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GVT: Hon Dr Michael Cullen: Launch of NZ Council for Infrastructure Development

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Launch of NZ Council for Infrastructure Development

NZ needs well-informed debate around infrastructure.

---------------------------------

28 July 2004 Speech Notes
Embargoed until: 4.30pm Wednesday 28 July 2004 Official Launch of the NZ =
Council for Infrastructure DevelopmentBell Gully Offices, Symonds St, =
Auckland

I would like to begin by welcoming the launching today of the NZ Council =
for Infrastructure Development. We need well-informed debate on the =
issues around infrastructure and its role in building the economy and =
sustaining our quality of life, and I look forward to the Council making =
a valuable contribution to that interchange. =20

Given the very large, long-term resource commitments involved in =
infrastructure development, poor quality debate, especially if it is =
driven by sectoral interests, can have quite major consequences. We =
learned that lesson with the Think Big projects.

To my mind there are three major temptations we need to resist. These =
are:

v First, the temptation to seek bureaucratic solutions to infrastructure =
issues;

v Second, the temptation of building infrastructure for its own sake; =
and

v Third the temptation to link infrastructure to ideological positions =
around the balance of public and private financing.

The bureaucratic temptation is something that is largely confined to the =
precincts of central Wellington. It is the belief that, since =
infrastructure is a large, all-encompassing concept, we need a large =
all-encompassing plan to address it. While I understand where this =
impulse comes from, I have been a consistent opponent of the attempt to =
formulate an infrastructure master plan.

The fact that we group together under the category of infrastructure =
transport, energy, water, telecommunications and (depending on how =
expansive we might feel) a range of other public amenities, does not =
suggest that the issues regarding investment, planning and management =
are uniform across all of these areas. Indeed, there are as many =
differences as there are similarities. Each has its own micro-economy, =
its own questions of public interest, its own risks, and its own pattern =
of public and private investment.

For this reason I have always advocated a sector by sector approach, =
ensuring only that we address cross-sectoral questions when they arise =
(and our current review of the Resource Management Act is a good example =
of this) and also practice the discipline of asking whether lessons =
learned in one sector may be applicable in others.

We do not have the time to wait for a master plan to be created, and the =
benefits of such a plan are, in my view, quite marginal.

That view was reinforced by the recent release of New Zealand's first =
nationwide infrastructure stocktake. It contained an audit carried out =
by Price Waterhouse Coopers, which identified a number of problem areas, =
specifically:

v Security of electricity supply, both in the short term (due to the =
shortcomings of a market model which does not factor in security =
margins), and in the long term (due to issues around the supply of gas =
in particular, but also the environmental issues around alternative =
fuels);

v A lack of investment in electricity transmission, brought about by a =
combination of land access issues and uncertainties over pricing and who =
should pay for investments;

v Road congestion, primarily in the Auckland region;

v Water allocation problems, due to a deficient statutory framework for =
prioritising water use; and

v Water quality problems in some areas.

Significantly, the Price Waterhouse audit also concluded that the plans =
already formulated to address each of these problem areas were sound and =
were already achieving their expected milestones. The conclusion I draw =
from this is that, so long as we continue to take infrastructure issues =
seriously and maintain our current programme of investment, there is no =
reason to panic.

The second temptation is what you might call the aesthetic appeal of =
infrastructure. There are those who feel the New Zealand landscape =
could do with some more grand structures of concrete and steel. But we =
need to beware of the lure of building infrastructure for its own sake. =
Do we need a four-lane highway stretching the length of the country? =
And (if I might take issue with some of the terminology in the objects =
of the Council for Infrastructure Development) do we really know what we =
mean by 'world-class' infrastructure, and are we sure that it is a =
meaningful benchmark for New Zealand? =20

Infrastructure exists to serve the needs of the nation, rather than =
being an end in itself. Because of our geography and our population =
size and distribution our needs for roading, water and energy will be =
different to, say, the UK with a larger, denser population, or Australia =
a larger country with a highly concentrated population in key cities. =20

Perhaps one of the tasks the Council can address is to define what we =
might mean by 'world-class' infrastructure. What are the appropriate =
benchmarks for aligning infrastructure investment with the needs and =
priorities of our economy and our communities?

