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Budget 2016 Home Page Budget Economic and Fiscal Update 2016

Capital Expenditure

The Government is forecast to spend a net total of $23.1 billion of cash on capital items over the forecast period, which includes purchasing physical assets (eg, school buildings), advances (eg, student loans), providing capital to CEs (eg, New Zealand Transport Agency (NZTA)) and future new capital spending (Table 2.6).

In total, Budget 2016 has allocated around $2.6 billion in gross capital spending over the forecast period. Some of the capital spending announced in Budget 2016 ($0.4 billion) will not have a cash impact during the forecast period (eg, Public Private Partnerships; refer page 41), so are not captured in the $23.1 billion mentioned above. In addition, the gross spending announced in Budget 2016 has been partly offset by capital savings, resulting in a net impact of $1.4 billion (which is broadly consistent with the allowance set out in the 2016 Budget Policy Statement).

Table 2.6 - Net capital expenditure activity 2015/16 to 2019/20[9]
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
5-year
Total
Purchase of physical assets (2.5) (3.5) (2.3) (1.9) (1.8) (12.0)
Sale of physical assets 0.2 0.1 0.1 0.1 - 0.5
Net purchase of physical assets (2.3) (3.4) (2.2) (1.8) (1.8) (11.5)
Advances made (2.3) (2.1) (2.5) (2.4) (2.2) (11.5)
Repayment of advances 2.2 1.5 2.1 2.1 2.1 10.0
Net advances (0.1) (0.6) (0.4) (0.3) (0.1) (1.5)
Investments (1.9) (2.1) (1.5) (1.4) (1.3) (8.2)
Return of investments - - - - 0.1 0.1
Net investments (1.9) (2.1) (1.5) (1.4) (1.2) (8.1)
Top-down capital adjustment 0.1 0.6 - 0.1 0.1 0.9
Future new capital spending - (0.6) (0.7) (0.7) (0.9) (2.9)
Net capital spending (4.2) (6.1) (4.8) (4.1) (3.9) (23.1)

Source: The Treasury

Net capital spending is expected to increase significantly in 2016/17, with the largest capital spend in a number of years (Figure 2.11). The size of the forecast spend does increase the risk that some spending may be pushed into future periods as capacity constraints are tested.

Figure 2.11 - Net capital spending history (excluding NZS Fund contributions and the Government Share Offer)
Figure 2.11 - Net capital spending history (excluding NZS Fund contributions and the Government Share Offer).
Source: The Treasury

Some of the increase in 2016/17 has flowed through from delays in expenditure in 2015/16 and a large part of the increase is owing to a significant portion of the Budget 2016 spending expected to occur in 2016/17. Net capital spending then starts to decrease in 2017/18 before returning to a level consistent with previous levels.

Net capital spending consists of four main components (Table 2.6):

  • Net purchases of physical assets represent forecast spending by core Crown agencies to maintain and expand their existing asset base and includes spending on defence equipment and school property and also includes capital spending related to the Canterbury rebuild.[10]
  • Net investments largely represent capital injections to CEs, to maintain and expand their asset base, and are estimated to be between $1.2 billion and $2.1 billion a year. The largest capital injections across the forecast period are to NZTA for state highways (between $0.9 and $1.2 billion each year of the forecast). Capital injections to district helath boards (DHBs), Crown Fibre Holdings and Southern Response are also included.
  • Net advances largely relate to the issuance and repayment of student loans. Student loan issuances peak at $1.8 billion in 2020 with repayments of $1.4 billion forecast in the same year.
  • Net capital allowances of $0.9 billion are forecast for Budget 2017 and remain at $0.9 billion for subsequent Budgets. The allowances represent a net spend and may consist of a higher gross spend and capital savings when allocated. The new capital spending for each Budget is spread over four fiscal years reflecting the assumed profile of future spending. This profile is illustrated in Figure 2.12.
Figure 2.12 - Capital allowances (net)
Figure 2.12 - Capital allowances (net).
Source: The Treasury

Public Private Partnerships

In addition to purchasing assets directly, the Crown is also expected to acquire assets over the forecast period by entering into Public Private Partnerships (PPPs). A PPP is typically an arrangement between the Crown and a private sector provider for the construction and financing of an asset and for the delivering of services associated with that asset. As the assets are progressively constructed, the Crown recognises a work-in-progress asset at cost. At the same time, borrowings of the same value are also recognised, reflecting the Crown’s obligation to pay for the assets in the future.

Over the next five years around $1.8 billion of assets are expected to be built through new PPP arrangements (eg, Transmission Gully, Auckland East prison and new schools) with a corresponding impact on borrowings. The timing of the repayment of the borrowings will be dependent on the length of the individual contracts, which will generally be long-term in nature (eg, 20 to 30 years) and beyond the forecast horizon.

With regards to the current PPPs, all, with the exception of Transmission Gully which is managed by NZTA, are included within the core Crown segment.

Impact on residual cash

Cash flows in relation to PPPs will commence on the completion of the asset. Residual cash captures the operating and capital activities of the core Crown. Core Crown cash payments in relation to ongoing interest costs and maintenance will impact on residual cash. As the repayments of the obligations from PPPs are not operating or capital but financing in nature they do not impact residual cash.

Impact on core Crown net debt

Obligations under a PPP arrangement increase borrowings and gross debt and, if the PPP is within the core Crown reporting segment, they will therefore impact on core Crown net debt. In general, during the construction phase of the asset, core Crown net debt will increase and then gradually decrease as the obligation is paid.

Impact on Budget 2016 capital allowance

Of the $1.8 billion of assets expected to be built through PPP arrangements, around $0.4 billion has been managed within the Budget 2016 capital allowance. The remaining $1.4 billion is managed outside budget allowances as the funding will be obtained from existing sources (eg, the National Land Transport Fund in the case of Transmission Gully).

Table 2.7 - Profile of PPP construction
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
5-year
Total
Core Crown
net debt impact
Auckland East prison 0.1 0.2 - - - 0.3 0.3
Schools 0.1 0.1 0.1 0.2 - 0.5 0.5
Transmission Gully 0.1 0.3 0.3 0.2 0.1 1.0 -
Total PPP assets under construction 0.3 0.6 0.4 0.4 0.1 1.8 0.8

Source: The Treasury

Notes

  • [9]Negative balances in this table represent cash outflows, while positive numbers represent cash inflows.
  • [10]The total estimated cost to the crown of the Canterbury earthquakes and rebuild (both operating and capital) is currently forecast to be $17.2 billion. Refer note 24 in the Forecast Financial Statements chapter for further details.
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