This week, the Government is hosting a grand event aimed at trying to interest big foreign capital players in financing capital works in New Zealand, particularly its big rural motorway programme.
Financing vs funding: a quick explainer
The key word in the sentence above is financing. It is important to be clear what this means. We will still all pay for these projects; we, New Zealanders, will remain the funders.
Financing, whether via a private-public partnership (PPP) or some other scheme, is the act of borrowing money to build something. Funding is actually paying for that something.
If that something is financed, then funding it will mean paying for interest, and risk, and other costs as well as repaying the loan principal, for the construction of the thing itself.
PPPs are typically very long-term deals, and are characterised by considerable complexity, including not just building but also operating the asset for the duration of the deal. Typically, in simple cash terms this means paying several times the plain sticker price of the construction of the project itself.
So why finance? Among the attractions of financing for the funder (say, the current government) is that they get to essentially spend future governments’ budgets now – by committing those governments (and those future people) to ongoing repayments, often over 20 to 30-year periods.
Other advantages are easier to achieve if the project in question generates some form of income, as this can contribute to the repayment. In transport, examples include public transport fares or road tolls.
The two current highway PPPs in NZ are what’s called “availability PPPs”, as they have no income except payments from NZTA. The provider’s performance is evaluated on various metrics, including the maintenance and safety record over the life of the PPP. In other words, they must keep the project available to be used, under very strict criteria (although this aspect has now broken down for Transmission Gully).
The art of the deal
Here’s the government’s official PPP framework, by Te Waihanga/ the NZ Infrastructure Commission.
The coalition government is currently seeking foreign partners to finance its infrastructure programme, which these big financiers may do if it looks lucrative enough for them.
As the headline below says, the government is promising ‘A big opportunity’. They’re hoping these big finance fish see an opportunity to make money, and that the resultant deal is also an opportunity for the country. As with any deal, it’s fair to ask, opportunity for whom?
Is it worth it?
To start with a general observation, this idea – of borrowing against the future to deliver projects – can work for New Zealand, but only if these two questions are answered:
- Does the project truly add value to the nation? In other words, projects must be guaranteed to make us richer, happier, and safer; more able to weather the slings and arrows of outrageous fortune (apologies to the bard). And moreover…
- Is the project not just value-positive, but so valuable that it remains so, even once you add in the additional costs of the financing and risk premiums?
Beyond these general tests, there are further questions specific to this moment:
What’s the risk?
International capital is only interested in three things, and they want these three things all together, or no dice. They want:
- big, long run projects (i.e. high $$$$)
- that deliver above long-term average returns (i.e. high return),
- with sovereign (government-level) guarantees over the full lifetime of the contracts, including exchange rate risk.
So, coming back to this week’s event: how can the government attract lots of bids to make this event a success? By offering high government-guaranteed returns and assuring a stable political and economic environment.
Political Risk
Might a future government just cancel big deals with international companies? Surely New Zealand governments don’t do that? Except ferries, right?
So how convincingly can this coalition government persuade investors that that won’t happen again?
Labour has been invited along to the event, presumably to try to get them to promise they’ll never reconsider any deal, no matter how they view it. Is this likely, or likely to be credible?
Regardless, if investors view us as a less reliable counterparty, they will want added risk premiums and harsher penalty clauses.
Economic Risk
Basically there remains the one big issue at the absolute heart of this: truly, how valuable are the proposed projects?
Does more tarmac, automatically, anywhere and at any cost, make us richer as a nation and thus more able to pay off these projects? Do they pay for themselves? How certain is that? Will our future selves and following generations thank us for committing them to these debts?
Whose opportunity?
Financing projects does enable them to be built earlier than otherwise, so the benefits are experienced sooner – but at a higher overall cost. And that reduces net project value. So projects must be really valuable for this approach to be appropriate.
All the other benefits that are often touted in favour of these financing schemes – innovation, etc – should be considered as marketing, and not real, because they can also be accessed through more traditional procurement processes (e.g. alliances).
Unless of course we miraculously receive really low cost, high-quality bids that are fully credible and locked-in, and that endure for the entire lifetime of the deal. Recent experience is not encouraging here.
And this brings us to…
Technical risk
Technical risks increase with the better-looking offers. Even if we can persuade ourselves of the certain value of the projects, we have to ask: how fixed are the costs?
Will we, as we did with Transmission Gully, find ourselves paying out more than the contracted sums, just to keep the project going to compleition? Or, again as with Transmission Gully, will we end up in expensive litigation with these big foreign players?