One approach I would be rather suspicious of is the attempt to define =
some percentage of GDP as a norm for infrastructure expenditure. The =
fact is that a substantial amount of capital is invested in =
infrastructure in New Zealand. For example, as at June 2003, the Crown =
owned:

v Transpower's electricity transmission network, valued at $2.2 billion;

v Electricity generation assets held by state owned enterprises, valued =
at about $6 billion; and

v The state highway network, valued at $12.6 billion.

The Crown also owns an 80 per cent share in Air New Zealand, and is in =
the process of transferring the rail network back into public ownership. =
=20

Meanwhile, drinking water and sewerage assets owned by local government =
are conservatively estimated to be valued at $3 billion plus.

There are also substantial assets held by the private sector. Telecom =
dominates the provision of telecommunications infrastructure with an =
asset base of around $7.8 billion. And Contact Energy is a major player =
in the electricity industry with assets of some $3.8 billion.

As for new investment in infrastructure, the government has recently =
provided significant financial support for infrastructure investment =
through:

v Project PROBE (amounting to tens of millions of dollars);

v The Whirinaki reserve electricity generation plant ($150 million);

v The Sanitary Works Subsidy scheme ($15 million per year over 10 =
years); and

v The Auckland transport package ($1.6 billion).

Commercial interests are also investing heavily in infrastructure. For =
instance, Telecom has signalled that it intends to move to a Next =
Generation Network, which will involve investment of upwards of $1 =
billion over 10 years; while its competitor Woosh is investing heavily =
in wireless broadband.

However, substantial investment is still required in a number of =
sectors:

v Transpower has estimated that total grid investment requirements over =
the next 10 years are around $1.5 billion;

v Significant investment in electricity generation is required to cover =
ongoing growth in demand (a concern which becomes even more acute =
following Meridian's decision not to proceed with Project Aqua);

v The Crown has agreed to spend up to $200 million on capital works for =
the rail network, but this may not be sufficient to address deferred =
maintenance issues, let alone new investment;

v An estimated $100 - $300 million of investment in drinking water =
supply is required. In addition, the Crown will be asked to contribute =
a proportion of this on a similar basis to the Sanitary Works Subsidy =
Scheme.

My government has overseen an increase in the overall level of =
expenditure on infrastructure, both by direct government expenditure and =
by encouraging others to invest. The 1990s was not a great decade for =
infrastructure investment in New Zealand. For example, in the years =
from 1994 to 2000 net purchase of physical assets by government amounted =
to only $5.8 billion or an average of $800 million per annum. In the =
period 2001 to 2008 we have increased that commitment to $8.6 billion or =
$1.1 billion per annum.

Since 2001, line-by-line consolidation of the Crown accounts also allows =
us to understand the level of investment by central government as well =
as Crown Entities and State Owned Enterprises. From 2001 to 2008 actual =
and forecast spending on purchase of physical assets rises to around $29 =
billion. This includes the rail network and Auckland transport. We =
also have our majority interest in Air New Zealand. =20

My point in enumerating all of these investments - current or planned - =
is that investment should be driven by an analysis of future need. =
Current expenditure amounts roughly to 2 per cent of GDP. Increasing =
that to 5 per cent - or any other arbitrary benchmark - should not in =
itself give us any assurance that we were addressing the issue =
adequately. =20

This leads me to the third temptation, which is that of ideology. There =
are two diametrically opposed views I am thinking of. On the one hand =
there are those who argue that we need more private financing of =
infrastructure in order to achieve some optimal mix of public and =
private investment. And on the other, there are those who argue that =
infrastructure should be the sole preserve of central and local =
government and should not be owned in any way by private interests. =
Frankly I am not convinced by either argument.

I would like to make it clear that I and my government welcome the =
prospect of increased private investment in infrastructure. Our =
approach is pragmatic, and we do not have any ideological position that =
holds that a private dollar is any better or worse than a public one =
when it comes to such investment.

