-health-disability-system-briefing-to-the-minister-of- health-2008

70 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

278. DHBs plan, manage, provide and purchase services for the population of their district. This includes funding for primary care, public health services, aged care services and services provided by other non-governmental health providers, including Māori and Pacific providers.

Funding and pricing

279. New Zealand’s health and disability system is predominantly funded from general taxation. The Vote Health allocation for 2009/10 is $12.6 billion (with similar levels in out-years).

280. Most of this funding is managed by DHBs, but 22 per cent is non-departmental expenditure (NDE) service funding managed by the Ministry.77 There are also small allocations (of less than 2 per cent each) for the Ministry’s operating expenses and for capital expenditure. New capital spending from Vote Health has to be approved by the government.

281. The following diagram provides an overview of the funding flows in the New Zealand health and disability system.

77 This includes funding for, among other things, Disability Support, Elective, and Maternity Services.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 71 NOT GOVERNMENT POLICY

New Zealand health and disability system funding flows

Source: “The New Zealand Health and Disability System: Organisations and Responsibilities - Briefing to the Minister of Health”, November 2008.78

78 Available at: http://www.moh.govt.nz/moh.nsf/indexmh/nz-health-disability-system-briefing-to-the-minister-of- health-2008

72 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Planning 282. Many current assets reflect previous decision-making processes. Recent processes have worked to apply more consistent criteria to large capital spending proposals through the National Capital Committee process. Capital spending has been substantial in recent years, with extensive plans for more spending (for examples, see the project list at the end of this section). Although DHBs are in principle devolved, the Crown as owner is involved in large investment decisions.

283. District Health Boards’ capital spending intentions are compiled into a National Asset Management Plan. The current Capital Asset Management (CAM) planning for the Ministry and DHBs covers 10 years and is done on a DHB-by-DHB bottom-up (business as usual) basis. DHBs have some incentives to economise on capital plans, but these are not as strong as they could be (e.g., Capital and Coast DHB is making substantial operating deficits partly as a consequence of the new Wellington Hospital). DHBs receive their funding in bulk from the government, from ACC, and from other DHBs with prices set on the basis of costs. Overall DHB budgets have increased substantially in recent years.

284. The net result of history, projected service changes, and the limitations of current planning processes is that current asset plans have shortcomings. Important changes are underway to improve the quality of DHB CAM. The National Asset Management Leadership Group (NAMLG) is developing guidance and tools to help DHBs move towards more of an ‘evidence-based’ process to developing asset management plans. As well as technical quality, a wider range of considerations has to be brought to bear in DHB CAM. More extensive change will involve integrating service planning with capital planning, looking further into the future, adopting a regional perspective, and introducing a top-down perspective.

Analysis

Drivers of capital expenditure

285. The main drivers of capital spending are renewing, modernising or upgrading buildings and increasing capacity to meet population pressures. Regional capital spending projections are not entirely driven by changes in population levels or population aging and pro rata demand for health services, but also by technology, disaster risk management, retaining staff, and so on.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 73 NOT GOVERNMENT POLICY

Capital expenditure by driver

New Condition Services $5,948 $396 63% 4%

Efficiency Existing Services Service Growth Quality $806 $1,661 8% $795 17% 8%

Source: The Ministry of Health

286. The functionality of clinical equipment is also a primary driver for capital expenditure. Total clinical equipment has a replacement cost of close to $1 billion and a useful life of 7 to 10 years. This requires an annual investment of over $100 million to ensure the equipment is both functional and replaced before it becomes unreliable.

287. Buildings and plant typically have a 50- to 100-year condition-based life. However, changing models of care can shorten the useful life, creating challenges for optimal asset management. Shorter useful life has yet to lead to widespread adoption of shorter life/lower cost construction approaches.

Building Replacement Cost by Year in which Service Demand Equals Capacity 700 600 Northern Midland 500 Central 400 Southern 300 M illio n s $ 200 100 0 Now 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017+ 2018+

Source: The Ministry of Health’s 2008 Capital Asset Management submission

74 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Corrections

Description

Background and history

288. Correctional services are an important part of New Zealand’s judicial system and are supported by a number of correctional facilities (prisons) throughout the country.

289. All prisons in New Zealand are currently owned and operated by the Department of Corrections. Auckland Central Remand Prison was opened under private management (GEO Group) in 2000, but management was returned to the Department in 2005.

Assets 290. Vote Corrections’ physical assets at 30 June 2008 were valued at $1.7 billion of which $1.5 billion were classified as non-residential buildings.79

291. The government owns and operates 20 prisons; 53 per cent of cells are high-security and 47 per cent low-security.80 The following diagram outlines the geographical locations, by region, of prisons.

Geographical locations of prisons

Source: www.corrections.govt.nz

79 Source: Crown Financial Information System Network (CFISNet). 80 As per advice from the Department of Corrections.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 75 NOT GOVERNMENT POLICY

Funding and pricing 292. Vote Corrections’ operating expenses in 2009/10 are budgeted at $1.1 billion. Approximately $713 million of that has been budgeted to fund the custody of prisoners.

Planning

293. The demand for prison beds is based on an 8-year 2008 Justice Sector Prisoner Population Forecast (“the forecast”), which predicts substantial growth in prison numbers.

Analysis

Demand drivers

294. The forecast is driven by crime rates, policing policy, prosecution and resolution rates, court processing rates, sentencing and the proportion of sentence served.

295. The government is considering options to address the forecast growth in the prison population. The Department of Corrections faces significant prison capacity demands over the next 10 years, and has developed a plan to increase capacity and replace obsolete capacity.

296. The government provided some funding towards this plan in Budget 2009 (for double bunking and further design/planning work). It is estimated that the remainder of the plan would cost up to $1.6 billion in capital over the next nine years, and up to $284 million in operating costs per annum by 2018/19.81

81 Budget 2009 Economic and Fiscal Update.

76 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Planned Investment

Transport: Roads

297. The following graph sets out anticipated expenditure as per the Government Policy Statement on Transport 2009/10-2018/19 (GPS). The expenditure in the GPS excludes local government contributions:

298. The government has signalled its commitment to the advancement of seven roads of National Significance. These are considered essential routes for New Zealand to reduce congestion, improve safety and support economic growth.

