Cabinet paper

Cabinet Paper ECO-24-SUB-0076: Improving Infrastructure Funding and Financing

Formats and related files

Improving Infrastructure Funding and Financing#

Proposal#

1 This paper sets out a proposed work programme that I consider will allow the Crown and councils to more smartly and fairly fund and finance infrastructure. I am seeking Cabinet endorsement of this work programme.

Relation to government priorities#

2 This work programme forms the Improving Infrastructure Funding and Financing priority within the broader vision set out in my Infrastructure Priorities Cabinet paper. Undertaking this work programme enables the government to achieve its overall priorities to:

2.1 Lift New Zealand’s productivity and economic growth, and

2.2 Improve housing affordability.

3 These priorities are referenced in the government’s coalition agreements.

Executive Summary#

4 Public infrastructure is an essential social and economic enabler for the prosperity of New Zealanders. The infrastructure system is facing significant challenges that will worsen if we do not make changes. The ways in which we fund, finance, and procure infrastructure are key enablers of a smarter and fairer infrastructure system.

5 The proposed work programme will support both the Crown and councils to make better use of existing assets, and sustainably address New Zealand’s infrastructure deficit, with a focus on the infrastructure required to enable housing growth and economic productivity.

6 The work programme has three pillars. I propose to:

6.1 Clarify when the Crown will use its balance sheet to fund and/or finance infrastructure,

6.2 Broaden and enhance the funding and financing tools available to the Crown and councils, and

6.3 Modernise and develop the Crown’s policies, frameworks, and contracting models.

7 I will be accountable for the delivery of the overall work programme, with cross-agency and cross-portfolio collaboration to be supported by the Infrastructure and Investment Ministers Group (IIMG).

8 There is close alignment between this work programme, my broader infrastructure priorities, the Going for Housing Growth programme, Local Water Done Well programme and the Adaptation Framework. I will be asking councils to significantly increase the supply of developable land for housing and they will require appropriate funding and financing tools to deliver on that expectation.

9 I have consulted the IIMG on the scope of work and timing of deliverables, which have been agreed with relevant agencies. Many of the priorities signalled in this paper will be completed by 30 September 2024. I will report back to Cabinet on progress and next steps in late 2024. This report back will, where relevant, seek Cabinet approval of proposed policy changes or revised policies, frameworks, or contracting models.

Background#

10 Public infrastructure is an essential social and economic enabler for the prosperity of New Zealanders. It connects our communities, regions, and cities, and provides essential services for our citizens, residents, and visitors. It underpins travel and freight movement on rail and roads, learning in schools, and healing in hospitals.

11 New Zealand’s infrastructure system is facing significant challenges that will worsen if we do not make changes. Decades of underinvestment have left us with significant infrastructure needs that we cannot buy our way out of. Underinvestment in infrastructure can also lead to unplanned and more expensive fixes, and reduced resilience to natural hazards. The way we plan, invest, build, and manage infrastructure is inefficient and fragmented. We need to bring the infrastructure system back on track.

12 A significant amount of work is required to enable the government to deliver its infrastructure priorities, requiring a collaborative effort across Ministerial portfolios and Crown agencies. I have established the IIMG to oversee this significant cross-agency work programme (ECO-24-MIN-0048 refers). This group will ensure dependencies are well managed, we have strong coordination and a consistent approach that delivers the change we need.

Analysis#

13 As a starting point I want to clarify the difference between funding and financing. Funding for infrastructure is sourced either directly from users or indirectly through the allocation of government (Crown or local) tax, rates, or levy-based revenue sources. Financing is the mechanism through which investments in infrastructure can be made, including debt or equity from either the public or private sector. The cost of financing, access to financing and risk appetites will vary depending on the source and form of financing. Ultimately, funding is needed to repay any financing.