The current public-private mix in New Zealand's infrastructure has =
arisen out of a mixture of historical accident, the prevailing =
technology and the economic realities of public goods and network =
industries. In some areas the sheer cost of infrastructure investment =
and the uncertainty of the returns has precluded any private investment. =
Technological innovations have altered those calculations in some =
instances and provided opportunities for private investment, usually =
under a regulated market. One could cite wireless telecommunications =
technology as an example of that.

In other areas the economic analysis remains problematic. Private =
roading investment in New Zealand will always have to overcome the =
difficulty of generating a sufficient income stream, due to the =
relatively small volumes of traffic available to generate toll revenue =
and the (quite legitimate) requirement that a free alternative route =
exists alongside any toll road.

Submissions on the Land Transport Management Act passed last year =
highlighted these tensions, in particular the arguments raised over the =
proposed regulatory framework for private investment in roading. I do =
not intend to comment on the detailed arguments; however, I would point =
out that the heart of the matter is the sharing of risk over the =
lifetime of infrastructure assets. =20

If we can create a regime in which there are prospects for private =
partners to earn a competitive return while bearing an acceptable share =
of the risk, then we are in business. Suffice it to say, no government =
is about to agree to bear an unreasonable or inefficient portion of the =
risk (and that includes political risk) simply to attract private =
investment into roading. =20

We need to remember also that there are numerous avenues for public =
private partnerships in infrastructure. One I have been considering =
recently is a broader investment vehicle such as an infrastructure bond.

This would differ from a conventional government bond in that it would =
be directly linked to new infrastructure investment and would be likely =
to have a significantly longer term of 20 to 25 years as opposed to the =
normal 5 to 12 year term. The Treasury and the Debt Management Office =
are currently looking into the feasibility of such a bond, and how it =
might be received by the markets. =20

A word finally on the review of the Resource Management Act. Clearly, =
there are some aspects of the RMA that are unhelpful from the point of =
view of national infrastructure priorities. =20

One example is the need to achieve the right balance of national and =
local interests. This is particularly important for infrastructure =
projects which cross regional boundaries, and where local authorities =
are increasingly being asked to consider issues of national significance =
using an Act that provides little or no guidance on how competing =
national benefits and local costs should be weighed. I am confident we =
can find a way of expressing some straightforward principles in this =
regard.

We also need to look at improving the consent decision making process, =
to ensure more consistency between councils; reduce delays and costs; =
provide greater clarity and certainty for applicants; and largely =
eliminate opportunities for abuse of the process for personal gain, =
trade competition, or other vexatious reasons. We should bear in mind =
that this is as much an issue of the capacity of local councils to =
handle the process as it is one of the legislative requirements =
themselves. =20

That is why part of the review is to consider measures for building =
capacity and promoting best practice among the 86 councils who decide =
approximately 50,000 resource consents each year. One thing that is =
clear is that the putative structural failings of the Act have much less =
impact where there is a high degree of technical competency and =
efficiency within the responsible council. And conversely a council =
which is under-powered in terms of the requisite expertise will struggle =
to provide a good service regardless of whether the process is =
streamlined or simplified.

So, to return to my starting point, the New Zealand Council for =
Infrastructure Development is a welcome addition to the debate we need =
to have around infrastructure issues. We talk a lot about innovation in =
this country, and generally associate that with new technologies. =
However, some of the most influential innovations have arisen from =
applying fresh ideas to old and familiar technologies. Certainly, in =
areas such as energy where the underlying technology is fairly settled =
and where the issues are often about how individuals and communities =
choose to organise their lives and their work, that should be a strong =
focus of our efforts.

Thank you.

The Michael Cullen mailing list operated by OneSquared Limited.

