TowardsanInfrastructureDevelopmentPlanforNewZealand

AsubmissionbytheNewZealandAutomobileAssociation(Inc)

InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

Contents
Introduction.......................................................................................................................................................3 1.WhytheAAhasaninterestininfrastructure................................................................................................4 1. ACTIONOUTCOMES...............................................................................................................................4

2.LongRunNationalOpportunityCost/Benefit..............................................................................................4 2. ACTIONOUTCOMES...............................................................................................................................6

3.AssessingWelfare..........................................................................................................................................6 3. ACTIONOUTCOMES...............................................................................................................................6

4.CapacityvsOrganisation................................................................................................................................7 4. ACTIONOUTCOMES...............................................................................................................................7

5.Substitutions..................................................................................................................................................8 5. ACTIONOUTCOMES...............................................................................................................................8

6.JoiningUp......................................................................................................................................................8 6. ACTIONOUTCOMES...............................................................................................................................9

7.InfrastructureandDevelopment...................................................................................................................9 7. ACTIONOUTCOMES............................................................................................................................. 1 1

8.Thevalueoftime......................................................................................................................................... 1 1 8. ACTIONOUTCOMES............................................................................................................................. 4 1

1 9.Safety........................................................................................................................................................... 4 9. ACTIONOUTCOMES............................................................................................................................. 5 1

10.MarketSize................................................................................................................................................ 5 1 10. ACTIONOUTCOMES......................................................................................................................... 6 1

11.LocalGovernment...................................................................................................................................... 6 1 11. ACTIONOUTCOMES......................................................................................................................... 8 1

12.Pricing ........................................................................................................................................................ 8 . 1 12. ACTIONOUTCOMES......................................................................................................................... 9 1

Conclusion........................................................................................................................................................ 9 1 FurtherInformation......................................................................................................................................... 9 1

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InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

Introduction
ItisunderstandablethattheTreasuryisconsultingonthequestionofincreasingnationaldebttofund specialinfrastructureprojectsoverthenextfiveyears.Howeverthedevelopmentofaninfrastructureplan forNewZealandisconsiderablymoreinvolvedthanashoppinglistofexpensivenewprojects. ThereareanumberofverysignificantproblemswithNewZealandslegislationandorganisationwith respecttoinfrastructuredevelopment,manyofwhichhaveyettobeaddressedbyGovernment.While specialprojectsmaybesignificanttoTreasuryintermsofitsresponsibilitiestomanagetheCrownsdebt risk,theTreasuryalsohasresponsibilityfortheoversightofthesystemsofexpenditureofexistinglevelsof taxation.Theselattersystemsarenotonlyofgreaterquantumbutiftheyarenotconfiguredwellwill interferewiththereturnthatcanbeexpectedfromspecialprojects.Thisthereforeisanexcellent opportunitytoreviewthesystemsunderwhichallinfrastructureisdeveloped,notjustthosespecial projectsoutlinedinInfrastructureFactsandIssues. ThefirstandmostimportantproblemisthelackofanoverallGovernmentviewontheroleoflongterm infrastructuredevelopmentaspartofeconomicdevelopmentandproductivityimprovement. Internationallyinfrastructuredevelopmentisregardednotasacosttobemetonapayasyougobasisbut aninvestmentinfuturerevenue.ThiswholeapproachismissingfromourformofGovernment.Developing thisexpertiseincentralgovernmentisessentialiftheproblemofinfrastructuredevelopmentistobe consideredrationally. Ingeneralinfrastructuredevelopmentisfundedfromdebt.Thisonlymakessenseifthereturnonthe investmentisgreaterthanthedebtandthedebtservicingcosts.Whileitisnormaltoexamineprojects againstabusinessasusualperspectiveonecanalsoexaminethemagainsttheopportunitycostofnot doingthem.Ifonetakesthisoutlookthetendencyistoexamineprioritiesintermsofgreatestwelfare returnwhichshouldalsoproducethegreatestfiscalreturn.ThereisnoreasonwhyGovernmentshouldshy awayfromnotionsofprofitabilityaslongasthetaxationburdenremainsstatic. Withintheenvelopeofexistingtaxationtherearealsobettermethodsforinfrastructuredevelopmentand developmentprioritisationwhichneedconsideration.WhiletheGovernmentisaddressingtheissues surroundingtheResourceManagementActthereareanumberofrelatedissueswhichlargelycomedown totheorganisationandlegislationsurroundinglocalgovernment.Ultimatelyallthecustomersofnetwork infrastructureoperatorsareaccessedviathelocalroadingnetwork.Thisincludes:telecommunications, electricityandwateraswellastransport.Roadingisthebiggestexpenseof,andlargestassetoflocal governmentandlocalgovernmentisstrugglingtomeetitscommitmentstoroading,particularlyroad safety.Thecurrentarrangementforfundingandmanagementoflocalgovernmentneedsurgentattention. Thefollowingsubmissiondoesnotpretendtohavealltheanswers.Itsobjectiveisprimarilytoprompt moreinvestigationbyTreasuryandotherbranchesofgovernmentintothedeficienciesofNewZealands infrastructuredevelopmentsystem.Ourpointisthatwhileitiseasytobedistractedbythespecialprojects thatinvolvespeciallevelsofGovernmentdebtandservicingitistheeverydayproblemswhichneedtobe addressedifthesearetosucceed. Wehopethatthisisausefulaidememoireforfuturethinkingontheproblemofdevelopingprojects towardsconstructingabetterprocessforinfrastructuredevelopmentinNewZealand.. Page3of19

InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

1.WhytheAAhasaninterestininfrastructure
TheNewZealandAutomobileAssociationisNewZealandslargestclub, representingover1.2millionmotorists.TheAssociationprovidesroadservice (breakdownassistance),tourismandtravellinginformation,vehicleinspection, anddrivereducation.TheAAalsohasjointventuresforinsuranceandmotor vehiclelicensing. Roading TheNZAArepresentsitsMemberinterestintheprovisionofasafeandefficient transportationsystem.Congestionimposeslargedeadweightcoststothe countryasdoesroadsafetyfailure.Thetransportsystemunderpinsprimary industryand(ofmoreconcerntotheAA)tourism,NewZealandslargestincome earners. Overthetermofanyinfrastructureplantechnologicalchangesuggeststhatthe AAsinterestinotherinfrastructuralmatterswillalsoincrease.Mostsignificantof theseistheprovisionofelectricpowerasvehiclemotortechnologyswitchesfrom theinternalcombustionenginetotheelectricmotoroverthenexttwentyyears. Thistechnologyhassignificantimplicationsforenergysystemmanagementand developmentasthreemillionlargeprivatestoragedeviceswhichspendmuchof thedayincarparkscouldbeasignificantformofstoredenergy. AnothermatterofsignificantconcernfortheAAisthefutureprovisionofmobile bandwidth.Mobilebandwidthapplicationswillinclude:tollingandmobile payment;routeselectionandrerouting;communications;safetyandsecurity; vehiclemanagement;andentertainmentpackages.ApplicationswilluseGPS coordinates,textdata,graphics(maps),soundandvideodata. Whilethisdatawillbedeliveredtovehicleswirelesslyitisinevitablethatthe servicesaccessedwillbepartofaterrestrialbroadbandnetwork. ACTIONOUTCOMES TheNewZealandAutomobileAssociationshouldbekeptinformedonpolicy proposalswhichaffectroading,electricityandmobilebroadband.

ElectricPower

Broadband

1.

2.LongRunNationalOpportunityCost/Benefit
Illiquid Investmentsininfrastructureareaformofcommunitysavinginphysicalform. Thecommunityforegoesthepresentvalueofsomeearningsforthereturnthat thephysicalasset(s)generatesoverthelongterm.Anessentialfeatureof infrastructurecapitalhoweveristhatonewayoranotheritissunk.Aphysical assetthatdoesnotgenerateareturnoverthelongtermisstillacosttothe communityspresentearningsbecausetheyarehighlyilliquid.

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InfrastructurePlanSubmission Risk

2009

NewZealandAutomobileAssociation

Thesequalitiesmeanthatinfrastructurecanposesignificantrisks.Anexample fromNewZealandhistorywasthe1,783,190investedintheBattleshipHMS NewZealandin1911.NewZealandwasstillpayingfortheshipin1937despite thefactthatitwasscrappedbytheBritishin1922aspartoftheircommitmentto disarmament.ItcanbesaidthatHMSNewZealandhadahighlongrunnational opportunitycostbecauseitcostafortuneandreturnedminimalbenefittothe communitythatpaidforit. AmorerecentcasefromNewZealandseconomichistoryistheThinkBig energyschemes.Theseinvestmentsbythestateinheavyenergyprojects followingsuccessiveoilpriceshocksin1973and1979werepredicatedonhigher averageoilprices.Howeverwhenoilpricesfellin1985manyoftheseschemes becameuneconomic. Inbothcaseshowevertherisksagainstwhichtheseinvestmentsweremadewere quitespecific.Inatimeofstrategicuncertaintyarmsmayseemprudent.The sameprincipalappliestoenergyprojects.Allinvestmentevenbusinessasusual incorporatessomedegreeofrisk.Howeveraninvestmentthatispredicated uponpopulationandeconomicgrowth(largelybecauseitcreatesit)islessrisky. Thequestioniswhethertheopportunitycostofinvestingandbeingwrongis higherthantheopportunitycostofnotinvestingandbeingwrong. Thecostsofnotbuildinginfrastructurecanbesaidtobetheforegone improvementsinwelfarethatwouldhaveaccruedhadtheinfrastructurebeen constructed.Thesearenotalwaysobviousbecausetheycanonlybeinferred.In somecasesitisappropriatetheriskisbornbytheprivatesectorratherthanthe publicsector,andinotheroccasionsitmaybebornejointly. WhatdoesnotmakesenseiswhentheGovernmentfailstoinvestdespitethere beinggoodevidencetobelievethattherewillbeafiscalreturnoninvestment (i.eitwillmakemoney).InthissituationtheGovernmentissimplyfailingto capitaliseontheopportunitiestoimproveitsfiscalpositionquiteasidefrom anywelfarebenefit.Inshortifaninfrastructureislikelymakeafiscalreturn overtimetheninvestingissimplygoodbusiness,andnotinvestingisbad governmentbusinessintermsofreturnontaxpayersfunds. TherearetwoformsoffiscalbenefitfrominvestmentforGovernment:direct profits(gainsfromsaleofassets,e.g.revaluedland)andindirect(taxesaccruing fromincreasedwelfare).NewZealandGovernmentagencieshavenotbeen particularlyintelligentaboutprofitingfromimprovements.ForexampleTransit neverboughtwholecorridorstorealiseacapitalgainonlandafterimprovement. ThesameappliestootherdepartmentsincludingtheDepartmentof Conservation.Howeverwhilecapitalgainsareworthgreaterinvestigation ultimatelytheindirectfiscalbenefitmustbebasedonanetwelfarebenefit.

OpportunityCost

FiscalBenefit

GovernmentProfit

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InfrastructurePlanSubmission 2. ACTIONOUTCOMES

2009

NewZealandAutomobileAssociation

TheTreasuryshouldinvestigateGovernmentoperationstodeterminewhether theCrowncouldachievegreaterreturnsontheCrownsInfrastructure developmentprocessesandrelylessontaxation.