14 The first order challenge for the infrastructure system is funding[1]. Crown and council infrastructure has historically been primarily funded by taxpayers or ratepayers. The land transport sector is a notable exception. Historically, road users have funded the National Land Transport Fund (NLTF) through the charging of Fuel Excise Duty (FED) and Road User Charges (RUC). In recent years a pause in FED and RUC adjustments alongside an increase in intended capital investment have placed significant pressure on the financial sustainability of the NLTF and resulted in calls for Crown capital.

15 Taxes and rates can be an appropriate source of funding for some forms of infrastructure (in whole or in part), but New Zealand’s heavy reliance on this approach has resulted in the emergence of three significant challenges.

16 First, funding settings (for example pricing) 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 stated that New Zealand’s infrastructure deficit cannot be resolved from building new infrastructure alone, and an improved approach to utilising existing assets is necessary[2]. One way to achieve this is through changing the way we pay for assets and services to better manage demand.

17 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. Research from the Infrastructure Commission shows the amount we are investing in renewals is far below depreciation for road and water infrastructure[3]. Insufficient asset maintenance shortens the useful life of assets, impacts on levels of service, and can ultimately result in a greater whole-of-life cost to both the Crown and councils.

18 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[4] and used[5], at times, struggle to recover the full cost of growth from users or beneficiaries. This results in a reluctance by councils to utilise existing tools, including making more appropriate use of financing or their broader balance sheet.

19 In the absence of sustainable funding settings and incentives, the Crown has at times directly funded council infrastructure. This approach tends to be counterproductive, as it has undermined councils’ utilisation of their existing funding tools and balance sheets. The fiscal impacts of these interventions have been considerable, with programmes such as the previous government’s HAF, IAF, and NZUP[6], extending into the tens of billion dollars.

20 While the first order system challenges relate to funding, evidence also suggests we are not financing[7] infrastructure efficiently.

21 As a result of their funding tools and behavioural constraints, councils do not tend to finance infrastructure assets in line with asset lives. Current debt-torevenue limits may mean ratepayers are being asked to fund long-lived infrastructure assets from operating revenues rather than with debt. Analysis indicates councils can, and have in the past, been able to sustainably utilise greater levels of debt[8].

22 Private capital can also play a role in improving infrastructure funding and financing. We already partner with private capital in many ways to deliver infrastructure, whether that is utilising their skills in design and construction, through to utilising their whole-of-life asset management expertise in leases and PPPs.

23 These partnerships can provide value-for-money if procured well and for the right types of investment. Value-for-money can be achieved through risk transfer, innovation, capacity, or the application of whole-of-life disciplines. Neither the Crown nor councils have a consistent and clear framework to assess when and how to utilise private capital in the delivery of public infrastructure.

Improving infrastructure funding and financing settings#

I will clarify when and how the Crown should use its balance sheet to fund and/or finance infrastructure

24 To meet the scale of infrastructure challenge in front of us, I do not consider the status quo approach to funding investments to be sustainable. The Crown will need to be more strategic and informed about how it uses its balance sheet. Rather than defaulting to the use of grants, I will expect every significant infrastructure project that seeks support from the Crown to consider opportunities for user-pays funding and private financing. If such opportunities are not available, I will expect to understand why and what the options are to ‘bridge’ to those opportunities.

25 This is a change in mindset, but one I consider is required to ensure the Crown gets value-for-money from any use of its balance sheet – both in terms of outcomes and through the potential to maximise the number of investments the Crown can make. The Government remains committed to using its balance sheet for infrastructure, and grants will remain a core part of the funding mix, but I will preserve that capacity for investments where alternative options are not available or where it is more appropriate for the Crown to be the primary funder.

26 To deliver this outcome, the Treasury will develop and publish a set of principles that will guide the Crown’s rationale and approach to the provision of Crown funding and/or financing. The principles will set out the issues the Crown expects to have been considered before providing support to any infrastructure investment, including opportunities for private capital and existing infrastructure specific Government funds to be deployed effectively. These principles will also provide clarity to our potential partners and agencies across the infrastructure system, including councils and the private sector.

