Infrastructure

Introduction

Good afternoon to you all. I am glad to be here today to discuss changes we are making to the infrastructure system, which will lay the foundations for New Zealand to prosper.

Thanks to Infrastructure New Zealand and The Post for organising this event, and Chapman Tripp for hosting us.

I would also like to acknowledge my Parliamentary colleagues Rt Hon Chris Hipkins and Hon Shane Jones for being here.

The fact you have three senior MPs here speaks to how important infrastructure is to New Zealand - and how far off track we have got.

Case for change

As Minister for Infrastructure, I am here to drive much needed change.

The Coalition Government's view is that New Zealand can be much wealthier and so much more productive than it is today.

If we're honest with ourselves, in recent decades, New Zealand has slipped on almost every measure that matters.

Whether it's global competitiveness, labour productivity, capital intensity, real incomes, student achievement, infrastructure sufficiency, asset management, or housing affordability - all have slipped relative to the countries we like to compare ourselves with.

This Government is determined to turn this situation around and infrastructure is a core part of that.

Infrastructure

New Zealand has a significant infrastructure deficit.

Estimates vary, but let's call it $100 billion or so. That's about 80 Transmission Gully motorways. It is also three times the size of our entire school property portfolio, and eight times the size of our hospital network.

This deficit is a major drag on productivity.

To help fix it, the Government is spending more than $68b on infrastructure investments over the next five years, including $11.6 billion in health.

The Infrastructure Commission's National Infrastructure Pipeline shows that across central government, local government and the private sector there are around $46 billion of projects under construction, and $10 billion more which are in procurement now.

But we can't buy our way out of the infrastructure deficit - that would be like pouring water into a leaky bucket.

Instead, we need to patch the leak by being a smarter investor - this means getting every dollar of public and private capital to its highest value use.

We also need to be more efficient around how we plan, select, pay for, and manage infrastructure.

The challenges we face have not come about by accident. They are the product of decades of poor systems, processes, and practice across successive governments.

This lack of attention to infrastructure and investment management is costing us.

It's costing us time, money, and ultimately New Zealander's standard of living.

But I am committed to getting things back on track, and I want to take as many people with me as possible - including contractors, financiers, capital-intensive agencies, the public, and other political parties.

Progress on my six infrastructure priorities

Earlier this year, I mapped out my six infrastructure priorities:

1. Developing a 30-year National Infrastructure Plan
2. Establishing a new national infrastructure agency
3. Improving infrastructure funding and financing
4. Improving the consenting framework
5. Improving education and health infrastructure, and
6. Strengthening asset management and resilience

Work is well underway on each of my priorities and given it's just over a year since we were elected, I'll give you a check-in as to where we're at on each of them.

1. National Infrastructure Plan

Let's start with the National Infrastructure Plan.

New Zealand needs a 30-year plan, and we have tasked the Infrastructure Commission with developing one.

The Commission has released a discussion document seeking feedback, and I encourage you all to participate.

The Plan will outline New Zealand's infrastructure needs over the next 30 years, planned investments over the next 10 years, and recommendations on priority projects and reforms that can fill the gap between what we will have and what we will need.

I want the Plan to mirror what happens in Australia, where the government leverages independent agencies to help them make the right long-term choices, while making sure there is strong capability within government to deliver these benefits.

In August, I asked the Commission to brief all parties on the Plan, and I am glad to report that most parties have been briefed.

I genuinely want to build cross-party consensus on the Plan.

One thing that I think will be important is the Infrastructure Priorities Programme or the IPP, which is a structured, independent review of unfunded projects and problems, as well as initiatives that avoid the need for investment.

The Priorities Programme is modelled off the Infrastructure Priority List in Australia, which has helped them build political consensus on an enduring pipeline of major projects - and that is what I want for us as well.

Proposals that pass the test will be identified as priorities for New Zealand. This does not guarantee funding - but it does provide decision makers with a menu of credible proposals which could inform investment decisions, and other decisions like eligibility for fast-track consenting and Regional and City Deals.

2. National Infrastructure Funding and Financing Co.

As most of you know, the national infrastructure agency officially opened for business yesterday.

We've named the agency National Infrastructure Funding and Financing Co as that is its core role.

NIFFCo will be a Crown advisor and doerin the infrastructure funding and financing space, and we have tasked them with:

• being a shopfront to the private sector, including being the "front-door" for market-led proposals,
• partnering with agencies on projects involving private finance, and
• administering Central Government infrastructure funds.

NIFFCo will unlock access to more capital for infrastructure and give the private sector a one-stop shop to partner with Government. I look forward to celebrating the establishment of NIFFCo with the team soon.

The new agency builds on the success of Crown Infrastructure Partners and adds more capability and resource. Again, I'm keen to ensure that this agency endures beyond this Government.