Who are the cleverer negotiators: our public servants, or these big international players? Who will control the documents that will govern every detail of these projects for multiple decades?
The issue of project value should not be downplayed in the rush to attract money and get construction underway.
Precedent
Last century’s massive undertaking to generate and distribute electricity to the entire nation, enabled a clear step up in prosperity and wellbeing. Truly transformational. Those dams we still so rely on!
I would also argue that the broadband programme of the Key era was another infrastructure investment that significantly changed economic possibilities. It really came into its own when the pandemic suddenly arrived and disrupted everything, supercharging the value of online connectivity, and adding resilience to the economy and society.
One thing that is common to both these programmes is that the resultant infrastructure as well as creating economic benefits, created ongoing financial returns. Charging for electricity and broadband services, into the future. Not just enabling a road that can be used. Sure road users pay road taxes, but these roads will not bring in more road user charges at any kind of volume to cover their costs, especially if just diverted from current routes.
So we have to ask: are the next projects in the RoNS pipeline as transformational as Think Big and widescale broadband? For me, it’s very difficult to see this extremely expensive programme as achieving transformation. At best, it offers incremental improvement. Getting people and goods somewhat quicker to market is indeed somewhat better – but it is not a revolution.
Think of the opportunity cost of signing up to billions and billions of future foreign debt for parallel rural motorways, especially where the current route is nowhere near capacity. These routes may have other issues that need addressing, but no goods are currently failing to reach market.
It is very hard to see a huge step-change here, required to justify the big bet. Indeed, in many cases the existing route could be upgraded, or have additional segments added, at much lower scale and cost. This would free up capital, and debt capacity, to be deployed on other truly ambitious, transformational programmes.
Resilience
Better, safer, more resilient roads are always welcome. But it remains hard to see these new roads generating sufficient new wealth to cover their eye-watering costs, now made greater through financing.
And anyway, how should we think about resilience in this new and unpredictable age?
Physical resilience is one thing; the ability for critical infrastructure to survive earthquakes or the ever-increasing risks of weather events. But risks to global supply chains and the trading economy in general are also clearly now higher than ever, and we have recent experience of hits to both. It is hard to see how betting the farm on more rural highways rugged-ises the economy against shocks to the international supply-chain, and economic/war/mad king risks.
Resilience is not just about natural events.
Think big, and different
Instead, imagine a programme of capital-intensive works that significantly reduces our dependence on imported fossil fuels. A huge build-out of renewal generation, incentive schemes for distributed generation. Electrify every farm and factory. Electrify and mode-shift transport. Reducing the $6-9 billion annual cost of oil – a fortune in foreign exchange we are forced to make every year. Building real self-reliance in energy and movement. As well as, critically, freeing up actual money to fund this financing opportunity.
Now that is a truly transformative opportunity.
I am aware this was the thinking behind the (often disparaged) Think Big programme of the 1970-80s National government, the attempt to build energy independence. What’s different is the technology now actually exists to make this possible, and is also the lowest-cost energy source available.
I also note this is the kind of thinking behind the generally successful Inflation Reduction Act of the previous US government, with the economic benefit known as home-shoring.
Furthermore, in alignment with current policy objectives, it is relevant to note that renewables are structurally deflationary: once built, they deliver value without requiring constant inputs. Combustion, the endless burning of things, is structurally inflationary. Combustion-based economies require constant feeding with inputs.
There are other co-benefits too of course.
Think Big was an interventionist state economic strategy of the Third National Government of New Zealand, promoted by the Prime Minister Robert Muldoon (1975–1984) and his National government in the early 1980s. The Think Big schemes saw the government borrow heavily overseas, running up a large external deficit, and using the funds for large-scale industrial projects. Petrochemical and energy related projects figured prominently, designed to utilise New Zealand’s abundant natural gas to produce ammonia, ureafertiliser, methanol and petrol.
So, although it is largely taken as a given now that Think Big was a disaster, perhaps it was just 40 years too early? Especially as it tried to replace one fossil fuel with another in many cases. Whereas now it is obvious that it is combustion itself that needs replacing, and that the technologies to do so are now available, and will make us richer and freer, the faster we do so.
Anyway, we should be honest and see that what is being proposed here by the current government is just as risky, in that it is really the same as that earlier programme: locking us into overseas borrowing in the hope that the benefits will outweigh the costs. It is Think Big redux, but just for roads. So, Think Big without ambition for structural change. Think small in ambition, while still big in debt.