3.AssessingWelfare
Thekeyproblemthereforeisdeterminingwelfarebenefitsfrominfrastructural investment.ThismustbeacorecompetencyoftheTreasuryifGovernmentisto undertakeanyexpenditureordebtservicingforinfrastructuredevelopment. Publicor TheTreasurymusthaveaviewonthelongrunnationalopportunitycost/ benefitofvariousformsofinfrastructuredevelopmentregardlessof GovernmentagencywhichallocatesBudgetfunding.Essentiallythequestionis this:isthenetwelfarevalueofpresentearningsgreaterifinvestedinpublic infrastructurethanifitisretainedintheprivatesector? Thismustnaturallytakeintoaccounttheearningcapacityoffirmswhichwould otherwiseattractprivateinvestment.Iffirmscanearnmoreinthepresenceof newcollectiveinfrastructureinvestmentthanwithoutit,theinfrastructure investmentshouldproceed.Ifnottheinfrastructureinvestmentisatbest prematureoratworstanopportunitycost. TodatethisformofassessmentbyGovernment(oranyotheragency)hasbeen unusual.TheAAsponsoredInfometrics/AllenConsultingreportBenefitsof investinginNewZealandRoadInfrastructure(August2004)isoneoftherare occasionswherethismethodologyhasbeenemployed.Itispeculiarthatitisnot astandardfeatureofGovernmentwelfareassessment. Whileeconometricequilibriummodelshavetheircriticsthecapacityforsome assessmentisbetterthanporkbarrelpolitics.WhileGovernmentsmayvaryin theirdeterminationtopursueinvestmentthecivilserviceshouldhavesome advicetoofferastothebestreturnoninvestmentavailablefrominfrastructure investmentdollars.Forifthecivilservicedoesnotattempttobalancethe nationalinterestagainstpoliticalexpediencythedenialofinformationtothe electorateraisesquestionsaboutthewholeedificeofourdemocracy. ACTIONOUTCOMES TheTreasuryshouldinvestigateGovernmentprojectevaluationprocesseslinked toinfrastructuredevelopmenttodeterminehowopportunitycostscanbebetter assessed.Thisshouldexplicitlyincludegreateruseofeconometricmodelling.

Private?

AllenReport

Advice

3.

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InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

4.CapacityvsOrganisation
Infrastructureislargelyconnectedtoissuesofthroughput,beitvehicles,railway wagons,datapackets,waterorwattage.Itisimportantthatinfrastructure investmentdoesnotbecomeentirelyfixatedonnetworkcapacity. Trademe ForexampleonlineauctionhouseTrademehasbecomeakeypartofNew Zealandscommercialinfrastructure.Whileitcertainlyreliesonhighbandwidth capacitytooperateitsownbusiness,itscustomersdonotneedsuchbandwidth capacity.Trademedeliverssignificantwelfarebenefitsbycreatinganonline bazaarforthewholecountry.Thisisanorganisingfunctionnotacapacityone. Bycontrastunderinvestmentinnetworkcapacitycannotberemediedby marginalimprovementsinorganisation.AssessmentsofroadcapacityinAuckland andWellingtonhavefoundthatnoamountoforganisationalimprovementcan overcomefundamentallackofthroughputcapacity. Value Itisimportantthatwelfareassessmentsdonotlosetrackofthefundamentalunit ofwelfarereturnoninvestment.Theobjectiveisnottoimprovethroughputof vehicles,railwaywagons,datapackets,watercumecsorwattage.Itistoextract maximumvaluefromthereasonsthesethingsareinmotion. Anobviousexampleiswaterconservation.Ifthemarginal(eitherlongrunorin timesofdroughtshortrun)costofcleanwaterprovidedtoacityisveryhighbut thepricesignalsaremutedthroughaveragedbillingthenitshouldnotsurprise anyonethattheremaywellbesignificantwaterwastageaspeoplecontinue wateringlawnsevenasreservoirsempty. Theissueforinfrastructureinvestmentistoensurethatcapacityinvestmentand organisationinvestment(egthebillingsysteminthewaterexample)arenot undulyoutofstepandthatpricingcaptureslongrunmarginalcosts. 4. ACTIONOUTCOMES TheTreasuryshouldinvestigateproposedinfrastructuredevelopmentsto determinewhethergreaterreturnoninvestmentisderivedfromcapacity increasesororganisationalchange.

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InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

5.Substitutions
Electricityforoil? Anotherconsiderationthatmustnotbeforgottenwhenassessingwelfareisthe realisticpossibilityofsubstitution.Forexamplewilltheelectricpowergrid substitutefortheoilrefineryanddistributionnetworkforautomotiveenergy. Thisisahugeissuewithbillionsofdollarsofpotentialinfrastructuralinvestment ridingonit. Considerationmustalsobegiventotheactualmarketsinquestion.Taketourism. Theunitofvalueistheindividualtourist.Touristsseeknovelexperiencesbased onavarietyofattractions.Theydonotseektransportexperiences,indeedthey wishtominimisetheirtimeexposuretothesedullbitsandincreasetheirsenseof valuefromtheirexperienceinvestment.Thusimprovinginfrastructurefortourists shouldbepredicatedonminimisingtransittimeacrossallmodes.Thismight meanadifferentarrangementofinternationalairportsmorethanroading improvements. Substitutionsshouldbetreatedwithcaution.Thesuggestionthattheprovisionof highcapacitybroadbandcansubstitutedirectlyforhighcapacitycommuter transportlinkspresupposesorganisationalchangestoemploymentcontractlaw whichmaynotbeborneout.Mostemploymentcontractsdefineemploymentin termsofpremises.Changingtheorganisationoffirmsmaybemorecomplexthan increasingcapacity.Thusbeforeembarkingoncapacityincreasesoneshould examinetheorganisationaleffectsandviceversa. ACTIONOUTCOMES TheTreasuryshouldinvestigateGovernmentprojectevaluationprocesseslinked toinfrastructuredevelopmenttodeterminehowsubstitutioncanbebetter assessed.Thisshouldtakeintoaccountanticipatednewtechnologiesthrough time.Itshouldalsoexaminethelegislativeandorganisationalhindrancesto substitutionandwhetherthesecanbechangedatrelativelowcost.

Unitofvalue

Organisation

5.

6.JoiningUp
Becausemostinfrastructureisprovidedaspartofanetworkitisessentialthat investmentispartofanetworkplan. Optimisation InroadingforexampleithasbeenobservedthatsomePublicPrivatePartnership concessionshavebeenletwhicharerevenuemaximisingratherthannetwork optimising.Theresultisthatonebottleneckissimplyreplacedbyanotherwhich iscontractuallyprotectedfortheconcessionperiod.