299. All are adjacent to the largest population centres in New Zealand:

• Puhoi to Wellsford - SH1;

• Completion of the Auckland Western Ring Route - SH20/16/18;

• Auckland Victoria Park bottleneck - SH1;

• Waikato Expressway - SH1;

• Tauranga Eastern Corridor - SH2;

• Wellington Northern Corridor (Levin to Wellington) - SH1; and

• Christchurch motorway projects.

300. These projects are likely to be candidates for funding from the NLTF, subject to evaluation and funding.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 77 NOT GOVERNMENT POLICY

301. The main projects currently under construction or planned are listed below.

Roads of National Significance

Region Organisation Corridor Strategic fit Total Cost Committed (un-escalated) Auckland NZTA Puhoi to Improving travel time $1.5 – 2 Billion N Wellsford – SH1 reliability, assisting movement of freight Auckland NZTA Completion of the Easing severe $1.5 – 2 billion Some Auckland congestion, assisting components Western Ring movement of Freight committed and Route underway, other components to be committed Auckland NZTA Auckland Victoria Easing severe $400 million Y Park Bottleneck – congestion SH1 Waikato NZTA Waikato Improving safety, $1.5 - $2 billion Some Expressway – easing congestion, components SH1 travel time reliability, committed and assisting movement underway, other of freight components to be committed Bay of NZTA Tauranga Eastern Easing congestion, $450 - $550 N Plenty Corridor – SH2 assisting movement million of freight and supports economic growth of sub region

Wellington NZTA Wellington Improving safety, $2.5 - $3.5 billion N Northern Corridor easing congestion, (Levin to travel time reliability, Wellington) – assisting movement SH1 of freight Canterbury NZTA Christchurch Easing congestion, $0.5 – 1 billion Some Motorway access to markets, components Y Projects assisting movement some N of freight

78 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Other significant roading projects expected to be implemented 2009/12

Region Organisation Project name/s Strategic fit Total Cost Committed $ million Northland Whangarei Lower Hatea River Easing severe 33.7 N District Council crossing (CBD urban congestion arterial) Northland Whangarei Porowini Avenue Easing congestion 7.5 Y District Council extension Auckland Rodney District (urban Easing severe 203.4 N Council arterial) congestion Auckland North Shore City Albany arterial road Easing severe 38.6 In part Council improvements congestion Auckland NZTA SH18, Constellation to Easing severe 19.2 N Albany interchange congestion; Western upgrade Ring Route RoNS Auckland North Shore City East Easing severe 40.9 In part Coast/Lake/Glenfield congestion arterial roads improvements Auckland North Shore City Taharoto/Wairau Road Easing severe 12.4 N bus priority congestion Auckland Auckland City AMETI (public transport Easing severe 11.8 N Council priority measures) congestion Auckland Auckland City Tiverton/Wolverton Easing severe 13.5 Y Council Roads arterial congestion improvements Auckland Auckland City Green Lane/Great Easing severe 29.4 Y Council South Road arterial congestion road improvements Auckland HNO, NZTA SH1, Newmarket Easing severe 226.6 Y Viaduct congestion; improving freight movement Auckland Auckland City Dominion Road arterial Easing severe 66.8 N Council bus priority measures congestion Auckland Waitakere City New Lynn transit- Easing severe 82.0 In part Council oriented development congestion Auckland Manukau City Nesdale/Liverpool Easing severe 29.6 Y Council Roads arterial congestion; improvement complement Western Ring Route Auckland Manukau City Smales/Ormiston/Prest Easing severe 16.9 N Council on /East Tamaki arterial congestion roads improvements Auckland Various Road – rail crossings Easing severe 25.4 N congestion; improving safety Auckland Auckland Auckland integrated Easing severe 70.0 N Regional fare solution congestion; improving Transport public transport Authority (ARTA) Auckland ARTA Rail station Easing severe 70.3 In part improvements congestion; improving public transport

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 79 NOT GOVERNMENT POLICY

Region Organisation Project name/s Strategic fit Total Cost Committed $ million Waikato Hamilton City Wairere Drive capacity Easing severe 97.3 In part Council improvements (urban congestion; arterial) complement Waikato Expressway RoNS Waikato NZTA SH2, Maramarua Improving safety; 51.5 In part deviation easing severe congestion; improving freight movement Waikato NZTA SH25, Kopu Bridge Easing severe 58.0 Y congestion; improving tourist movement Waikato Taupo District East Taupo arterial Improving 98.6 In part Council freight/tourism movement Bay of Plenty Tauranga City Pyes Pa bypass Easing congestion 30.3 In part Council Bay of Plenty NZTA SH2, Tauranga Easing severe 10.3 In part northern arterial congestion; improving freight movement Hawke’s Bay Napier City Prebensen four-laning Improving freight 7.8 N Council and Hyderabad movement overbridge Hawke’s Bay Tararua District Pahiatua Track Improving freight 8.7 N Council improvements movement Wellington NZTA SH2/58, Hayward’s Easing severe 1.5 Y interchange congestion; improving freight movement Wellington NZTA SH2, Melling Easing severe 4.2 N interchange congestion; improving freight movement Wellington Wellington City CBD bus priority Easing severe 10.6 Y Council measures congestion; improving public transport Wellington Greater Rail station Easing severe 206.2 In part Wellington improvements congestion; improving public transport Wellington Greater Real-time passenger Easing severe 10.8 Y Wellington information system congestion; improving public transport Canterbury Christchurch City Wigram/Magdala Easing severe 11.6 N Council arterial improvement congestion; complement Chch motorways RoNS Otago Dunedin City Portobello Road arterial Easing congestion; 6.4 Y Council improvements improving tourist movement Otago NZTA SH1, Caversham four- Easing severe 37.1 N laning congestion; improving freight movement Otago Dunedin City Harbour arterial Easing congestion; 10.3 N Council improving freight movement Southland Invercargill City Tiwai Bridge Improving freight 11.5 Y Council movement

80 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Transport: Rail

302. Subject to government policy decisions about the size of the network it wishes to support, it is likely that KiwiRail Group will need to undertake capital expenditure of several billion dollars over the next 10 years, including critical expenditure of $2 billion over the next five years, to realise its aspirations for the business.82 Commercial revenue will not be enough to cover this level of expenditure, which will also require significant funding from central government if it is to go ahead.