To unsubscribe, enter the following address in your browser address bar =
and press the Enter key.

http://www.beehive.govt.nz/Lists/index.aspx?UID=3D2160&unsubscribe=3Dyes

You can also subscribe to this service or change and maintain your =
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http://www.beehive.govt.nz/lists/default.cfm

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<html><head></head><body>Launch of =
NZ Council for Infrastructure Development NZ needs =
well-informed debate around =
infrastructure. --------------------------------- 28 July =
2004 Speech Notes Embargoed until: 4.30pm Wednesday 28 July 2004 =
Official Launch of the NZ Council for Infrastructure DevelopmentBell =
Gully Offices, Symonds St, Auckland I would like to begin =
by welcoming the launching today of the NZ Council for Infrastructure =
Development. We need well-informed debate on the issues around =
infrastructure and its role in building the economy and sustaining our =
quality of life, and I look forward to the Council making a valuable =
contribution to that interchange. Given the very large, =
long-term resource commitments involved in infrastructure development, =
poor quality debate, especially if it is driven by sectoral interests, =
can have quite major consequences. We learned that lesson with the =
Think Big projects. To my mind there are three major temptations =
we need to resist. These are: v First, the temptation to seek =
bureaucratic solutions to infrastructure issues; v Second, the =
temptation of building infrastructure for its own sake; and v =
Third the temptation to link infrastructure to ideological positions =
around the balance of public and private financing. The =
bureaucratic temptation is something that is largely confined to the =
precincts of central Wellington. It is the belief that, since =
infrastructure is a large, all-encompassing concept, we need a large =
all-encompassing plan to address it. While I understand where this =
impulse comes from, I have been a consistent opponent of the attempt to =
formulate an infrastructure master plan. The fact that we group =
together under the category of infrastructure transport, energy, water, =
telecommunications and (depending on how expansive we might feel) a =
range of other public amenities, does not suggest that the issues =
regarding investment, planning and management are uniform across all of =
these areas. Indeed, there are as many differences as there are =
similarities. Each has its own micro-economy, its own questions of =
public interest, its own risks, and its own pattern of public and =
private investment. For this reason I have always advocated a =
sector by sector approach, ensuring only that we address cross-sectoral =
questions when they arise (and our current review of the Resource =
Management Act is a good example of this) and also practice the =
discipline of asking whether lessons learned in one sector may be =
applicable in others. We do not have the time to wait for a =
master plan to be created, and the benefits of such a plan are, in my =
view, quite marginal. That view was reinforced by the recent =
release of New Zealand's first nationwide infrastructure stocktake. It =
contained an audit carried out by Price Waterhouse Coopers, which =
identified a number of problem areas, specifically: v Security of =
electricity supply, both in the short term (due to the shortcomings of a =
market model which does not factor in security margins), and in the long =
term (due to issues around the supply of gas in particular, but also the =
environmental issues around alternative fuels); v A lack of =
investment in electricity transmission, brought about by a combination =
of land access issues and uncertainties over pricing and who should pay =
for investments; v Road congestion, primarily in the Auckland =
region; v Water allocation problems, due to a deficient statutory =
framework for prioritising water use; and v Water quality =
problems in some areas. Significantly, the Price Waterhouse audit =
also concluded that the plans already formulated to address each of =
these problem areas were sound and were already achieving their expected =
milestones. The conclusion I draw from this is that, so long as we =
continue to take infrastructure issues seriously and maintain our =
current programme of investment, there is no reason to panic. The =
second temptation is what you might call the aesthetic appeal of =
infrastructure. There are those who feel the New Zealand landscape =
could do with some more grand structures of concrete and steel. But we =
need to beware of the lure of building infrastructure for its own sake. =
Do we need a four-lane highway stretching the length of the country? =
And (if I might take issue with some of the terminology in the objects =
of the Council for Infrastructure Development) do we really know what we =
mean by 'world-class' infrastructure, and are we sure that it is a =
meaningful benchmark for New Zealand? Infrastructure exists to =
serve the needs of the nation, rather than being an end in itself. =
Because of our geography and our population size and distribution our =
needs for roading, water and energy will be different to, say, the UK =
with a larger, denser population, or Australia a larger country with a =