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InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

Equallyinvestmentsininfrastructurethatarenotjoinedupcanhavehigher opportunitycostscomparedtothosethatare.Constructinghalfabridgedenies theresourcestootherprojectswhicharebetterintegratedintoanetwork.This dependsverymuchonthescaleandtimeframeoftheinfrastructureproposal.In NewZealandengineershavefrequentlybuilthalfbridges(islandsof improvement)intotheroadingnetworktoforceinvestmentinthecompletionin subsequentbudgetaryperiods.Aninfrastructureplanshouldexaminethetotal costandwelfareopportunitycost/benefitintermsofreturnoninvestmentof thenetworklinkovertime. 6. ACTIONOUTCOMES TheTreasuryshouldinvestigateGovernmentoperationalplanningintermsofthe weightingputonjoiningupcoherentvaluechainnetworkstoimprovereturnon assets.WhilesomeGovernmentagenciesandorganisationsmayhaveaclear viewontheirownnetworksintermsofcapacitytheydonotassessacross networks(egroad,air,sea,rail)oracrosstasks(eginformationcommunication, energy,transport)intermsofreturnonassetparticularlywell.

7.InfrastructureandDevelopment
Theprovisionofinfrastructureimprovementcananddoescreategrowth.Some refertothisgrowthasinduceddemandasifitwereanegativething.Changing theaccessibilityofaregion(forexample)canincreasetheamountofactivityin thatregionandthevalueoflandinthatregion.Themostobviousexampleofthis wasVogelsinvestmentintransportinfrastructurefrom1870onward. DeprivationZones NewZealandhasanumberofdeprivedregionswhichhavewellknown infrastructureshortcomings.Theseinclude:Northland(transport,electricity, broadband);EastCape(transport,electricity,broadband);KingCountry (transport,electricity,broadband);Wairarapa(transport,electricity,broadband); Tasman(transport,broadband);Marlborough(transport,water,electricity, broadband);WestCoast(transport,electricity,broadband);Southland(transport, electricity,broadband). Historicalreasonsforinvestinginnewinfrastructurewereeithermilitary(eg RomanroadsorParisianBoulevards)ortheexploitationofphysicalresources. Thefivemainphysicalresourcesofinterestare:energy(oilorcoal);mineralsor metals;wood;andfood.Demandfortheseresourceswillinturndrivepricesand thedemandfromtheprivatesectorforinfrastructuretoreducecostsand thereforeimproveprofits(e.g.thesocalledwallofwood).Obviouslythereisa considerablelagbetweenpricesignalsandinfrastructuredemand.

Resources

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InfrastructurePlanSubmission Tourism

2009

NewZealandAutomobileAssociation

TourismisoneofNewZealandslargestindustriesanditishighlyintegratedinto infrastructureprovision.TourisminjectsrevenueintotheNewZealandeconomy inattractionareasandalongattractionroutes.Thereareconsiderableoverlaps betweentourismandresourceexportinthatinboundtourismaircraftprovide outgoingcapacityforhighvalue,highlysensitiveexports.Forexamplethereturn perhectareonacutfloweroperationismanytimesgreaterthanadairy operationbutthecutfloweroperationdependsonimmediateaccesstoregular outboundflightstoexportmarkets.Improvingconnectivityintourismmarketsto attractionsaroundNewZealandcanimprovethescopeforhighvalueexportsall overthecountry.Aircrafttechnologydevelopmentsareencouragingthe potentialforlinksbetweenNewZealand,Australia,SouthEastAsia,Japanand ChinaandNorthAmericawhichhaveanetworkratherthanahubandspoke topography.TheadventofdirectflightstoQueenstownandthegrowthofthat cityhasdemonstratedhowpowerfulthisformofinfrastructuredevelopmentcan betolocaleconomies.Thisisinevitablyasituationwherenewdevelopmentmust precedegrowth.InternationallythereappearstobescopeforPPPsforthistime ofdevelopment. Thepresentworldeconomyissomewhatunusualinahistoricalcontext.Inthe 20thCenturymanufacturing(includingITC)nationsenjoyedgreaterincomeper capitathencommodityproducingnations(excludingoilproducingnations). Whilesomenations(notablyBritain)wereforcedbycurrencyconsiderationsto sacrificetheirmanufacturingbaseandcombinecommodities(oil)andservices.In theearlypartofthe21stCenturymanufacturingnationsareundersignificant pressureduetotheemergenceofChina(andtoalesserextentIndia)as manufacturingpowers.Withlowproductioncostsandhugedomesticdemand thesenationsarerenormalisingmanufacturingprices.Thisissqueezingother manufacturingnationswithhigherproductioncosts.Howevercommodityindexes (evenifoilisexcluded)remainstrong.IfthiscontinuesNewZealandispoisedto reapgreaterreturnsthemorecommoditiesitexports. Openingupterritoryfornewdevelopmentcandependverymuchonthe technologiesavailable.Forexampletheabilitytojettouristsdirectlyinto Queenstownhasleadtoaboomindevelopmentandlandpricesinthatarea.The abilitytolandlargerjetsisbecominganessentialinfrastructuralcapabilitywith relativelyminormarginalcosts(oversmallerairstrips)buthighpotentialreturns inplaceslikeNorthland,Tasman,theHawkesBayorRotorua.Improving organisationsothatopportunitiescanberealisedisessentialforlongterm development. Whilethepurposeofcommunityassetsistophysicallyassistthecommonwelfare caremustbetakentoavoidsituationswherepublicpresentearningsarebeing retainedthroughtaxationforinvestmentforwelfarebenefitswhichare distributedamongaverysmallgroup(stealingfromthepoortogivetotherich).

Strangetimes

Decentralisation

Whobenefits?