27 I will undertake this work alongside Hon. Nicola Willis as the funding and financing principles will be applicable across a wide range of Crown activities and have implications for the Crown’s fiscal and balance sheet position.

I will broaden and enhance the funding and financing tools available to the Crown and councils

28 To address current system challenges, I propose to build out the tools available to the Crown and councils with a focus on two key themes: value capture and enhanced transport revenue.

29 First, the Ministry of Housing and Urban Development will lead the development of a sector agnostic policy framework for value capture. In developing this framework, I will consider whether value capture is best delivered through enhancements to existing tools[9] or through the development of new mechanisms. As part of this work, I will also consider whether existing funding tools are generally fit for purpose and if improvements are necessary to ensure infrastructure can be delivered fairly. Parliamentary Under-Secretary Simon Court will assist me in this work with officials in the delegation I have provided him for policy development on infrastructure funding and financing tools – he will keep me informed on the progress and issues as the lead Minister.

30 Second, the Ministry of Housing and Urban Development will lead the work on improvements to the Infrastructure Funding and Financing Act. Parliamentary Under-Secretary Simon Court will similarly assist me in this work as part of his delegation, keeping me updated as lead Minister.

31 Third, the use of tolls and road user charges by the Crown will be reviewed. Time-of-use charging will also be investigated as part of Ministry of Transport’s overall transport revenue work programme. These initiatives are in line with direction signalled in the draft Government Policy Statement on Land Transport. Hon. Simeon Brown is the lead on these priorities as Transport Minister and will present his proposals to the IIMG and Cabinet in due course.

32 As part of this work programme, Hon. Simeon Brown will also keep me closely informed on work to enable new funding and financing tools as part of Local Water Done Well. An important item that has linkages with the Improving Infrastructure Funding and Financing priority is the Local Government Funding Agency (LGFA) reforms being undertaken by the Department of Internal Affairs and the Treasury. These reforms will seek to broaden LGFA’s ability to lend across local infrastructure investment.

In providing a broader set of tools, I will also modernise and develop Crown’s policies, frameworks, and contracting models.

33 To deliver the change that is needed, the Crown will have to act as a fair and more competent customer. I have directed the Treasury to lead work modernising Crown policies and frameworks, and the Infrastructure Commission to lead work modernising the PPP model with input from the Treasury. My intent is to ensure the Crown takes a more strategic approach to funding and financing as part of its procurement processes, including in relation to PPPs, sale and leasebacks and unsolicited proposals.

34 Modernisation of Crown’s policies across these areas will allow for the use of private capital where it represents value for money for the Crown. I have asked Parliamentary Under-Secretary Simon Court to assist me in this work programme. I will provide updates to the new IIMG and Cabinet over coming months. From time-to-time, I will request Parliamentary Under-Secretary Simon Court to make updates on my behalf.

35 Shifting our approach also applies in the context of Crown’s interactions with councils. City and Regional Deals (CRD) are a format for achieving mutually beneficial outcomes between Crown and councils and the establishment of these (including the role of PPPs, tolling, and value capture mentioned above) is part of the ACT-National Coalition Agreement. Hon. Simeon Brown has led the development of a framework for how Crown will approach CRDs. Hon. Simeon Brown will present this framework and his proposed next steps to Cabinet in due course.

36 Given councils are insufficiently incentivised to deliver infrastructure for housing in advance of growth, council incentives are an important related focus area. These incentives, including consideration of sharing with councils a portion of GST collected on residential builds, also form part of the ACT-National Coalition Agreement. Hon. Simeon Brown and I will lead this work and present proposed next steps to Cabinet in due course.