highly concentrated population in key cities. Perhaps one of =
the tasks the Council can address is to define what we might mean by =
'world-class' infrastructure. What are the appropriate benchmarks for =
aligning infrastructure investment with the needs and priorities of our =
economy and our communities? One approach I would be rather =
suspicious of is the attempt to define some percentage of GDP as a norm =
for infrastructure expenditure. The fact is that a substantial amount =
of capital is invested in infrastructure in New Zealand. For example, =
as at June 2003, the Crown owned: v Transpower's electricity =
transmission network, valued at $2.2 billion; v Electricity =
generation assets held by state owned enterprises, valued at about $6 =
billion; and v The state highway network, valued at $12.6 =
billion. The Crown also owns an 80 per cent share in Air New =
Zealand, and is in the process of transferring the rail network back =
into public ownership. Meanwhile, drinking water and sewerage =
assets owned by local government are conservatively estimated to be =
valued at $3 billion plus. There are also substantial assets held =
by the private sector. Telecom dominates the provision of =
telecommunications infrastructure with an asset base of around $7.8 =
billion. And Contact Energy is a major player in the electricity =
industry with assets of some $3.8 billion. As for new investment =
in infrastructure, the government has recently provided significant =
financial support for infrastructure investment through: v =
Project PROBE (amounting to tens of millions of dollars); v The =
Whirinaki reserve electricity generation plant ($150 million); v =
The Sanitary Works Subsidy scheme ($15 million per year over 10 years); =
and v The Auckland transport package ($1.6 =
billion). Commercial interests are also investing heavily in =
infrastructure. For instance, Telecom has signalled that it intends to =
move to a Next Generation Network, which will involve investment of =
upwards of $1 billion over 10 years; while its competitor Woosh is =
investing heavily in wireless broadband. However, substantial =
investment is still required in a number of sectors: v Transpower =
has estimated that total grid investment requirements over the next 10 =
years are around $1.5 billion; v Significant investment in =
electricity generation is required to cover ongoing growth in demand (a =
concern which becomes even more acute following Meridian's decision not =
to proceed with Project Aqua); v The Crown has agreed to spend up =
to $200 million on capital works for the rail network, but this may not =
be sufficient to address deferred maintenance issues, let alone new =
investment; v An estimated $100 - $300 million of investment in =
drinking water supply is required. In addition, the Crown will be asked =
to contribute a proportion of this on a similar basis to the Sanitary =
Works Subsidy Scheme. My government has overseen an increase in =
the overall level of expenditure on infrastructure, both by direct =
government expenditure and by encouraging others to invest. The 1990s =
was not a great decade for infrastructure investment in New Zealand. =
For example, in the years from 1994 to 2000 net purchase of physical =
assets by government amounted to only $5.8 billion or an average of $800 =
million per annum. In the period 2001 to 2008 we have increased that =
commitment to $8.6 billion or $1.1 billion per annum. Since 2001, =
line-by-line consolidation of the Crown accounts also allows us to =
understand the level of investment by central government as well as =
Crown Entities and State Owned Enterprises. From 2001 to 2008 actual =
and forecast spending on purchase of physical assets rises to around $29 =
billion. This includes the rail network and Auckland transport. We =
also have our majority interest in Air New Zealand. My point in =
enumerating all of these investments - current or planned - is that =
investment should be driven by an analysis of future need. Current =
expenditure amounts roughly to 2 per cent of GDP. Increasing that to 5 =
per cent - or any other arbitrary benchmark - should not in itself give =
us any assurance that we were addressing the issue adequately. =
 This leads me to the third temptation, which is that of =
ideology. There are two diametrically opposed views I am thinking of. =
On the one hand there are those who argue that we need more private =
financing of infrastructure in order to achieve some optimal mix of =
public and private investment. And on the other, there are those who =
argue that infrastructure should be the sole preserve of central and =
local government and should not be owned in any way by private =
interests. Frankly I am not convinced by either argument. I =
would like to make it clear that I and my government welcome the =
prospect of increased private investment in infrastructure. Our =
approach is pragmatic, and we do not have any ideological position that =
holds that a private dollar is any better or worse than a public one =
when it comes to such investment. The current public-private mix =
in New Zealand's infrastructure has arisen out of a mixture of =
historical accident, the prevailing technology and the economic =