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InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

ItisnotablethatsomeprivateindustriescanstampedeGovernment infrastructurebysimplyfailingtoinvestforthefuturethemselvesandthen declaringadisasterandblamingtheGovernmentatalaterdate.Forexample forestershaveagood20yearswarningofanimpendingharvestandtheneedfor transportofthatharvestshouldnotbeasurprise.Whatisalsonotasurpriseis theirunwillingnesstobuildprivateroadstocarryoutthatharvestiftheycan lobbyGovernmenttosubsidisetheircropwithpublicones. ThereisgoodreasonwhydevelopersshouldberequiredtoparticipateinPublic PrivatePartnershipsforinfrastructureratherthansimplymarketingthebenefits oftheirprivateinvestmentasapublicgoodtolocalandcentralGovernmentinan efforttolobbyforsubsidies.Developerscanimposeconsiderablecostsonroad controllingauthorities/localGovernmentandlocalGovernmentshouldbeina positiontorecoverthosecostseitherthroughchargesorthroughdividendsor both. ACTIONOUTCOMES TheTreasuryshouldinvestigateinfrastructuredevelopmentbasedonpotential highvaluechainnetworksforbothimportsandexportsintermsofpotential publicprivatepartnerships.Investigationsshouldexaminereturnperhectare effectsfortradedevelopmentbasedontheeffectsofchangingforeignandNew Zealanddevelopedtechnologychange.Investigationsintofuturerequirements shouldalsoidentifypotentialinfrastructureshortfallsthatprivatesector developerscouldreasonablybeexpectedtocontributetowards.

PPPs

7.

8.Thevalueoftime
Thevalueoftimeisakeyissueforinfrastructureinvestment. Privatevspublic Typicallythedifferencebetweenpublicandprivateinvestmentisthatprivate investorsdemonstrateakeenersenseofthevalueoftimethanpublicinvestors. Timeisoftheessenceforprivateinvestors,publicinvestorshavetypicallyshown lessalacrity. TheNewZealandGovernmenthasapoorrecordinvaluingimposedvaluesof timebycreatingoverheadsfordevelopers.Imposingtimecoststhroughlegal processesonbothitselfandprivateinvestorsisadeadweightcostonthewhole economywhichhassignificanteffectsonevaluatingwelfarebenefitsfrom investment.TheGovernmenthas,todate,doneapoorjobofassessingthis deadweightcostacrossallindustriesbutinparticularthoserelatedto infrastructure.

Timeoverhead

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InfrastructurePlanSubmission Opportunitycost

2009

NewZealandAutomobileAssociation

Thevalueoftimeappliestobothopportunitycostsandbenefits.Forexample failuretodeepentheRangitotoshippinglanefordeeperdraftvesselswouldhave hadaveryhighopportunitycostforthePortsofAuckland.Failuretodeepenthe lanewouldleadtothelongtermshrinkingofbothmarketshareandincomeas shippingcompaniesoptforeverlargerandmoreeconomicvessels.The opportunityvalueoftimealsodependsverymuchonthevalueofthe opportunity.ForexampletheRugbyWorldCupisaonetimeopportunity.Itis importantthattheactualvalueoftheopportunitiesareaccuratelyassessedin ordertoprovideabasisfortradingoff. Thevalueoftimeisusedintheallocationofresourceswithinfiscalconstraints. ThistakestheformofGovernmentdiscountrate.Theargumentinfavourofa highdiscountrateisthatGovernmentshouldonlyproceedwithinvestmentsif therateofreturnisatleastashighasaprivatesectorinvestment.Thisisaproxy foransweringthequestionposedearlier:isthenetwelfarevalueofpresent earningsgreaterifinvestedinpublicinfrastructurethanifitisretainedinthe privatesector? Thediscountratewouldserveassuchaproxyifitwasalsotiedtotherateof taxation.ThispointismadeinPublicSectorDiscountRatesforCostBenefit Analysis(July2008) Apublicsectorprojecteitherdisplacesaprivatesectorproject,orithas tobepaidforbyincreasingthetaxburdenontheprivatesector.p(4)A discountrateequaltothepretaxprivatesectorrateofreturntherefore seemsappropriate. Thisassumptionisfalse.Therateoftaxationisthelevelfixedinapoliticalmarket (egratesorroaduserchargeincreases)andthediscountratehasnobearingon this.Infactthediscountrateispartofanallocationmechanismwithinapre definedfiscalenvelope.Governmentsraiseorlowertaxesforpoliticalreturnnot financialreturn.

Discountrate

Fiscalenvelope

Comparisons

Lookedatfromaprivateinvestorspointofviewtheriskfreerateofreturncanbe determinedfromtenyearGovernmentbondslessinflation. Itiswidelyassumedthatlongtermgovernmentbondratesareagood proxyfortheriskfreerateofinterest.10yearNZgovernmentbondsare currentlyyieldingaround6.4%.Deductingthecurrentlyforecastinflation rateofaround3%resultsinarealriskfreerateof3.4%.(p4) Theuseofprivateequitypricesasacomparatorissensibleforsome infrastructurebutnotforothers.Telecomisaninfrastructureinvestor,asarethe electricitygentailers,buttransportfirmsaresmallandcompetitivewithhigh riskwhereroadcontrollingauthoritiesarelargemonopolieswithalmostnoriskat all.Privateequitypricesarebasedontheexpectationofvaluebythemarket. Thesearebasedondividendorcapitalgainsexpectations. Page12of19

InfrastructurePlanSubmission Government

2009

NewZealandAutomobileAssociation

TherearenocapitalgainsordividendexpectationsfromGovernment.Infactthe onlyequivalentistheexpectationofGDPgrowth.Thenearestmarketequivalent tothispriceisthetenyearbondmarketbutthisis,ofcourse,theratethe Governmentitselfoffersinvestorsbasedonitsownprojectionsofitsfuture incomeandmarketperceptionsofsovereignrisk.Itisnothingliketheprivate investorsexpectationsfromprivateriskcapital. Thereishoweveranimportantpointhereandthatisunlikeprivateinvestors theinvestmentdecisionofhowtoinvesttaxincomehasalreadybeenmade. Thereisnofreemarketfortaxincome.Forexampleallincomecollectedby transporttaxeswillbespentontransportonewayoranother.Allthediscount rateisactuallydeterminingiswhetherthosetaxeswillbespentpurelyon assetsandoperationsforthosepayingtaxesnoworwhethertheywillbespent onthosepayingtaxesnowandthosepayingtaxeslater.Thequantumoftax howeverdoesnotchange.