I would rather the government – any government – did think big, and more carefully, when signing us up to major forex debt. I want them to make sure that if we borrow large against the future, it’s only for things that will make us richer, freer and more resilient in an increasingly mad world.
This is the real Big Opportunity.
But nothing like it appears to be currently on the table.
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PS For those interested in Think Big, its conflicted reputation, and its legacy today, check out this fascinating 2020 profile of Bill Birch (Muldoon’s Steven Joyce) from the Otago Daily Times. There’s great detail:
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Great post Patrick and bang on the money. The Government should be on the hook for releasing all the BCRs to the public before signing up to anything.
Thanks for this post and the detailed analysis! Its a long evidenced way of saying the RONS program and especially using PPP finance is UTTERLY IDIOTIC. Sorry caps shout, it is a phrase i often employ to describe the current coalition of clowns
One project from the previous Think Big that does reduce our dependency on fossil fuels was the electrification of the central North Island railway line. Almost scrapped then saved again. Electrifying other parts of the rail network especially to Tauranga then also adding some passenger trains on the route would seem a good current Think Big project.
Lake Onslow Battery? High speed rail? Better regulation of our banking and supermarket industries?
Just three ideas that might be better and more transformational than another cluster of motorways.
But imagine the time savings if you can get from the traffic jam on SH1 to the traffic jam on SH20 quicker on Friday afternoon! So much productivity.
National’s argument that the money needed for this could be spent more effectively elsewhere on other projects could have been a good; one had they actually made plans to do so.
This is one of the most lucidly written sensible articles I’ve read. It is great to read a positive future plan instead of just carping about the bleak present. I’m voting only for those in tune with this vision.
There’s an idea floating round called the Gigawatt Project and it’s a plan to incentivise the owners of all the big Warehouses and Factories in South Auckland to put solar on their roofs. It adds up to 2GW of generating capacity. That’s more than a third of the hydro generation in our country. (Oh, you say the sun only shines half the time. Correct, so let’s call it 1GW – that’s more than coal and a little less than gas and geothermal) This is the sort of project we should be pushing, not more roads.
And Geothermal for the advances overseas in deep drilling in just the last twelve months open up so much more of the country to geothermal possibilities.
More roads is just such lazy and unimaginative thinking.
I forgot, National is in hock to the Fossil Fuel companies and the ICE car companies and the Road Building companies so it’s not “unimaginative thinking”, it’s “donor thinking”.
Sadly that project has gone to “was an idea”. https://www.toba.nz/post/gigawatt There are good financial reasons for anyone to add solar to their buildings and to export the excess to the grid and sell directly to users not generator/retailers. Much better return than corporate owned solar farms.
“A huge build-out of renewal generation, incentive schemes for distributed generation. Electrify every farm and factory.” Exactly this. You don’t need a huge Lake Onslow Battery, you have the existing hydro lakes for this. You use solar during the day to conserve water in the existing dams. You save distribution costs by generating power in the location it is needed. But this will never be implemented as it under cuts the big business plans of the generating companies.
While I broadly agree it is worth noting that there isn’t really a saving in terms distribution costs. This network is still needed to get power from the dams at night.
You will save future distribution costs as the network will not have to be expanded to the same extent it would have to be with large remote located power generation.
If large remote power generation is still required at night or during times of low sun then the distribution network will still be required.
If you also add a local storage battery into the mix, you get a whole new set of ways to save on distribution costs. It just requires a bit of imagination.
Agree, local storage would be a game changer. It will likely need to be the quantity of storage that carries from summer to winter, not just day-to-day.
The hydro lakes should be providing Summer to Winter storage as they were designed to do. The problem is that we have not built the complimentary summer time (solar) and spring/autumn (wind) generation required to complete the plan. Instead we have taken the easy route and squander the water through the summer and autumn and have to burn gas and imported coal through most of the year.
If you want to understand the problem we are in read this; https://static.transpower.co.nz/public/bulk-upload/documents/MO%20Latest%20Update.pdf?VersionId=gSBuLl4IfPtMXh.xCOzMU036Pwe0Kz1o
Using a solar charged battery storage system that exports in the evening peak can have a notable difference in your power bill. I know of one system comprising of a solar panel and the equivalent of 4 lime scooter batteries that is timed to export in the evening peak and has made a notable reduction in usage. Another is a system set to charge batteries after midnight and exporting in the morning peak with a net gain in return for the owner.
Especially would of been good recently with all the sunny days we have been having.