3. Improving Infrastructure Funding and Financing

My third priority is improving infrastructure funding and financing.

Earlier this year, I announced our ambitious work programme to give councils and the Crown smarter and fairer tools to fund and finance infrastructure.

Our Infrastructure Funding and Financing work programme has three pillars.

1. Clarifying when the Crown will use its balance sheet to fund and/or finance infrastructure
2. Broadening and enhancing the funding and financing tools available to the Crown and councils, and
3. Modernising and developing the Crown's policies, frameworks, and contracting models

This is a good time to talk about funding for infrastructure. Crown and council infrastructure has historically been primarily funded by taxpayers or ratepayers. Taxes and rates are obviously an appropriate source of funding for some forms of infrastructure, but our heavy reliance on this approach has resulted in three significant challenges.

First, funding settings for many assets do not manage investment demand or signal where investment is required. This places pressure on the Crown and councils to build new infrastructure, rather than more effectively utilise existing infrastructure.

The Infrastructure Commission has done really good work here. Our infrastructure deficit simply cannot be resolved from building new infrastructure alone, and an improved approach to utilising existing assets is necessary.

One way to achieve this is through changing the way we pay for assets and services to better manage demand. That means pricing - think congestion charging and water meters.

Second, funding models for many assets do not reflect the full economic cost of delivering the service. This means operational activities, including asset renewals and maintenance, often compete with wider priorities. A classic is water infrastructure.

For years water infrastructure has competed for scarce capital with other worthy and not-so-worthy council projects. With respect, some councils, and I think of my own city of Wellington, have funded "nice to haves" at the expense of core business.

Again, I'd point you to research from the Infrastructure Commission which shows the amount we are investing in renewals is far below depreciation for road and water infrastructure.

Third, councils are not sufficiently incentivised or equipped to deliver infrastructure in advance of growth, even when it is economically efficient to do so. The way current tools are designed means we struggle to recover the full cost of growth from new entrants. This results in a reluctance by councils to support new housing.

As a result, the taxpayer steps up. That explains why we have a proliferation of Crown funding buckets for councils like the Housing Acceleration Fund, the Infrastructure Acceleration Fund, and the NZ Upgrade Programme. This is unsustainable.

So, today I can announce that Cabinet has agreed to a new Infrastructure Funding and Financing Framework to help the Crown make smarter and more informed funding and financing decisions.

I'm releasing that Framework today.

The new Funding and Framework has two objectives.

First, to broaden the funding base for investments and utilise private capital, where efficient; and second, to apply commercial disciplines to the Crown's approach to the provision of public capital.

There are four key principles underlying the Framework.

1. Crown funding and/or financing should only be sought when all other sources have been exhausted
2. Crown capital should be deployed in an optimal form
3. Crown capital should be provided on the basis it is 'recycled' as soon as practical
4. The Crown should actively manage the financial risks associated with its investments.

For too long the Crown has defaulted to the use of grant funding.

Quite frankly, this is lazy, and New Zealanders deserve better.

I want to flip the system on its head - agencies and other players looking for Crown funding won't just get access to a pot of cash - they will now need to show that they have tested other funding models such as user and beneficiary pays.

So, we expect proposals from sectors such as water, energy, housing, climate adaptation, and transport to be able to demonstrate how user or beneficiary pays can contribute towards funding requirements.

If user or beneficiary pays is not possible, I expect to understand why, and whether this funding source can be reasonably unlocked.

This approach is not just about preserving the Crown's balance sheet capacity, but it is also about fairness - in most cases, people who benefit from an asset or service should help pay for it.

The Crown will consider using its balance sheet capacity once these alternatives have been exhausted and will apply commercial disciplines when deciding how to support a proposal. This means providing 'just enough'support to make proposals feasible.

Using this approach will allow Government to support more initiatives and give greater support to investments where alternative funding options are not available or where it is more appropriate for the Crown to be the primary funder - like in the health and education sectors.

The Minister of Finance and I expect agencies to consider the Framework for proposals seeking new Crown funding.

The Treasury will be providing advice to me and the Minister of Finance on options to integrate the Framework into the Investment Management System and Budget process.

Over time, I also expect the Framework to flow through to baseline spending, which is the lion's share of Crown spending.

This approach represents a significant change in the way the Crown tackles its funding and financing challenges. But it's a change we must make.

We've also made progress on the second and third pillars I talked about before - broadening and enhancing the funding and financing tools available to the Crown and councils, and modernising and developing the Crown's policies, frameworks, and contracting models.

A couple of weeks ago, my Undersecretary Simon Court and I released the refreshed Public Private Partnership (PPP) Framework.