Note

  1. [1] Funding for infrastructure includes fuel excise duty/road user charges, local property rates, targeted rates, Infrastructure Funding and Financing Act levies, development contributions, water infrastructure charges, and general taxes.
  2. [2] New Zealand Infrastructure Commission (2022). New Zealand Infrastructure Strategy 2022 - 2052.
  3. [3] New Zealand Infrastructure Commission (2024). Build or Maintain? New Zealand’s infrastructure asset value, investment, and depreciation, 1990-2022.
  4. [4] Development contributions are the primary tool for recovering growth capital expenditure. The Local Government Act 2002 Section 197AA states the purpose of development contributions is to recover “a fair, equitable, and proportionate portion of the total cost of capital expenditure necessary to service growth over the long-term”.
  5. [5] Local Government New Zealand, New Zealand Local Government Funding Agency and Cameron Partners Ltd in their joint submission to the Future for Local Government review (2020) state that local authorities "struggle to recover sufficient funding from development contributions to cover the full cost of related infrastructure while others discount development contributions to encourage development”.
  6. [6] Housing Acceleration Fund (HAF) $3.8 billion; Infrastructure Acceleration Fund (IAF) $1.0 billion; New Zealand Upgrade Programme (NZUP) $12.0 billion; note, not all funding was utilised for local infrastructure.
  7. [7] Typical debt financing sources for the public sector include the Crown, the LGFA and directly from private markets.
  8. [8] New Zealand Infrastructure Commission (2024). Is local government debt constrained. A review of local government financing tools.
  9. [9] Existing tools such as Infrastructure Funding and Financing Act levies, targeted rates, and development contributions. Another mechanism for value capture is to acquire land prior to the announcement of infrastructure investment intentions.

Delivering the work programme#

The core of this work will be completed by the end of September 2024

37 I have consulted the IIMG on the scope of work and timing of deliverables, which have been agreed with relevant agencies. Many of the priorities signalled in this paper will be completed by 30 September 2024. The Treasury will be my lead advisors across this work programme, and I will report back to Cabinet on progress and next steps in late 2024. This report back will, where relevant, seek Cabinet approval of proposed policy changes or revised policies, frameworks, or contracting models.

38 I note that this work programme sets out several work streams which crossover with other Government priorities such as Going for Housing Growth and Local Water Done Well. I am including these cross-over workstreams in this work programme to ensure alignment on funding and financing initiatives across the system and to provide a coordinated approach to achieving the government’s overall priorities.

39 Hon. Simon Watts will also keep me informed about his work on the Adaptation Framework. The Framework will guide the Crown’s decisions on investments to reduce natural hazard risk. There is natural alignment between this work and the Improving Infrastructure Funding and Financing priority.

40 I will also progress this work programme in parallel with the establishment of a new National Infrastructure Agency (NIA). The establishment of a NIA may reallocate functions and responsibilities across the infrastructure system. Advancing work on my infrastructure funding and financing priorities will ensure we make progress across the system to achieve our infrastructure objectives without conflicting with the establishment of the NIA.

Cost-of-living Implications#

41 Addressing cost-of-living issues is not a primary objective for the Improving Infrastructure Funding and Financing priority. However, improvements to the infrastructure funding and financing system will enable greater economic growth, deliver efficient infrastructure, and improve the supply of housing, all of which will have long term impacts on the cost-of-living.

Financial Implications#

42 This work programme is expected to be funded from baselines.

Legislative Implications#

43 There are no legislative implications in this paper.

Impact Analysis#

Regulatory Impact Statement

44 There are no regulatory impacts with this paper.

Climate Implications of Policy Assessment#

45 There are no CIPA-related implications with this paper.

Population Implications#

46 There are no direct population implications with this paper. This comprehensive work programme will unlock a substantial improvement in living standards for all New Zealanders.

Human Rights#

47 The proposals in this paper are consistent with the New Zealand Bill of Rights Act 1990 and the Human Rights Act 1993.

Use of external resources#

48 No external resources have been engaged in core policy development processes for this work programme.

Consultation#

49 I have consulted with departments and agencies including Ministry of Housing and Urban Development, Ministry of Transport, Department of Internal Affairs, Ministry for the Environment, and the New Zealand Infrastructure Commission.