• The current locomotive and wagon fleet allows little or no room for revenue growth. The fleet is old (average age is 30 years for locomotives and 25 years for wagons) and prone to structural failure. KiwiRail has recently announced the purchase of 20 new locomotives from China, using a $75 million debt facility provided by the government. Further locomotive and wagon investments worth several hundred million dollars will be needed to replace the ageing fleet.

• More than a decade of under-investment in the track network has resulted in a backlog of deferred maintenance, affecting reliability and transit times, and undermining competitiveness with road transport. Track renewals and upgrades are KiwiRail’s largest items of capital expenditure. Some of this may be spent building new lines to take advantage of new freight opportunities (such as the proposed line to Marsden Point).

• KiwiRail is spending approximately $40 million to upgrade carriages on the TranzAlpine and TranzCoastal tourist services over the next two years, funded by a government grant.

• A new interisland rail ferry is likely to be needed by 2016 to replace the ageing vessel Arahura, and may cost up to $250 million.

303. Demand for further investment in the Wellington and Auckland metro rail systems will also continue, although this is driven by passenger demand and the investment plans of local government, rather than the national rail operator.

• Current metro projects in Auckland include the double-tracking of the Western line, under-grounding at New Lynn, the re-opening of the Onehunga branch line, a new spur line to Manukau, and a number of station upgrades, including a major upgrade at Newmarket, as well as electrification of the entire Auckland network and the purchase of a fleet of new electric passenger trains. Elements of this are already complete, although the entire project won’t be finished until 2013, by which time approximately $1.6 billion of central government investment, and $220 million of local government investment (subsidised through the New Zealand Transport Agency) will have been made. Improvements to date on Auckland’s metro rail system have already contributed to record patronage growth83.

• Current metro projects in Wellington include the double-tracking and electrification of the line to Waikanae, upgrade of the Johnsonville line, and the purchase of a new

82 Source: KiwiRail Group (2008) Business Overview and Review of Strategic Issues for Shareholding Ministers. 83 Auckland Regional Transport Authority, May 2009: Auckland’s public transport growth highest for twenty years. Available at: http://www.arta.govt.nz/newsroom/media-releases.html?releaseid=17f54ea8-5056-a41f-92ec- 52dd938d644c

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 81 NOT GOVERNMENT POLICY

fleet of electric passenger trains. This will be completed by 2011 and will have a total cost of approximately $550 million (including about $40 million of local government investment).

304. Beyond the projects already approved and under way, both regions have significant aspirations for the ongoing development of their metro passenger rail systems, which will require expenditure of billions of dollars over the next 20 years.

• Auckland is planning for an inner-city underground passenger rail loop connecting the Britomart Transport centre and the North Auckland Line near Mt Eden station, a rail link to the airport, and a rail tunnel under the Waitemata Harbour to the North Shore.84

• Wellington is planning for the purchase of further electric trains, and ongoing improvements to rail corridors, stations and park and ride facilities, including the provision of ‘feeder’ shuttle services.85

Transport: Ports

305. There is limited public information available on planned investment in Ports. However, we are aware of the following: The Ports of Auckland Port Development Plan 200886 identifies potential options for reclamation to extend the Ferguson and Bledisloe Wharves:

Source: Ports of Auckland Port Development Plan 2008

84 For more information, see the Auckland Transport Plan, available at: http://www.arta.co.nz/home/auckland_transport_plan_.html 85 For more information, see the Wellington Rail Plan, available at: http://www.gw.govt.nz/section1128.cfm 86 Available at: http://www.poal.co.nz/news_media/publication.htm

82 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

306. The Lyttelton Port of Christchurch is currently investigating two projects: Capital Dredging and a Coal Stockyard Expansions Project.87

Transport: Air services

307. Future investment in aviation is likely to include continuation of terminal upgrades in Auckland, Christchurch and Wellington, and runway extensions at Hamilton, and , as set out in the following:

Airport Project Cost Auckland • Continuation of Pier B, completion expected by 2009 $200m • Stage 3B of arrivals processing at the international terminal for secondary Customs/Quarantine processing Hamilton • Anticipated runway extension from 1960m to 2,200m, allowing Not known unrestricted Boeing 737-300 operations • Potential runway extension to 3,500m Rotorua • Runway extension to enable trans-Tasman flights Not known Palmerston North • Future runway extension Not known Wellington • Stage 2 of International terminal upgrade and expansion – new $51m terminal expected to be completed end 2009 Christchurch • Continuation of combined domestic/international terminal, $195m expected to be completed 2011 Source: Treasury Electricity

308. Investment in generation (notably wind and gas electricity) is growing steadily. The table below shows current planned investment in generation, and the graphic shows actual and forecast growth in total generation capacity: Year Plant/Location Owner/Operator Fuel Capacity MW GWh 2009 West Wind Meridian Wind 143 573 Te Rere Hau (2,3) NZ Windfarms Wind 31 117 Benmore upgrade Meridian Hydro 11 50 2010 Nga Awa Purua Mighty River Power Geothermal 132 1099 Stratford OCGT Stratford Gas 200 438 Tauhara binary Contact Geothermal 19 158 2011 Titiokura Unison/Roaring 40s Wind 48 139 2012 Geo 1 * Confidential Geothermal 80 666 Hawea gates * Contact Hydro 17 66 2013 Geo 2 * Confidential Geothermal 80 666 Te Mihi * Contact Geothermal 60 450 2014 Tauhara * Contact Geothermal 225 1235 Total capacity additions (1080 GWh per annum average) 2183 11879 Total capacity additions excluding Whirinaki (1049 GWh per annum average) 2028 11540 * Plant may be delayed depending on demand. Source: Ministry of Economic Development/Electricity Commission 2009 (based on information supplied by generation companies)

87 See: http://www.lpc.co.nz/RP.jasc?session=F53D594C52546F5335B65B137E0841&Page=N278P2

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 83 NOT GOVERNMENT POLICY

*Does not include Co-generation Source: The Treasury using Ministry of Economic Development data 2009

309. Transpower is refreshing its National Grid Strategy with the development of “Transmission 2040”. This outlines how Transpower is thinking of developing the national grid over the next 40 years. The Annual Planning report also indicates that Transpower is now taking a more long-term view in relation to its approach to investment in the network, with major upgrades announced to the North Island’s grid. See the following figures for a national summary of new committed or proposed projects.

