Capital expenditure and its funding

The Government is releasing a Supplement to the 2010 Investment Statement of the Government of New Zealand alongside the other Budget 2011 documents. The Supplement outlines the Government's medium-term investment priorities, and signposts how the Government is working to improve asset management. It also provides details on how future investment will be funded.

The Crown's balance sheet has more than doubled over the past 10 years, and there is extensive investment planned in the years ahead. The Government will acquire net additional assets of $34.3 billion (with gross additions of $78 billion), over the five years between 2010 and 2015, with total assets increasing to $257.7 billion. There is substantial planned infrastructure investment in roads, rail, broadband and electricity transmission. Investment in infrastructure remains a key part of the Government's overall growth agenda. The Government will also continue to accumulate financial assets via its various investment arms, including the New Zealand Superannuation (NZS) Fund and ACC.

Figure 11 – Net worth by asset class

Source:  The Treasury

The scale of this demand for capital, all of which is ultimately funded by taxpayers, reinforces the need for the Government to prioritise where its capital is used.

We are applying the same restraint on capital spending as on operating spending. Investment in productive capital remains a major priority for this Government, but the key change will be how this is funded. Much of the capital spending within the total Crown operation, including that by State-owned enterprises (SOEs), is funded either commercially, by retained earnings or by dedicated taxes or levies (for example, with the New Zealand Transport Agency (NZTA), ACC and EQC). About $21 billion will be funded directly by the Crown over the next five years, including most core social infrastructure.

The Government is continuing to explore ways to better use its balance sheet. One way of freeing up capital to reduce debt accumulation is to extend the Mixed Ownership Model - of the type adopted for Air New Zealand - to more of the Government's commercial assets. As well as freeing up capital for priority areas, extending this model will broaden the pool of investments for New Zealand savers, help to raise the productivity of the businesses involved through sharper commercial disciplines and give the companies involved access to wider sources of capital.

The Government has decided to seek a mandate to extend the Mixed Ownership Model, having been assured the following tests can be met:

• the Government maintains a controlling stake in the company
• New Zealand investors are at the front of the queue
• the companies involved present good opportunities for investors
• the capital freed up from this is used on behalf of taxpayers to fund new public assets, thereby reducing the pressure on the Government to borrow, and
• New Zealand consumers are protected by appropriate regulatory regimes.

The Government intends to apply the Mixed Ownership Model to Mighty River Power, Genesis Energy, Meridian Energy and Solid Energy, along with reducing its shareholding in Air New Zealand, over a three to five-year period starting in 2012 - subject to the Government receiving a mandate in the 2011 general election. No decisions have been taken on precisely how much of each company will be sold or when, other than that the Government will retain a majority shareholding.

The expected proceeds are in the order of $5 billion to $7 billion. Extending the Mixed Ownership Model will thus fund approximately one-third of the Government's increased investment in core social infrastructure and student loans. This represents the reallocation of capital to higher priority areas, rather than simply borrowing more.

Spending on infrastructure associated with the Canterbury earthquakes is treated separately from the capital allowances, with all costs covered by the Canterbury Earthquake Recovery Fund.