50 The National Emergency Management Agency and Department of the Prime Minister and Cabinet have been informed.

Communications#

51 Delivering the best infrastructure for New Zealand requires both the public and private sectors to work together. My approach will mean re-activating our partnerships with private investors and financiers. To ensure readiness across the economy, I will be attending the Infrastructure New Zealand’s Building Nations Conference – 28 to 31 August 2024 to publicly communicate aspects of the work programme set out in this paper.

Proactive Release#

52 I propose to proactively release this paper.

Recommendations#

The Minister for Infrastructure recommends that the Committee:

1 note my deliverables for the Improving Infrastructure Funding and Financing priority are to:

1.1 Clarify when the Crown will use its balance sheet to fund and/or finance infrastructure;

1.2 Broaden and enhance the funding and financing tools available to the Crown and councils; and

1.3 Modernise and develop the Crown’s policies, frameworks, and contracting models.

2 note my officials have developed a cross-agency work programme to deliver on the Improving Infrastructure Funding and Financing priority that will be overseen by the Infrastructure and Investment Minister group to ensure there is coordination and alignment across portfolios and agencies;

3 note there are several work streams within the Improving Infrastructure Funding and Financing work programme that also form part of other government priorities such as Going for Housing Growth, Local Water Done Well, and Land Transport Revenue;

4 endorse the Improving Infrastructure Funding and Financing work programme as set out in this Cabinet paper;

5 direct the Minister for Infrastructure to report back on progress and next steps for the Improving Infrastructure Funding and Financing work programme in the third quarter of 2024; and

Financial Implications#

6 note that policy work programmes outlined in this paper are expected to be funded from baselines.

 

Authorised for lodgement

Hon Chris Bishop
Minister for Infrastructure

Annex 1#

Deliverables and Roles#

Deliverables and Roles
Overall Accountability – Minister for Infrastructure (to approve scope and timing of deliverables, including for the Infrastructure and Investment Ministers Group)
DeliverableResponsible MinisterSub-delegationResponsible AgencyDescription of deliverableLinkages with other work programmes
Clarify when and how the Crown will use its balance sheet to fund and/or finance infrastructure
Funding and financing principlesMinister for Infrastructure and Minister of FinanceNoneThe Treasury

Principles that guide the Crown’s rationale and approach to the provision of funding and/or financing. The principles will ensure the Crown gets value from any use of its balance sheet, while enabling better partnering with councils and the private sector. The principles will be published.

Final principles by 30 September 2024.

Work has links to the Minister of Finance’s broader fiscal and balance sheet management programme
Broaden and enhance the funding and financing tools available to the Crown and councils
Value capture (VC) frameworkMinister of Housing and Minister of TransportUnder-Secretary to the Minister for InfrastructureMinistry of Housing and Urban Development

Staged deliverables:

Stage 1: current state-of-play and challenges with existing tools for value capture, provide options on enhancements and/or new tools to Ministers. Delivered by 30 June 2024.

Stage 2: subject to Ministerial decisions, advice on required changes to existing tools and/or advice on mechanics of a new tool and framework clarifying the various forms of value capture tools available and guide decisions about when and where to apply and use different VC tools (status quo or enhancements). Delivered by 30 November 2024.

The Ministry of Transport, Department of Internal Affairs, Infrastructure Commission, and Treasury will be key contributors into this deliverable.

Any required legislative change to follow.

Specific workstream within Going for Housing Growth
Infrastructure Funding and Financing Act (IFF Act)Minister of HousingUnder-Secretary to the Minister for InfrastructureMinistry of Housing and Urban Development

Advice on legislative reform and operational issues to improve the functioning of the IFF Act levy model, reduce costs of IFF Act levy transactions and support greater uptake (including in greenfield areas).