Transmission capital expenditure

Source: Transpower

84 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 85 NOT GOVERNMENT POLICY

Source: Transpower Annual Planning report 2009

Gas

310. Contact Energy has one project under way – a gas storage project. The project is costing approximately $250 million. Through a combination of new gas, compression and new wells, the Ahuroa reservoir will be re-pressured and able to store gas until it is economic to use it.

311. Further details are being sought on the level of private sector investment.

86 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Urban Water Infrastructure

Drinking water

312. Councils appear to be making substantial investment in water network assets. Analysis of 2009-19 Long-Term Council Community Plans (LTCCPs) indicates that capital expenditure on drinking water systems for the next 10 years is forecast at approximately $2.8 billion (this includes both renewals and new assets). This forward expenditure is split fairly evenly between metropolitan (48 per cent) and provincial (41 per cent) councils, with the remaining $310 million associated with rural council capital spending.

313. A preliminary estimate from the 2009-19 LTCCPs suggests that up to $230 million of capital funding will be required over the next 10 years for councils to meet water quality standards, although it is often difficult to separate the cost of compliance from planned renewal and upgrade work.

Waste water

314. The estimated replacement cost of (territorial authority-managed) wastewater infrastructure is $12.7 billion. Analysis of 2009-19 LTCCPs indicates that capital expenditure on wastewater systems for the next 10 years is forecast at approximately $3.7 billion (including renewals and new assets). In contrast to drinking water, the majority of this forward expenditure is linked to metropolitan councils (64 per cent), compared to provincial (27 per cent) and rural (8 per cent) councils.

315. Major wastewater projects are planned for the next few years in Gisborne, Nelson/Tasman (joint project), Marlborough and Rotorua.

Rural Water Infrastructure

316. In 2008, MAF was aware of 22 prospective irrigation schemes, both storage and non- storage-based, in Canterbury, Otago, Tasman, Marlborough, Hawke’s Bay and the Bay of Plenty.

317. More details on planned investment is being sought.

Telecommunications

318. Development in the telecommunications sector reflects the pace of technological change and is fast-moving and dynamic. It is currently undergoing a fundamental shift from an analogue to a higher-speed digital infrastructure. As such, telecommunications, IT and broadcasting are no longer separate but converging digital industries delivering voice, video and high-speed data.

319. Vodafone’s major upgrade plans will see its ‘Third Generation’ mobile network rolled out to 97 per cent of the population by 2010. This will deliver speeds of 10-20 megabits per second (Mbps) and may directly benefit some rural customers who will miss out on Telecom’s broadband upgrades.

320. As part of the regulated Undertakings agreed through the separation of Telecom, Telecom’s network arm Chorus has committed to upgrade its network (through

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 87 NOT GOVERNMENT POLICY

cabinetisation) to ensure that all towns with a population of 500 or more will receive broadband speeds of between 3-7 Mbps by 2011.

321. NZ Communications is spending around $200 million in the first stage of its network build and currently has RMA approval for 395 cell sites.88 It has built networks in the three main centres and is using Vodafone’s network elsewhere for roaming.

322. There is likely to be strong private investment in the telecommunications sector over the next five years:

• Telecom will invest $1.4 billion in its cabinetisation upgrades and a further $300 million in Third Generation mobile upgrades;

• Vodafone will invest $500 million in the expansion of its Third Generation mobile network; and

• New Zealand Communications will spend at least $150 million in support of its launch in the mobile market.

323. In 2008, the government announced that it would invest $1.5 billion in Fibre to the Home. The government's goal for broadband investment is to accelerate the roll-out of ultra-fast broadband to 75 per cent of New Zealanders, concentrating in the first six years on priority broadband users such as businesses, schools and health services, plus green field developments and certain tranches of residential areas. The government investment will be alongside additional private sector investment, and be directed at open-access infrastructure.

324. The Minister for Communications and Information Technology and Ministry of Economic Development officials are currently considering submissions made on the government's draft proposal for implementing its broadband initiative. Ministers intend to make decisions on the approach within the coming months.

88 Presentation to Commerce Commission by Tex Edwards, March 2009.

88 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Primary and Secondary Education

325. At October 2008, Ministry of Education capital projections were as follows:

Capital 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Total expenditure $m $m $m $m $m $m $m $m $m $m 08/09 - profile 17/18 $m

Baseline 521.4 409.0 415.1 424.1 417.5 417.5 417.5 417.5 417.5 417.5 4,274.6 capital expenditure funding available

Total capital 592.0 599.9 510.3 512.4 534.6 537.6 509.7 540.0 569.4 534.3 5,440.1 expenditure intentions

Additional 70.6 190.9 95.1 88.3 117.1 120.1 92.2 122.5 151.9 116.8 1,165.5 funding required to meet capital expenditure intentions

Source: The Ministry of Education’s 2008 Capital Asset Management submission

326. Further capital expenditure funding for school property of $325 million for 2009/10 - 2011/12 was provided in Budget 2009 to address the immediate gap.

327. The following tables outline new schools and school sites that are included in the Ministry of Education’s School Property Capital Plan 2009/10.89

New Schools and Site Requirements 2009/10

School Construction $ millions School name Local office Opening 2009/10 2010/11 2011/12 Total Date Remarkables Primary Dunedin Feb-10 12.000 5.330 17.330 Lowes Road Rolleston Christchurch Feb-10 8.000 4.863 2.200 15.063 Wanaka Primary School Dunedin Oct-10 12.000 7.880 1.100 20.980 Albany Senior High School Auckland Oct-10 35.650 22.317 2.730 60.697 (permanent campus) Papamoa Primary Rotorua Feb-11 3.800 3.300 7.100 Papamoa Secondary Rotorua Feb-11 10.060 14.130 6.810 31.000 Mt Wellington) Auckland Feb-12 4.500 3.230 2.270 10.000 Waipapa (Kerikeri) Whangarei Feb-12

89 Figures for capital requirements are early indications and are only provided for projects that have been approved (however, the totals include projected funding across all of these projects).