realities of public goods and network industries. In some areas the =
sheer cost of infrastructure investment and the uncertainty of the =
returns has precluded any private investment. Technological innovations =
have altered those calculations in some instances and provided =
opportunities for private investment, usually under a regulated market. =
One could cite wireless telecommunications technology as an example of =
that. In other areas the economic analysis remains problematic. =
Private roading investment in New Zealand will always have to overcome =
the difficulty of generating a sufficient income stream, due to the =
relatively small volumes of traffic available to generate toll revenue =
and the (quite legitimate) requirement that a free alternative route =
exists alongside any toll road. Submissions on the Land Transport =
Management Act passed last year highlighted these tensions, in =
particular the arguments raised over the proposed regulatory framework =
for private investment in roading. I do not intend to comment on the =
detailed arguments; however, I would point out that the heart of the =
matter is the sharing of risk over the lifetime of infrastructure =
assets. If we can create a regime in which there are prospects =
for private partners to earn a competitive return while bearing an =
acceptable share of the risk, then we are in business. Suffice it to =
say, no government is about to agree to bear an unreasonable or =
inefficient portion of the risk (and that includes political risk) =
simply to attract private investment into roading. We need to =
remember also that there are numerous avenues for public private =
partnerships in infrastructure. One I have been considering recently is =
a broader investment vehicle such as an infrastructure bond. This =
would differ from a conventional government bond in that it would be =
directly linked to new infrastructure investment and would be likely to =
have a significantly longer term of 20 to 25 years as opposed to the =
normal 5 to 12 year term. The Treasury and the Debt Management Office =
are currently looking into the feasibility of such a bond, and how it =
might be received by the markets. A word finally on the review =
of the Resource Management Act. Clearly, there are some aspects of the =
RMA that are unhelpful from the point of view of national infrastructure =
priorities. One example is the need to achieve the right =
balance of national and local interests. This is particularly important =
for infrastructure projects which cross regional boundaries, and where =
local authorities are increasingly being asked to consider issues of =
national significance using an Act that provides little or no guidance =
on how competing national benefits and local costs should be weighed. I =
am confident we can find a way of expressing some straightforward =
principles in this regard. We also need to look at improving the =
consent decision making process, to ensure more consistency between =
councils; reduce delays and costs; provide greater clarity and certainty =
for applicants; and largely eliminate opportunities for abuse of the =
process for personal gain, trade competition, or other vexatious =
reasons. We should bear in mind that this is as much an issue of the =
capacity of local councils to handle the process as it is one of the =
legislative requirements themselves. That is why part of the =
review is to consider measures for building capacity and promoting best =
practice among the 86 councils who decide approximately 50,000 resource =
consents each year. One thing that is clear is that the putative =
structural failings of the Act have much less impact where there is a =
high degree of technical competency and efficiency within the =
responsible council. And conversely a council which is under-powered in =
terms of the requisite expertise will struggle to provide a good service =
regardless of whether the process is streamlined or =
simplified. So, to return to my starting point, the New Zealand =
Council for Infrastructure Development is a welcome addition to the =
debate we need to have around infrastructure issues. We talk a lot =
about innovation in this country, and generally associate that with new =
technologies. However, some of the most influential innovations have =
arisen from applying fresh ideas to old and familiar technologies. =
Certainly, in areas such as energy where the underlying technology is =
fairly settled and where the issues are often about how individuals and =
communities choose to organise their lives and their work, that should =
be a strong focus of our efforts. Thank you. The =
Michael Cullen mailing list operated by OneSquared Limited. Click =
<a =
href=3D'http://www.beehive.govt.nz/Lists/index.aspx?UID=3D2160&unsubscrib=
e=3Dyes'>here</a> to unsubscribe. If the unsubscribe link is not =
active, enter the following address in your browser address bar and =
press the Enter =
key. http://www.beehive.govt.nz/Lists/index.aspx?UID=3D2160&unsubs=
cribe=3Dyes You can also subscribe to this service or change and =
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=3D =
'http://www.beehive.govt.nz/lists/default.cfm'>http://www.beehive.govt.nz=
/lists/default.cfm</a> </body></head>
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