Further changes to give effect to wider government decisions (e.g. value capture, transport revenue, Local Water Done Well) may be considered but will be subject to the outcomes of adjacent policy work.

Initial policy advice by 31 July 2024; Cabinet decisions by 31 December 2024.
Any required legislative change to follow.

Specific workstream within Going for Housing Growth
Infrastructure Funding SettingsMinister of Housing and Minister of Local GovernmentNoneMinistry of Housing and Urban Development and Department of Internal Affairs

Advice on how policy options could address issues with current funding tools, for example, how development contributions and targeted rates can better recover the cost of growth from beneficiaries.

Policy advice by 31 August 2024; Cabinet decisions by 30 November 2024.
Any required legislative change to follow.

Specific workstream within Going for Housing Growth
Fleet-wide transition to road user chargesMinister of TransportNoneMinistry of Transport

Advice on shifting all vehicles to RUC, including enabling eRUC. Initial advice including possible timeframes and work programme by June 2024.

Final advice in mid-2025.
Any required legislative change to follow.

None
Time of use chargingMinister of TransportNoneMinistry of Transport

Advice on enabling time of use charging, and drafting instructions for legislation.

Final advice by June 2024.
Any required legislative change to follow.

None
Tolling reformMinister of TransportNoneMinistry of Transport

Advice on enhancing tolling settings, including legislative changes required to enable more tolling, and more effective tolling.

Final advice by end of 2024.
Any required legislative change to follow.

None
LGFA reformMinister of Local GovernmentNoneDepartment of Internal Affairs

Advice on enabling greater lending flexibility for water infrastructure through the LGFA.

The Treasury will be key contributors to this deliverable, given both balance sheet implications for the Crown (as shareholder in the LGFA) and the Treasury’s work-to-date leading a potential LGFA reform option for Local Water Done Well.

Final advice 30 September 2024.

This work is directly related to Local Water Done Well and has implications for Going for Housing Growth
Modernise and develop Crown’s policies, frameworks, and contracting models
Public private partnershipMinister for InfrastructureUnder-Secretary to the Minister for InfrastructureNew Zealand Infrastructure Commission

Advice on modernising the Crown’s approach to PPP procurement to apply lessons from the New Zealand and international experience to date, to better reflect the nature of prospective projects and enhance deliverability in a range of market conditions. Advice will include proposed guidance to be published on amendments to the PPP procurement process, contracting model/s and standard form contract suite. Infrastructure Commission will engage with agencies and the market to agree bankable and transactable updates to the PPP standard form contractual framework.

Final advice by 30 September 2024.
Instruct drafting changes to the NZ PPP standard form contract suite from late 2024.

None
Long-term leasingMinister for InfrastructureUnder-Secretary to the Minister for InfrastructureThe Treasury

Guidance on which circumstances it is appropriate to use long-term (whole-of-life) lease arrangements (to be utilised as part of any procurement options analysis undertaken for capital projects).

Publish by 30 September 2024.

None
Unsolicited proposalsMinister for InfrastructureUnder-Secretary to the Minister for InfrastructureThe Treasury

Revised guidance on government’s process for assessing unsolicited unique proposals.

Publish by 31 December 2024.

None
City and regional deals (CRD)Minister of Local GovernmentNoneDepartment of Internal Affairs

Framework that sets out the Crown’s expectations for its involvement in CRDs. Joint Minister for Infrastructure and Minister of Local Government Cabinet paper in late July 2024 seeking endorsement of framework, governance of CRDs, and next steps.

Report back to Cabinet by end of 2024 to seek agreement to initiate negotiations.
First CRDs to be formalised in 2025.

None
Council IncentivesMinister of Housing and Minister of Local GovernmentNoneMinistry of Housing and Urban Development

Advice on options to improve council incentives for growth, including potentially sharing a portion of GST from developments and land protection options to lower infrastructure costs.

DIA will be key contributors to this deliverable.

Policy advice by 30 November  2024.

Specific workstream within Going for Housing Growth