Transport

Themostimportantpointhereisthatinvestmentsmadewiththefutureinmind aremorelikelytogeneratelongtermgrowth.Recyclingtaxrevenueinto continuousmaintenancemayboosttheincomesofmaintenancecontractorsbut itdoeslittletoliftoverallproductivity. Foroperatorsinaprivatemarket,investmentshouldobviouslybebasedon whateverrateofreturnappliesinthatmarket.Thisisreadilyappliedto telecommunicationsandenergymarkets.Butthetransportinfrastructuremarket isnotfreenorisitsmall. Whereothermarketsarebasedonshorttimehorizonsbecausetechnologyis evolvingrapidlyanddepreciationisasignificantfactortransportinvestmentis significantlydifferent.Undertherightsettingstransportassetscanreadily achievelifetimesof50to100years.Themainreasonwearenotbuildingassets withthoselifetimesiswechoosesettingswhichleadusnottodosoin particularthediscountrate.Thediscountratethereforebecomesaselffulfilling prophecy. Theeffectofinvestmentintransportinfrastructureonproductivityiswell documented(summarisedinTransportandEconomicDevelopmentEuropean ConferenceofMinistersofTransportRoundtable119).Thusthechoiceof buildingfortheshorttermisfalseeconomyinthelongtermbecausethe economicproductivitygainsfromtransportinvestmentarenotrealised. Toachievethegreatestrateofsocialreturnwithinthisfiscalenvelopethe discountrateshouldbesetatarelativelylowlevelsothatinfrastructure investmentsaremadewithalongerlifetimeinmind.

Effectonroading

Inpracticethiswouldhaveasignificanteffectonmanyformsofinfrastructure constructionparticularlyroading.Thecurrentdiscountratefavoursaroading systemwhereexpenditureislargelyfocusedonmaintenance,andconstructionis Page13of19

InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

carriedoutinlowercost,relativelyshorterlivedmaterials.Thereisno engineeringreasonforthisasmanynationsontheRimofFire(Japan,Philippines, Indonesiaetc)buildinhighercost,longerlivedmaterials.Reducingthediscount ratewouldbringNewZealandintolinewiththeengineeringpracticesinthese othernationsandpotentiallyintroducegreaterscopeforcompetitiveentryfor largescaleroadingprojects. Knockoneffects Roadingplaysaveryimportantroleinnationalinfrastructureprovisionbecauseit alsoprovidesthespaceforotherformsofinfrastructurenetworks. Telecommunications,electricity,cleanandwastewater,andgasinfrastructureis usuallychannelledundertheroadreserve.Constructionofroadwaysinmore durablematerialswouldforcemorelongtermplanningonotherinfrastructure industrieswhichcurrentlyopenandcloseroadsregardlessofthecostimposedon therestofthecommunity.Innovationssuchassharedserviceconduitswouldbe encouragedreducingthecurrentlyunallocatedcostoftimefromroadworks. ThevalueoftraveltimeusedtoallocateresourcesbytheNZTAhasbeen averagedacrossalllocationsandallmodes.Thisunderstatesthevaluelostfrom delayfrommodeswithhighertraveltimevaluesinplaceswheretimeconstraints aregreatest.Longtermthiseffectivelyimposesaneconomictimevaluecoston ourmostvaluabletravellers.Thisisbothanopportunitycostandarealcostinthe eventofdelays. ACTIONOUTCOMES TheTreasuryshouldquantifythecostsofadministrativeoverheadsonNew Zealandbasedbusinessaspartofageneralquestforgreaternationalefficiency. Forecastingshouldidentifyeasilyremovedadministrativebottlenecks(suchas fundingforenvironmentcourts)beforetheyoccur. TheTreasuryhasrecently(2008)reviewedtheGovernmentdiscountrateand reduceditslightlytoeightpercent.Theassumptionsusedinthisrevieware howeverquestionableinrespectoftransportandthisshouldbereexamined. Thisshouldnotsimplyinvolvereturningtothesameconsultantstorevisitthe sameargumentsfromthesameperspective. ThevalueoftraveltimeusedintheNZTAEconomicEvaluationManualshouldbe disaggregatedandmechanismsforimposingthecostofdelaysonfirmsopening andclosingroadsimplemented.

Valueoftraveltime

8.

9.Safety
Roadtraumaimposesadeadweightcostontheeconomyofroughly$1billiona year.Anincreasingproportionofroadtraumaisoccurringonroadsownedand operatedbylocalGovernment.Thisisparticularlysoinareaswhereeconomic developmentisstrongandinfrastructureneedstrailbehinddemand.Thereisno doubtthatnewapproachestoroadfundingandmanagementareneededifroad traumaistobereduced. Page14of19

InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

Thestatisticalvalueoflifeisakeyinputintocostbenefitequations.Thevalue usedisderivedfromstatedpreferencesurveysindicatingthevaluesrespondents arepreparedtopaytoavoidinjury. Thereisagrowingdisparitybetweentheeconomicvalueoflife(averagedacross ACCdeathbenefits)andthestatisticalvalueoflife.Itisalsonotablethatthe growingcostofpermanentinjuryisnowherenearthestatisticalvalueofserious injury. ACTIONOUTCOMES TheTreasuryandACCshouldconductareevaluationoftheStatisticalValueof LifeprovidingforacategoryofPermanentInjury(tocoverblindness,headinjury andlossoflimbfunction)Thesevaluesshouldalsobeusedelsewherein Governmentforevaluationofcostbenefits.

9.