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 89 NOT GOVERNMENT POLICY

School Construction $ millions School name Local office Opening 2009/10 2010/11 2011/12 Total Date Ormiston Senior High Auckland Feb-12 (stage 1 only) Churton Park Lower Hutt Feb-12 6.500 2.400 8.900 Hingaia Primary Auckland Feb-12 Mission Heights Primary Auckland Oct-10 (stage 2) Hobsonville (planning Auckland Feb-13 only) Takanini Primary #2 Auckland Feb-14 (planning only) Babich Primary School Auckland (site works only) TOTAL 90 119.000 84.800 40.800 244.600

Source: Ministry of Education School Property Capital Plan 2009/10

Site Acquisitions $ millions Site name Local office 2009/10 2010/11 2011/12 Total Hobsonville Auckland 2.300 7.000 10.200 Hamilton North Secondary Hamilton 16.500 16.500 Kumeau/Huapai (primary) Auckland 11.200 11.200 Wakatipu (primary) Dunedin 8.850 8.850 Papamoa East (site fees) Rotorua 0.381 0.381 Halswell (designation costs) Christchurch 0.109 0.109 Frankton (secondary) Invercargill 21.910 21.910 Waipapa (Kerikeri) (designation Whangarei 0.600 0.600 & site costs) Pegasus (designation & site Christchurch 0.100 0.100 costs) TOTAL 30.000 39.150 0.700 69.850

Source: Ministry of Education School Property Capital Plan 2009/10

328. Additional capital expenditure is expected on existing kura and wharekura (with generally another three to four redevelopments expected to be approved each year).

329. Other significant projects for 2009/10 in the Ministry of Education’s School Property Capital Plan 2009/10 include:

• $35 million for an estimated 188 new classrooms to meet peak rolls;

• $40 million to address general space deficiencies in schools;

• $31 million for the replacement of buildings beyond their economic life;

90 Figures for capital requirements are early indications and are only provided for projects that have been approved (however, the totals include projected funding across all of these projects).

90 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

• $30 million for the upgrade of four Upper Hutt Schools – on top of the $14.6m previously approved; and

• $135 million for about 400 schools re-entering into their five year agreements with the Ministry for the period 2009-2014.

Health

Demand and capital intentions

330. DHBs have assessed the impact of health service changes expected within the next 5, 10, and 20 years by considering demand (demographics, patterns of need, change in access and intervention rates) and supply (including new health technologies, new models of care, changes in workforce availability, workforce roles, changes in the location of service delivery and information technology advances).

331. Based on this, the projected requirements for additional capital (beyond what will be available from depreciation) is currently $233 million per annum in the first 5 years (to bring the condition of current infrastructure up to an acceptable level) and $77 million per annum for the remaining 15 years:

New Health Capital Budget Funding Requirements by Year of Spend 400 350 5 year average 300 $233 million per 10 year average 20 year average annum 250 $165 million per $116 million per 200 annum annum

$millions 150 100 50 0

9 0 1 4 6 8 9 2 3 7 -0 -1 -1 -12 -13 -1 -15 -1 -17 -1 -1 -20 -21 -2 -2 -24 -25 -26 -2 -28 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 0 1 1 2 2 0 00 01 01 01 01 01 0 01 0 01 01 02 0 02 02 02 02 0 02 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Source: Ministry of Health

Total health capital spending p 10 year average 800 5 year average $604 million per 700 $722 million per annum 20 year average 600 $491 million per 500 400 300 $millions 200 100 0

9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 -0 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Source: Ministry of Health

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 91

92 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 SEPTEMBER 6 AND ISSUES FACTS INFRASTRUCTURE: | 92 332. Projects currently under way:

Project Crown Est. Finish Project Name Description Driver Budget91 Funding Date

Waikato - Service & Campus Redevelopment of Thames Hospital and core Meet demand $249.3 $125.0 2013 Redevelopment (SCR) clinical facilities at Waikato Hospital

Bay of Plenty - Project Leading Edge Redevelopment and expansion of facilities at Meet demand $139.4 $79.8 2011 Organisation (LEO) Tauranga Hospital

Major upgrade and reconfiguration of facilities Counties Manukau - Core at Middlemore Hospital including new ward Meet demand $104.7 $25.0 2009 Consolidation

building NOT GOVERNMENT POLICY

Establishment of new infrastructure to All DHBs - Oral Health Projects Facility upgrade $116.0 $116.0 2012 implement the adolescent oral health policy

IT NSDP IT redevelopment redevelopment

91 The differences between Crown Funding and the Project Budget are made up through self-funding by DHBs.

ETME 09 INFRASTRUCTURE: 6 SEPTEMBER2009 333. Projects committed but not started:

Project Crown Est. Start Est. Finish Project Name Description Driver Budget92 Funding Date Date Waikato - Acute Medical Precinct Creation of a modern acute medical facility of Meet demand $29.8 $0.0 Mid-2009 Mid-2010 (AMP) Project 100 beds over the Emergency Department (ED) Hutt Valley - ED and Theatre Doubling of ED and Theatres at Hutt Valley Meet demand $81.9 $60.0 Mid-2009 2011 Expansion Hospital Lakes - Health Service Improvement Redevelopment of Taupo and Rotorua Refurbish/replace $89.5 $39.4 End of 2009 2011 Project (LHSIP) hospitals. Construction of new Clinical Services Block

Northland - Whangarei Hospital Replacement of Acute Mental Health Unit and Refurbish/replace $25.1 $0.0 End 2009 2011 NOT GOVERNMENT POLICY Redevelopment – Stage 1 upgrade of campus infrastructure

Waitemata - Lakeview Extension Expansion of Emergency Care Centre and Meet demand $48.7 $37.1 End 2009 Mid 2011 additional acute medical beds (48) Taranaki - Project Maunga Redevelopment of Base Hospital at New Refurbish/replace $80.0 $43.0 End 2009 2012 Plymouth. Core clinical facilities will be replaced including an increase of 2 theatres Counties Manukau - Towards 20/20 – Major redevelopment of Middlemore Hospital. Meet demand $208.6 $100.0 Start 2010 Mid 2015 Future Growth Replacement of core clinical facilities including 3 additional theatres. Completion of Edmund FACTS AND ISSUES PLAN | 93 AND ISSUESPLAN FACTS Hillary Ward Block

92 The differences between Crown Funding and the Project Budget are made up through self-funding by DHBs.

NOT GOVERNMENT POLICY

334. In addition to the projects outlined above, DHBs are planning further capital projects which have yet to be developed or considered by Ministers. As noted above, at August 2008, total health capital expenditure, including replacement of clinical equipment, averaging $491 million per annum was projected over the next 20 years. Of this, new health capital funding of approximately $116 million per annum would be required.

