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Infrastructure

Secure and efficient transport, energy and communications infrastructure is essential to a well-functioning and high-productivity economy. We think the capacity of the existing structure around telecommunications, airports and ports is adequate for a dynamic, growing economy. However, we consider that there are more significant issues around electricity and roads.

Electricity

New Zealand’s electricity market shares the key characteristics of other liberalised markets around the world. We share common features of separation of generation and transmission, allowing consumers to choose suppliers, introduction of wholesale markets, regulation of access to the grid and the introduction of a sector-specific regulator.

A prolonged period of economic growth has meant that electricity demand is clearly moving closer to supply. This is reflected in the rising price of electricity. As a consequence, many potential new generation projects are being considered by generating companies. On balance, we believe that the basic regulatory settings around electricity remain sound but there are three aspects of the policy settings that warrant close monitoring.

  • The extent to which new generation and transmission proposals are able to obtain secure environmental consents in a timely manner. Recent RMA reforms should assist but it may be necessary to consider use of the new mechanisms available for providing clearer articulation of the national interest in generation and transmission. Ministers will sometimes need to bring the consenting process to the central government level.
  • Uncertainty around fuel stocks. Investors will have to consider our declining known stock of gas relative to projected demand for electricity and consider other options, such as importing gas or investing in other fuel stocks. Electricity prices are rising, which will enable generators to invest in relatively more costly fuels.
  • The performance of the Electricity Commission. The newly created Commission has an ambitious workload and must establish robust relationships with all the electricity market participants.

Roading and urban transport

There has been significant under-investment in roading for a sustained period, since only projects with very high benefit-cost ratios (BCRs) have received funding over the last decade. Recent increases in road funding have the potential to significantly improve transport outcomes.

Figure 6: Land transport funding has increased markedly
Figure 6: Land transport funding has increased markedly.
Source: The Treasury

In the face of this rapid increase in funding, the current challenge for the roading and urban transport sector is to ensure that spending is of high quality. Specific issues are:

  • With the economy running at near capacity, completing projects without putting pressure on wages and inflation will be challenging. Any further investment in the short term is likely to result in cost escalation rather than improved transport outcomes, because of the constraints on the speed at which the construction industry can gear up.
  • Since 2004 there has been a move away from the benefit-cost approach for determining funding priorities as a consequence of the New Zealand Transport Strategy, as well as a number of regional transport packages. There is a danger that this has led to some projects that have relatively low BCRs being funded. We would recommend that all land transport funding should be based on a rigorous, nationally consistent and transparent allocation framework, rather than targeted to specific regions or modes.

Recommendations

  • Retain planned funding at current levels for land transport over the short term and assess long-term transport needs once the impact of current decisions becomes clearer
  • Allocate funding to projects with the highest national benefit based on transparent and consistent criteria
  • Strengthen the benefit-cost allocation mechanism to improve quality and consistency of decision-making
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