10.MarketSize
Competition ThesizeofNewZealandsmarketisaconsiderableconstraintontheconstruction oflargescaleinfrastructure.Acomparisonofthecostofroadingprojects conductedbytheAA(TransportingOurselvesp11)foundthecostperkilometre ofconstructioninNewZealandtobemorethandoublethatofothernations.The IndependentMinisterialEnquiryintoRoadingCostssaidthatsomeofthiswas duetolimitedscopeforcompetition,althoughtheprimarycausewas specificationchangestomeettherequirementsofpotentialenvironmental objectors. ItwouldbenicetothinkthatNewZealandwasspendingmoreonconstructing roadssothatitcouldspendlessonmaintainingthem.UnfortunatelyNew ZealandspendsmoreonconstructingroadsANDspendsmoreonmaintaining themperkilometrethancomparatornations.Whilethediscountrate(discussed earlierintheValueofTimesection)hassomebearingonthis,themainreasonis thewayroadcorridorcontractsaremanaged. Currentlyroadsaretenderedforconstructionandtenderedformaintenanceand inbothcasesthelowestconformingbidisselected.Unfortunatelythismeans thatinbothcasesthetendencyisfortheleastlastingsolutiontobechosen.By contrastPPPprojectsinternationallytendtobebuiltquickest(toreducedebt costs)ofthemostdurablematerials(toreduceoperationalcostsoverthelifeof theconcession).Thisprovidesthelowestongoingcostfortheroadsowner operators. Itwouldthereforeseemsensibleifroadconstruction/renewalandmaintenance contractswerebundledintolongtermfranchises.Thesecouldbebasedona costplusCPIincrementorashadowtollarrangement.Thiswouldincentivisethe roadoperatortomeetthespecificationsinthemostcosteffectivemanner.

Contracts

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InfrastructurePlanSubmission Behaviour

2009

NewZealandAutomobileAssociation

Thescopeforcompetitioninmarketscanalsobedeliberatelyreducedbythe behaviourofmarketparticipants.Intelecommunicationsithasbeennotablethat therehasbeenaracebymarketplayerstolaybandwidthcapacitytoclaim dominanceinlocalmarkets.Thisisduetothewaythemarketisstructuredand themonopolyrightsaccordedbyresourcemanagementlegislation,andthe supineroleoflocalgovernmentintheprocess. Ultimatelyaccesstoalmostallnetworkcustomersisprovidedviatheroading corridorwhichisownedandoperatedbylocalgovernment.Central Governmenthaslegislatedthatthiscorridorhasnovalueatallbylegislatinga rightofaccesstonetworkcompanies.Theproblemwiththisisthatitfavours largenetworkoperatorswhocanconstructtheirownserviceconduitsrather thansmallernetworkoperatorswhomightotherwiseshareserviceconduits. ForexampleiflocalGovernmentownedandoperatedtheservicescorridorand chargedarentaltoothernetworkoperatorsthenthecostsofaccesstothe corridorwouldbesignificantlyreducedespeciallyforreadilyinjected infrastructuresuchastelecomsfibre.Thiswouldalsohavebenefitsintermsof traveltimedelay. WhileGovernmenthasanaveragedtraveltimevalueforroadingprojects,travel timevaluesarenotappliedtoothernetworkoperatorswhentheywanttoaccess theroads.Thusthevalueofdelaysbecomesanexternalitybornelargelyby motoristsandtransportoperators.Someformofproxypricingshouldapplybut cannotdosowhilenetworkoperatorshaveaccesstotheroadingcorridorasof right. ACTIONOUTCOMES TheTreasury,theMinistryofEconomicDevelopmentandtheLocalGovernment Commissionshouldexplore: a. Optionsforlongtermroadmanagementfranchisesasaformofstrategic servicedeliverpartnership(SSP). Themarketeffectsandexternalitycostsofnetworkoperatoraccessrights totheroadcorridor

Roadaccess

10.

b.

11.LocalGovernment

LocalGovernmenthasavitalroletoplayintheprovisionofinfrastructure throughoutNewZealand.NotonlyislocalGovernmentaninfrastructureinvestor andoperatorbutlocalgovernmentalsohasanimportantregulatoryroleforthe consentingandmonitoringofmanyinfrastructureassets. LocalGovernmentisfundedthroughtwomainrevenuestreams:taxationon capitalvaluesoflandandimprovements(rates)andfeesandcharges.Botharea Page16of19

Rates

InfrastructurePlanSubmission

2009

NewZealandAutomobileAssociation

sourceofconsiderabledissatisfactionfromthepublic.Inmostcasesbyfarthe largestshareofratingsincomeisspentonroading,andyetmanylocal governmentsstruggletomaintainroadinginamannerthatissafeandtoa reasonablestandard.Indeedtherearenonationalstandardsforroadingwhich localGovernmentisobligedtomeet. Structure DissatisfactionwiththeorganisationoflocalGovernmenthasreachedcrisislevels inAucklandleadingtotheunificationofterritorialandregionalauthorities.There appearstobeconsiderableinterestinthismodelinotherlargeurbanregions. Oneofthebenefitsofregionalcentralisationaremoreconsistentplanning processesandeconomiesofscaleparticularlyshouldNewZealandfollowBritain downthepathofstrategicservicedeliverypartnerships.Howeveritmustbe notedthatmuchofthecurrentlocalgovernmentlegislationisframedintermsof currentstructures. AccordingtotheBritishAuditCommissionreportForbetter,forworseSSPs havehadmixedresultsintheUK.WhileCouncilshaveachievedupto15% reductionincosts,inmanycasesthepartnershipshavedissolved.Thisisdueto poorcontractmanagementonthepartofCouncilswhosestaffwereinadequate tothetask.ItisunlikelythatNewZealandlocalGovernmentwouldperformany better.Ingeneralthestateofhumanresourcesinlocalgovernmentneedsdue considerationbetweennovelapproachestoinfrastructuredevelopment conceivedinWellingtonarepromulgatedthroughoutthecountry. Thatsaidthereremainsignificantopportunitiesforinfrastructurejointventure companieswithinNewZealandsolongaslocalgovernmentisempoweredto allowformsoflimitedmonopoly. Themostvaluablemonopolyoperatedbylocalgovernmentisitslargestassetand itsmostexpensiveoperationalcost:theroadnetwork.Itsabilitytogeneratea returnonthisassetislimitedbystatutetoitsabilitytoincreasethevalueofland surroundingtheasset.Whilelocalgovernmentstruggleswithlimitedincome networkoperatorssuchaselectricitygentailersandtelecommunicationsfirms reportlargeprofits.Thisislargelybecausetheyonlypayforthedirectcostsof accessingtheircustomersnotthecostsofprovisionofthecorridor,northecosts oftraveltimedelaywhentheiractivitiesimpingeontheotheroperationofthe corridor. Thiscouldtaketheformofdevelopmentzones,facilitiesdevelopmentand managementfirms(suchasbroadbandcableconduitventures)orjointventures withCrownagencies.Theissuewillbetomanagepricing,competitiveentryand operationsinwaysthatarefinanciallysoundandpoliticallyresponsible. Page17of19