Corrections

i Underway

Mt Eden replacement project (replaces obsolete facility) is under construction and is expected to be finished in 2011 at a cost of approximately $228.3m.

ii Committed and funded (but construction not begun) Double Bunking Budget 2009 Decisions93

Facility Number of beds Spring Hill Corrections 368 Otago Corrections 150 Northland Regional Corrections 198 Auckland Regional Women’s Corrections 170 Mt Eden Prison 104 Total 990

iii Yet to be committed/funded Increased Prisoner Capacity Budget 2010 Decisions

Location Number Estimated Security Level of beds Capital Cost $m Northern Region 1854 $ 706.0 High Central Region 780 316.0 High Central Region 240 77.0 Low Total 2,874 $1,099.0

Increased Prisoner Capacity Budget 2011 Decisions

Location Number Estimated Security Level of beds Capital Cost $m Central Region 200 $ 138.0 Maximum Northern Region 260 108.0 High Northern/Central Regions 650 201.0 High Total Proposed Beds 1,110 $ 447.0

93 Budget 2009 funded a total of $144.8m for double bunking, which is unable to be split by facility due to commercial sensitivities of the tender process. Additionally, the table details a mixture of low and high security.

94 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Cross-Sectoral Issues

Regulatory Issues

335. In the context of infrastructure, the objective of regulations is to ensure sufficient certainty and consistency for business to operate competitively and with confidence, and with minimum transaction costs. New Zealand’s productivity performance has been very low by international standards (22nd out of 30 OECD countries) and there is concern that this may in some part be the result of the cumulative cost of compliance, particularly on small businesses. Consequently the government has initiated a regulatory review programme to identify and remove inefficient and superfluous regulation.

336. The regulatory review programme sets out general principles for good regulation which include that it:

a) Be the minimum necessary to achieve its objectives, having assessed costs, benefits and risks;

b) Be as generic and as simple as the sector allows;

c) Be appropriately durable, predictable and adaptable;

d) Where appropriate, accord with international best practice while being mindful of our commitment to a single economic market with Australia;

e) Minimise compliance costs imposed; and

f) Aim to minimise adverse impacts on:

i. Innovation and investments;

ii. Competition;

iii. Individual responsibility (with appropriate risk balance); and

iv. Property rights.

337. In conjunction with this, the Infrastructure Plan will have a particular focus on identifying and reducing existing hurdles to investment in infrastructure. The following sets out the intended impact of changes in legislative and regulatory reform already underway.

Resource Management Act

338. The Resource Management Act 1991 (RMA) is the principal legislation for managing New Zealand’s environment and allocating natural resources. The RMA is intended to provide a legislative framework that enables integrated regulation (covering local planning and environmental effects) at regional and local levels. In practical terms, this means that decisions on resource management issues, both in the planning process and in specific consents, need to take into account social, economic and cultural considerations, in addition to the direct physical effects of proposed activities upon the receiving environment.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 95 NOT GOVERNMENT POLICY

339. The government believes that the RMA is creating unnecessary delays and compliance costs which are hindering economic growth and infrastructure development. Streamlining and simplifying the Resource Management Act is an important part of the government's overall economic strategy (especially given that its programme for economic recovery includes major infrastructure investment).

340. As a result, the government has launched a major reform of the RMA. In the first phase, it developed a package of proposals to streamline and simplify process. The Resource Management (Simplifying and Streamlining) Amendment Bill, which will implement this package, is currently before the Local Government and Environment Committee.

341. Phase two of the RMA reforms will progress over a longer timeframe and examine a range of more complex issues. The primary objective of these reforms is to achieve least cost delivery of good environmental outcomes, including (among other things) improving the economic efficiency of implementation without compromising underlying environmental integrity.

342. Specific areas for investigation include aquaculture, the role and functions of the Environmental Protection Authority, fresh water management, and urban design and infrastructure issues.

343. With regards to infrastructure, the government will:

• Review the role of designations in facilitating infrastructure development and examine options for reviewing and streamlining the designation mechanism;

• Investigate the alternatives to designations for planning for and managing the effects of activities on network infrastructure;

• Investigate alternative options for compensation under the Public Works Act 1981; and

• Streamline and integrate processes under the Public Works Act and other legislation.

344. The objective is to remove unnecessary barriers and identify new mechanisms, so that infrastructure development can be progressed in as timely a fashion as possible.

Reviews and legislative changes

345. The Corrections Contract Management of Prisons Amendment Bill, which removes the prohibition on the use of public private partnerships in the management of prisons, is currently being considered by Select Committee. The Infrastructure Bill changes utilities’ access to transport corridors and provides for a mandatory code of practice to manage the use of transport corridors by utilities. There are also a number of reviews underway including reviews of Land Transport Management Act, Local Government Act 2002, the Building Act, the Watertight Homes Resolution Services Act, and the Overseas Investment Act and Regulations and the Electricity Review. Complementary measures to facilitate the roll out of Broadband are also being considered. This may or may not involve regulatory changes.

96 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Other possible regulatory initiatives

346. The New Zealand Council for Infrastructure Development (NZCID) has drawn attention to the multiplicity of legislation and approval processes that sometimes apply to infrastructure developments and has advocated legislating for a single consenting process, at least for nationally critical infrastructure94.

347. The practice of requiring detailed specification of projects before a resource consent can be obtained under the RMA is difficult to reconcile with the desire to encourage innovation. While there have been instances where applicants have successfully obtained ‘outline consents’, in practice this is often difficult. Consideration could be given to legislative changes that make this easier.

Funding Infrastructure: The Government’s Fiscal Strategy

348. The Infrastructure Plan will include specific sections on Transport, Corrections, Education and Health.

349. Central government is projecting operating deficits until 2015/16. Therefore, without policy changes, the unconstrained spending intentions of the above would result in continually increasing debt levels. The government has decided that projected levels of net debt above 40 per cent of Gross Domestic Product (GDP) would not be fiscally responsible. Therefore, in Budget 2009, the government indicated that actions will be taken to keep projected net debt below 40 per cent of GDP and reaching 30 per cent no later than the early 2020s.