You save future distribution costs but you’ve got to generate a return on at least $15b of investment. Which can buy a lot of other things which may be more effective ways of plugging that gap. $15b should buy us an entire region-wide transport network.
The thing is, committing future generations has long been achieved by conventional government borrowing to finance government buying stuff. Or is the real aim of the exercise to allow the government to borrow without that debt appearing in its books as a bond issue would? The advantage of that to a politician might be clear, to a taxpayer less so.
dont build any more roads .I have always cringed at the fact we spend 9 billion on importing fuel every year .Now Luxon wants us to add 9 billion to the interest bill just so he can get to whangarei 5 minutes quicker .No doubt he will roll out how that is saving NZ 1 MILLION A YEAR .WOOPIE if we had e.90 % of vehicles electric and fully electric rail we would be saving 173 million a week which would tip the ballance of payments on its head .
In many ways we are still suffering from Muldoon’s greed for power. He cancelled the Labour govts. superannuation scheme inferring it amounted to communism (dancing cossacks). Now we are short of locally generated money resulting in borrowing from overseas pension funds and exporting the financial return that would have stayed at home had that scheme been retained.
Good article. Yes, pity the electrification of the central North Island railway line was not completed but good what we do have of it. I think it was because we “ran out of money” and also the oil shock at the time was averted somewhat.
Anyway, so many good projects to do aside from more motorways to far away places with limited population densities.
Great post Patrick.
We’re a country looking for the 2025 version of the Knowledge Wave and accompanying Growth and Innovation Framework …
… not a 2 day conference to bankers and Ministers alike applauding lowest-denominator procurement outcomes.
I bet they got a better lunch than the children.
Great to see the government bringing action on a ‘Second Harbour Crossing’, but does come with a Heavy Rail tunnel underneath the commuter tunnel? Auckland right now really needs more Heavy Rail lines particularly one that leading into North Shore! A Southdown-Avondale line isn’t enough for Auckland particularly by 2035-2040s, most access ways in & out to Auckland CBD will be even more bottlenecked cause of reliance of cars to commute and buses stuck with the congestion. High density Apartments won’t be built in urban areas that are nearby CBD, if we don’t construct more Heavy Rail and Busways in Auckland and guarantee property investors. There’s a real need for at least two more Heavy Rail projects in-order to reduce bottlenecks during peak times and weekends.
What National seems to forgetting is their policies are only helping businesses, not helping everyday low & middle income households! The idea to only bring the benefits to business isn’t going to mean the translation of low & middle income households will benefit to due to low costs passed onto businesses. Businesses in their individual rights control the economy as a whole not low & middle income households meaning they still pass high costs to gain excessive profits cause of lack of constructive policy making and intervention with low & middle income households.
We definitely can’t be following on Mayor Wayne Brown idea of constructing ‘cheapskate’ idea of building Angers, France light tram as a long term solution and in fact it’s not a proper solution for Auckland! Light tram going to brake versatility option of choice for society living in areas affected. A proper solution would be to build more Heavy Rail corridors for to & from city already operating frequent route along with some more busways outside CBD area that go in & out of CBD area. If there was more linked up rapid transit network here in Auckland we’d definitely be seeing more construction of high intensified apartments across our already existing Heavy rail lines such as Western line. For example you live in Henderson and ride rail you only have currently only one rail line option which is Western line. If there were multiple lines operating out of Henderson right now we’d be seeing high intensification apartments out in Henderson. Central government and council need to entice property investors by investing in more rapid transit corridors so its gives people living in these high densely apartments more options of getting to places.
Exactly why Panmure is having success of high intensification apartments cause of construction of Eastern Busway and its linked up with Eastern Line. But Panmure definitely needs more rapid transit corridors to entice more property investors to invest in construction of high densely apartments but is showing highest growth of than other suburbs outside CBD cause of linked up rapid transit corridors.
MT Eden another example is showing higher growth due to more high intensification apartments but MT Eden is bit different story. If there was no redevelopment of Mt Eden station, we wouldn’t be seeing growth in high intensification apartments cause of pasts inconvenience of getting to station and linked rapid transit corridors. MT Eden was only a Western line station in the past but once CRL comes online it’ll service EAST-WEST line and Onehunga line. We need more rapid transit options for MT Eden too! Also the PM likes to mention the ‘Crockers Rent to own’ apartment block built right nearby MT Eden station. But thing about rent to own scheme, its very slow way of getting highly intensified apartments cause the locations that the property investor chooses is in area with no flexible choices of public transport routes to ride without taking second public transport route, location of apartment plays factor, accessibility from variety of supermarkets not just one, nearby other shops & small businesses, doctors, public transport station.