This Framework outlines enhancements to how the Crown will approach future PPP transactions and was informed by learnings from domestic and overseas experiences.

Without getting too into the weeds, we have focused on:

• Better allocation of risk,
• Stronger collaboration in the tendering phase,
• Lowering the time and cost burden involved in bidding,
• Being more realistic about "Affordability Thresholds" comparators the Business Cases, and
• Improving dispute management processes.

I want to ensure New Zealand is making the most of PPPs as they are a commonly used procurement model that we should have in our toolkit.

PPPs will allow us to utilise private sector expertise and capital. And strong contract incentives in PPP transactions will drive greater maturity in the design, construction, and maintenance of major projects.

New Zealand's approach to PPPs has always been, "greater outcomes for the same cost". As such, we will only use PPPs where they deliver better outcomes than the next best procurement model for the same, or less cost.

I really welcome Barbara Edmonds' writing a foreword to the new PPP Framework.

New tools

Today we have also released new guidelines for Market-Led Proposals.

And soon Simon Court and I will release new Strategic Leasing guidance.

Together, these new guidelines will help the Crown be a more sophisticated investor, by opening New Zealand to proposals developed by the private sector and guiding the Crown to utilise innovative procurement approaches.

Improving the consenting framework

I'm running out of time, but for completeness let me quickly mention my other priorities.

Number four is improving our consenting environment.

Last year, we repealed the Natural Built Environment Act and the Spatial Planning Act before Christmas, and we've spent this year on Phase Two of our RMA Reforms.

We will soon pass our Fast-Track Approvals Bill to deliver nationally and regionally significant infrastructure and development projects.

The plan is to pass it this year and of course it includes an initial tranche of 149 projects to address our infrastructure deficit, help fix our housing crisis, unlock renewable energy and boost mining, aquaculture and the resources sector.

Phase 2 also includes a package of changes to National Direction instruments which will be enabling of infrastructure.

In the new year, we will consult on a new NPS for Infrastructure and a strengthened NPS for Renewable Energy.

The third and final phase of the RM reform programme will include replacing the Resource Management Act with two Acts - one will manage environmental effects and the other to enable urban development and infrastructure.

Focus for 2025

My remaining two priorities: improving education and health infrastructure; and strengthening asset management and resilience will be key focus areas for me in 2025.

For education infrastructure, I am working with Erica Stanford to ensure the $30 billion portfolio is being managed properly. We are currently determining a new permanent model or entity for school property functions to drive better value for money and performance. But we've made good progress already.

In Q1 2024, over 60% of new classrooms were initiated as offsite manufacturing, up from under 20% in Q4 2023.

For Health infrastructure, I am working with Shane Reti, and we are both looking forward to receiving Health NZ's long-term Infrastructure Investment Plan and determining next steps.

For asset management, a couple of weeks ago, I received the Infrastructure Commission's Asset Management State of Play, which shows that New Zealand has limited visibility of infrastructure assets we own, their condition, and how they are performing.

There is also a lack of transparency around how competent providers are at managing their assets.

After the OECD ranked New Zealand fourth to last for Asset Management earlier this year, there is clearly room for improvement. So, next year I will be responding to the Commission's State of Play report and starting a comprehensive work programme on asset management.

Conclusion and bipartisanship

I would like to wrap up by saying thank you for inviting me to speak.

Today's forum is about bipartisanship and political consensus. I hear the call from you and from the public for more consistency - and I agree.

To me, the most practical and enduring way to get consistency is to get the fundamental system settings right, first.

And that's what I'm doing.

That doesn't mean getting everyone to agree on every project - because that is a one-way street to never building anything again to be honest.

Instead, I intend to create a system that incentivises players to uphold good practice so that that infrastructure can be properly planned, manged, and provide good value for money.

In practice, this looks like handing over credible and affordable projects as political change occurs.

So, even if projects in the pipe are not a first-best ideological choice, they are realistic and worth pursuing.

Also, when it comes down to it, I think there is more agreement on the infrastructure pipeline than might appear at first glance.

For example, the total value of the 'funded'National Infrastructure Pipeline hasn't changed much since we came into Government - there have been increases, but this is largely due to more providers contributing data, and I encourage this so that we can have better visibility.

In addition, it has been assessed that 60 cents in every dollar should go to looking after existing assets - asset management should be business and usual, so we should crack on with that.

The contention is in those few big nation shaping projects, and that is what our democratic system is for - for New Zealanders to vote on the direction of our country.

We have a long way to go before those few big projects are the real problem.

The real problem is the underlying system settings that lead to poor planning, the selection of unrealistic and unaffordable projects, cost escalation, delays, poor asset management, and other issues.

So, let's work together on getting the fundamentals right, which will drive more certainty for the sector, and drive better outcomes for the public.

Thank you.