350. In the transport sector, state highway assets are worth around $21 billion (20 per cent of overall Crown fixed assets) and require funding of around $1 billion per annum to meet current levels of infrastructure maintenance and new builds. Essentially, land transport sector expenditure is a ‘pay-go’ system funded from user charges, so the sector generally poses no fiscal burden unless government wishes to pursue other priorities than those set out in the National Land Transport Fund.

351. By contrast, the level of asset-related activity in core Crown and other Crown entities (including Corrections, Education and Health) is more directly influenced by the Crown’s fiscal situation. These sectors manage around $72 billion worth of fixed assets and are projected to spend on average around $2.5 billion - $3 billion annually on those assets. In aggregate, existing baselines can sustain that level of activity. However, there is ongoing pressure to refresh, upgrade or expand some of these asset networks. A Treasury survey in September 2008 revealed a potential funding gap of at least $10 billion over 10 years between the aggregate capital intentions of the capital-

94 Some legislative provisions that could be consolidated for this purpose include the: • Historic Places Act 1989 • Reserves Act 1981 • Local Government Act 2002 • Public Works Act 1981 • Foreshore and Seabed Act 2004

• Land Transport Management Act 2003

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 97 NOT GOVERNMENT POLICY

intensive agencies and their current baselines. The main driver of pressure relates to the interplay between demographic changes and current government policies.

352. These figures do not include any Crown funding pressure that may arise from SOE activity or other investments such as broadband networks.

353. The government is investigating the adjustments that will be needed in order to manage pressures within this constraint. Given other pressures on the operating account, the implication is that the government will need to find ways to improve the models of business operation so that the necessary levels of service can be delivered a) more cost-effectively over time, and b) with less capital than current unconstrained agency projections.

354. There may also be some scope for further funding through increased user charges, but in the absence of a significant change in public appetite for user charges this is unlikely to make more than a minor contribution.

Financing Infrastructure: PPPs

355. Government infrastructure can be funded either from:

• Current income (taxation or user charges); or

• Future income (which can be financed either from direct borrowings or with private finance).

356. The choice between these depends on how the government wishes to conduct its long- term fiscal strategy. The choice between direct borrowing and using private finance depends on incentive effects and transaction costs.

357. Private finance is usually provided through public private partnerships (PPPs). PPPs typically allocate all construction and operating risks to a private sector party. This not only reduces the risks faced by the Crown but provides stronger incentives to minimise whole-of-life costs and improve service quality than is possible within the public sector. The main disadvantages of PPPs are the reduced flexibility due to the long-term nature of the contract, and the cost that arises from unanticipated contract variations. This cost is not usually recognised at the time the PPP is evaluated. PPPs may therefore be attractive, compared with other types of contracts, provided the likelihood of unexpected contract variations is low.

358. The government intends to use PPPs where they represent value for money to taxpayers. The NZ accounting treatment of PPP arrangements means that “off-balance sheet” considerations are not a factor in the Government’s choice of procurement option.

98 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

Local Government Finances

359. The chart below shows annual rates charged by Local Government as a percentage of GDP. This compares with average core Crown tax revenue of around 30 per cent of GDP.95

360. The cause of the increase is not immediately obvious. Further analysis is required to determine the extent to which this reflects assumed further cost inflation, and assumptions about future increases in the quality and quantity of services or compliance with standards, such as drinking water standards.

95 Source: The Treasury’s Budget 2009 documentation.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 99 NOT GOVERNMENT POLICY

361. The following chart illustrates the amount of debt carried by local authorities:

Source: Summary data collected from draft LTCCPs received from May 2009

362. The chart below indicates that councils, on average, are forecasting increased operating surpluses (excluding asset revaluations) over the same period.

Demographic trends96

363. New Zealand’s population is expected to increase by approximately 22 per cent, from 4.185 million in 2006 to 5.089 million in 2031. The following are the most significant changes projected by the end of this period:

• Sixty-two per cent of New Zealand’s population growth between 2006 and 2031 will be in the Auckland region;

96 Information based on 2006 Census and projecting forward using the Statistics New Zealand middle and median series.

100 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

• Manukau City will pass Christchurch City as the second most populous territorial authority between 2006 and 2011;

• Queenstown-Lakes District will have the highest rate of population growth with an average annual increase of 1.9 per cent over the 25 year period (2006–2031);

• Almost half of New Zealand’s 73 territorial authority areas will have fewer residents in 2031 than in 2006;

• The 0-44 age group stabilises and the 65 and over age group doubles; and

• The number of families in New Zealand increases by approximately 20 per cent, with the number of households increasing by 28 per cent.

364. The increase in the growth triangle area of Auckland, Waikato and Bay of Plenty is projected to be almost 34 per cent, compared to an increase of about 12.7 per cent in the South Island (an increase in population of 686,000 in the former, compared with 127,000 in the South Island). The population increase in Auckland will exacerbate already strained infrastructure in some sectors.

Region 2006 2011 2016 2021 2026 2031

Auckland 1,371,000 1,483,300 1,597,600 1,711,300 1,823,400 1,932,300 Waikato 395,100 412,000 426,500 439,100 450,000 458,900 Bay of Plenty 265,300 279,900 293,100 305,200 316,400 326,200

South Island 998,800 1,034,500 1,063,900 1,088,700 1,109,500 1,125,700

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 101 NOT GOVERNMENT POLICY

Age Group 2006 2011 2016 2021 2026

0-14 888,300 894,600 906,600 917,600 906,400 15-44 1,786,200 1,797,700 1,804,200 1,826,700 1,883,300 45-64 998,500 1,115,500 1,178,200 1,209,500 1,194,300 65-84 453,500 512,100 610,200 714,500 828,000 85+ 58,100 73,400 89,500 102,500 127,300

Total 4,184,600 4,393,300 4,588,700 4,770,800 4,939,300

365. In the longer term, the proportion of super annuitants increases significantly. Given that our superannuation system and public health system work on a ‘pay-go’ basis this means there will be a corresponding increase in the burden on other taxpayers. These pension and health liabilities must also be considered when contemplating the level of debt that is sustainable in future.