SSP/PPPs

Opportunities

InfrastructurePlanSubmission 11. ACTIONOUTCOMES

2009

NewZealandAutomobileAssociation

TheTreasurytogetherwiththeLocalGovernmentCommissionshouldreviewthe legislativeimplicationsoflocalgovernmentcentralisation.Considerationfor assistingtheuptakeofSSPsandPPPsshouldalsobeundertaken. TheTreasury,theMinistryofEconomicDevelopmentandtheLocalGovernment Commissionshouldexplorethepotentialeconomicbenefitofallowinglocal governmenttochargeacorridorlevyforaccesstolocalroads.

12.Pricing
Pricinginfrastructuredependsverymuchonthetransactionscostsofmanaging thatpricingregime.Inmostpartsoftheworldlongrunaveragedpricingis preferredoverlongrunmarginalpricingbecausethetransactioncostsofthe latterareprohibitive. RoadPricing Economistshavelongarguedinfavourofmarginalpricingofroadcapacitybut thetransactioncostsofmanagingsucharegimeareprohibitiveandarelikelyto remainsoforatleasttwodecades.TheAAsproposalforatransitionpathtoward electronicRoadUserChargingforheavyvehicles,whichwasendorsedbythe IndependentMinisterialInquiryintoRoadUserCharges,hasofferedtheonly feasiblepathwaytowardthisformofcharging. ThispathwayproposedprivatisingRUCbillingtofleetmonitoringcompanieswho currentlyprovidefleetmanagerswithRUCrebatedata.Thetransactioncosts wouldthereforebeembeddedinotherserviceswhichfirmspurchase.The benefitofthisisthatitwoulddiversifyriskandameliorateprivacyconcerns.It wouldalsoserveasaplatformfortechnologicaldevelopment.Overtimeandas technologyreducedfuelexcisedutyincomeandtransactioncostsitwouldbe feasibletomovemoreoftheprivatefleettotheseservices.Governmenthas begunaprojectexaminingthescopeforthiswiththeheavyfleetwhichisalready shoulderingthehightransactioncostsofsuchasystemtogainotherbusiness benefits.Itwilltakesomeconsiderabletimebeforethesecostsreachsuchalevel astobecomparablewiththeadministrativecostsoffuelexciseorsimilarproxy pricingsystems. Tolls TheAAendorsestheuseoftollingwhereafreealternativeroutealsoexists.This meansthatthemarginalpriceforatollroutecannotbecomeextortionatebut mustaccuratereflecttheperceivedservicelevelimprovementoverthefree alternative.Thisisintendedasanincentiveforoperatorstoreducetheir operatingcosts.IncaseswherethereisnofreealternativetheAAendorses tollingifthereisnootherwaytheroadwouldbeconstructedinatimelyfashion. InNewZealandmanyroadscouldbefundedbytollingiftheconsentingcosts werereducedtoaneconomiclevel.

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InfrastructurePlanSubmission Electricityforcars

2009

NewZealandAutomobileAssociation

Marginalretailelectricitypricingwouldalsoberequiredtomakeelectricvehicles morecosteffective.Currentlyretailpricingishighlyaveraged.Themainpeaksfor residentialelectricitydemandarethemorningandeveningsurges.Duringthe nightthewholesaleelectricitypriceisonlyslightlymorethantheproduction price. Inanelectriccarfleetenvironmenttheelectricitymarketchangesdramatically. Demandincreasesduringthenightascarsrecharge.Thereissomedischargeuse ofpowerfortransportduringthedaybutformanyvehiclesmostofthedaythey wouldremainpotentiallyanetworklinkedstoragesourceforloadmanagement. Amillionvehicleswouldbecomeanotinconsiderableresourceforelectricityload balancing.Thesecouldtradestoredpowerwiththegridandstillretainsufficient chargeforthereturntriphome.Thiswould,however,requireacompletely different(nonaveraged)approachtoconsumerelectricitypricing. ACTIONOUTCOMES TheTreasuryandMOTshouldjointlydevelopamonitoringprocessforevaluating theefficiencyandwelfarecostofroadpricingagainstaveragedchargingregimes andschedulereviewsagainstindicativemeasurevalues. TheTreasuryandtheElectricityCommissionshouldjointlydevelopamonitoring processforevaluatingindicatorsfortheneedfornewconsumerchargingregimes inlightoftheadventofelectriccartechnology.

12.

Conclusion
Wehopewehavedemonstratedthatthereisstillagreatdealofinvestigationandworkrequiredto developaninfrastructuredevelopmentplanwithscopebeyondtheimmediateterm.Therearemany shortcomingsinNewZealandsinfrastructuremanagementanddevelopmentsystemsandforspecial projectstomakethecontributionexpectedofthemthesesystemsneedtobeaddressed.Thealternativeis thattheextracostsofspecialprojectswilleventuallybedrainedbysystemsthatarenotasefficientnoras effectiveastheymightbe.

FurtherInformation
ForfurtherinformationcontacttheWellingtonAAOffice. POBox1 Wellington Tel9319999 Theprimaryauthorofthissubmission:PeterKing(peter.king@aa.co.nz) Page19of19