Also National questions why places like Otahuhu haven’t grown in high intensification apartments in the area since its got Southern line and Eastern line operating currently. Mostly the reason why Otahuhu hasn’t grown in high intensification apartments is cause it doesn’t feature big retail shopping centre with street where’s their linear line of small businesses in the area and isn’t within the CBD area where getting to places is easier in CBD area than urban areas.
We need National to be investing in more rapid transit corridors in-order to get more intensification apartments into urban suburbs in Auckland. Not only that, fixes the ‘Cost of Living Crisis’ which still experiencing and current solutions not going to fix the ‘Cost of Living Crisis’. We need to be increasing housing market supply wanting to start a family, more available affordable rentals for younger people. If we continue building more high density apartment blocks, the more older people move out of their 4 bedroom houses into two or one bedroom apartments, opens up market for people wanting to start family! People living in CBD currently owning and living in one or two bedroom apartments would have option to move to the urban suburbs finally meaning there be more affordable rental properties for younger people. Small businesses in urban suburbs would thrive cause of easier access to public transport and convenience to & from station. Lastly fare of AT would decrease due to convenience and patronage numbers. Everyone would benefit if there was more public transport corridors across Auckland being built!
Auckland really needs more Heavy Rail corridors to bring down the ‘Cost of Living’. A lot of National policy there implementing are going to make outcomes worse if they don’t start bringing in more Heavy Rail corridors or even more new busways corridors into Auckland. Cause people really need more high intensification apartments that are in close proximity to CBD. If we continue building more high density apartment blocks, the more older people move out of their 4 bedroom houses into two or one bedroom apartments, opens up market for people wanting to start family! People living in CBD currently owning and living in one or two bedroom apartments would have option to move to the urban suburbs finally meaning there be more affordable rental properties for younger people. Small businesses in urban suburbs would thrive cause of easier access to public transport and convenience to & from station. Lastly fare of AT would decrease due to convenience and patronage numbers. Everyone would benefit if there was more public transport corridors across Auckland being built!
“Light tram going to brake versatility option of choice for society” what does this even mean lmao
Means providing communities with transport mode options without it affecting other transport modes. Light tram not an option for Auckland, cars would be forced to turn left every time at end of road of an light tram corridor and cars on car/light tram corridor wouldn’t be able turn street on right side. Not good for small businesses who rely on higher disposable income.
so the 400 odd cities with tram and light rail networks around the world are all lifeless then i take it?
Fun fact, urban busways ALSO require rightofways that cars cross into. Do pray tell, why are they somehow immune to that?
also boo hoo crybaby petrolheads can cope with a little longer drive to get where they’re going, they’ve had it too good for too long
Well that’s settled! Auckland isn’t going to be part of “400 odd cities of light trams networks around the world” cause they’re out of their ‘life cycle’ and is slow, incapability of travelling more than 15 km, crappy, inconvenient mode of transport. Hence to that, they’re going to cause more bottlenecks by joining regular traffic which isn’t what Auckland needs!
What Auckland needs is to become a ‘Smarter city’ not become like Australia where they end up with silver medal and say “it’s too hard and complicated”. Auckland needs to become a gold medal, not silver! Where giving commuter fast, convenient and accessible option is busways & Heavy Rail and that’s final!
didn’t answer my question, why are busways immune while light rail isn’t?
Why is putting light rail down the middle of a road different from putting a kerb-protected busway down the middle of a road?
also lmao you couldn’t be wronger, light rail can run at speeds of up to 105kph and there are lines over 70km long in the US and Belgium. What limits light rail is grade separation and priority. Same as putting buses on a busway turns them into bus rapid transit, putting trams on a protected route separate from cars turns them into rapid transit.
But if you gulped up Jon Reeves propaganda then of course you’d be misled. I’d be happy to have a civil conversation about the capacity comparisons of light rail, light metro, heavy rail; the nature of service frequency – but it’s clear you’re a ptua stooge or as good as one, so keep being a delusional dan if that’s what you want and spamming your ChatGPT generated troll comments calling for a ridiculously expensive, geographically improbable, low frequency transit system based on old trainspotters’ dogma
To add to this, we really need more Aucklander heading to the city doing peak to use our current transport modes into the CBD instead of driving cars. We should be making driving cars to the CBD a ‘luxury’ for people with high disposable income instead of making parking affordable for everyone since Auckland becoming car congested city which needs to change and build more Heavy Rail corridors and busways!