Climate change

366. Climate change is a very significant environmental and economic issue. While the extent of the change is unclear, over the period of the plan climate change is likely to impact on New Zealand in a number of ways, including:97

• Higher rainfall in the west and less in the east;

• More frequent extreme weather events such as droughts (especially in the east of New Zealand) and floods;

97 Source: Ministry for the Environment website: http://www.mfe.govt.nz/issues/climate/about/impacts.html

102 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

• Rising sea levels; and

• Higher temperatures, but more in the North Island than the South.

367. These effects are likely to have an adverse effect on the resilience of New Zealand’s infrastructure.

368. Agricultural productivity is expected to increase in some areas, but it is likely that land- use activities will change to suit a new climate. As these changes will occur over time, the impacts on infrastructure will not be immediate.

369. The main economic impact of climate change is likely to be through commitments that require us to reduce emissions.

370. As a signatory to the Kyoto protocol, New Zealand has committed to reducing its greenhouse gas emissions. Just how this impacts on the economy depends on the design of our domestic carbon policy. The Emissions Trading Scheme (ETS) was introduced to create a price for carbon in New Zealand. It was designed to achieve emissions reductions in the sectors that can achieve these most efficiently.

371. Implementation of the ETS is expected to encourage a shift from high-emitting activities to lower-emitting ones over time.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 103 NOT GOVERNMENT POLICY

Infrastructure and Growth

372. The government’s medium and long-term strategy for achieving economic growth is to provide the conditions that maximise innovation and productivity in the economy while meeting other welfare objectives. In the longer term, increases in productivity are needed, with a focus on international competitiveness, to permanently raise New Zealanders’ living standards. The government has identified six policy drivers that will form the core of its economic programme for the next three to five years:

• Reviewing regulation and red tape;

• Delivering better, smarter public services;

• Improving education and skills;

• Offering innovation and business assistance;

• Reviewing the tax system; and

• Investing in productive infrastructure.

373. A National Infrastructure Plan needs to be based on a clear understanding of the role that infrastructure plays in enabling economic growth. According to the World Economic Forum’s latest Executive Opinion Survey, inadequate infrastructure is a more serious barrier to doing business in New Zealand than inadequate institutions, macroeconomic stability or health and primary education.98

374. In its latest New Zealand country survey, the OECD states that:

When public expenditures were restrained during the reforms of the mid-1980s to the early 1990s, infrastructure investments were particularly affected because delayed impacts made them attractive targets for cuts. Deferred maintenance has since accumulated, and infrastructure bottlenecks are starting to show up, particularly in electricity transmission and roads in and around Auckland. Public expenditures on infrastructure have risen significantly in recent years, but it will take some years before the impact is visible.

Infrastructure … is an important focus of public policy for two main reasons. … The second is a strong presumption from economic theory that infrastructure investments can have positive effects on growth that go beyond normal additions to the capital stock. This is because investments in network industry infrastructure are thought to yield positive externalities on other sectors. For instance, better communications infrastructure can facilitate collaboration among workers and raise their productivity. This last characteristic makes achieving optimal levels of infrastructure in network industries especially important. Empirically, however, the link between infrastructure investment and growth has traditionally been difficult to pin down. The direction of causality is hard to determine convincingly and appears to depend on the country, sector and existing level of provision. Recent cross-country studies have used sophisticated

98 World Economic Forum (2008), The Global Competitiveness Report 2008-2009, World Economic Forum, Geneva.

104 | INFRASTRUCTURE: FACTS AND ISSUES 6 SEPTEMBER 2009 NOT GOVERNMENT POLICY

econometric techniques to untangle these effects and have confirmed that greater provision of broad measures of infrastructure is associated with higher subsequent growth rates …. Recent OECD work also finds that the contributions of infrastructure to long-run output levels and growth go beyond normal additions to the capital stock (ie, they generate positive externalities) and that they are not homogenous across countries…In New Zealand’s case, this work indicates that past investments in road infrastructure have yielded the greatest growth benefits.99

375. The recent OECD work referred to above100 is based on econometric analyses. However, it is consistent with a microeconomic analysis and, in particular, the conclusion in the last sentence is consistent with the observation that during the 1990s, new road projects needed to have a benefit cost ratio of at least 4:1, to achieve funding which is equivalent to an internal rate of return of over 50 per cent.

376. More generally, microeconomic considerations suggest that infrastructure projects contribute to economic welfare if their benefit cost ratio exceeds 1:1, where “benefit” and “cost” are interpreted widely to include all social, economic and environmental benefits and costs, including positive and negative externalities.

377. Over the period of the plan, real GDP is projected to increase by over 60 per cent from approximately $133 billion in 2008/09 to $213 billion in 2028/29.101 While this is a significant increase over 20 years, on an annual basis it equates to an increase in the two to three per cent range.

378. However, the government has set a goal for New Zealand’s wage levels and standard of living to reach those of Australia by 2025. To achieve this, New Zealand's GDP will have to grow at a faster rate than it has over the last decade. Rather than growing at 2-3 per cent per annum (as assumed), it is estimated that GDP will have to grow at around 5 per cent a year until 2025 to catch Australia.

379. The 2025 Taskforce’s brief is to provide recommendations on ways to improve productivity and close the income gap with Australia by 2025. The Taskforce will provide an initial report in October 2009, identifying changes that will deliver the productivity growth necessary.

380. It is not yet clear to what extent the Taskforce will focus specifically on infrastructure or on the extent to which its thinking will be sufficiently developed in its October report for it to be taken into account in the first National Infrastructure Plan. While the Plan will pick up relevant Taskforce recommendations, we encourage submitters to also focus on this area. In particular, we invite submitters to suggest areas of additional investment that would help NZ to increase its rate of economic growth and describe why this additional investment should be a priority for the allocation of funds.

99 OECD Economic Surveys: New Zealand, OECD 2009. 100 In particular Égert, B., T. Kozluk and D. Sutherland (2009), "Infrastructure Investment: Links to Growth and the Role of Public Policies", OECD Economics Department Working Papers, No. 686, OECD publishing, © OECD. 101 Projecting forward The Treasury’s Fiscal Strategy model.

6 SEPTEMBER 2009 INFRASTRUCTURE: FACTS AND ISSUES | 105