We need to spend a massive amount more on water infrastructure - the arguments are about how we pay for it. Photo / Supplied
We need to spend a massive amount more on water infrastructure - the arguments are about how we pay for it. Photo / Supplied
GHD chief economist David Norman says New Zealand faces a challenge delivering infrastructure at a time when the rest of the world thinks it can use infrastructure to build its way out of economic weakness.
New Zealand is competing on a worldwide scale, not only for labour, but for the materials and even the machinery needed to build infrastructure projects.
Norman points out that major investment in New Zealand’s infrastructure was already under way before the Covid-19 pandemic disrupted progress.
The Labour Government’s New Zealand Upgrade Programme set aside $12 billion in late January 2020 for infrastructure spending.
“Then we had the ‘shovel-ready’ projects through the emergency Covid Budget, which was about $3b,” he relates. “Then there was the $2b infrastructure acceleration fund — a pot of money run by Kāinga Ora that councils can bid for. It is specifically for the infrastructure needed to enable more housing.
“There’s the Climate Emergency Response Fund, another pot of money for infrastructure funding.
“We have all these pots of money that didn’t exist three years ago, which is fantastic. It acknowledges that we need to get on and build infrastructure.”
But New Zealand’s infrastructure sector now faces a variety of resilience challenges; the main ones are financial, social and climate-centric.
Norman explains that by creating a sizeable pool of money, the Government relieved one aspect of the financial resilience challenges facing the sector, only to arrive at others.
“We’re in a global competition for resources, while at the same time, the world is enduring supply chain disruptions because of lockdowns.
“And now we are seeing inflation, not only in the wider economy, but also in construction and infrastructure delivery.
“It means we can’t build all the things we want. There aren’t the workers to do it, and some projects will be eye-wateringly expensive.”
For Norman, financial resilience means we need to be wiser about prioritising what we deliver and how quickly.
He asks: “What are we going to deliver, when, at what price, and who should pay for it?”
He says the last of these questions is the hardest, and it is one that New Zealand doesn’t tend to answer well at both the central and local government levels.
Local government finance for infrastructure projects is familiar territory for Norman.
Before he joined GHD, he was the chief economist for Auckland Council for four-and-a-half years. Previously, he worked for organisations like Westpac and PwC.
“If you want to build 400 new houses, who should pay for the infrastructure needed to support the growth, or should the development be primarily paying for itself?
“Historically, we put the burden on the general ratepayer rather than letting the development pay for itself. And now we’ve got into a bind, because that money is running out.
“Ratepayers are understandably concerned about large rate rises at a time of fast-rising cost of living. The system we have at the moment is broken, and it means we’ll get further and further behind with delivering the infrastructure, because in that sense we are not financially resilient.”
David Norman. Photo / Supplied
Three Waters project
An obvious example of this is the planned Three Waters project.
Leaving the politics aside, there is widespread agreement that New Zealand has a problem with delivering safe drinking water along with reliable wastewater and stormwater services.
Norman says everyone concerned knows we need to spend a massive amount more on water infrastructure.
This touches on something important to Norman’s view of the infrastructure sector. He says it is important to remember that “infrastructure is not an end in itself; it’s a means to improving the quality of people’s lives”.
Viewed through this lens, Norman says the key is to focus on a project’s outcome. In the case of the Three Waters project, the key is to focus on the outcome and achieve it at a price that can be afforded.
“The outcome we want is water that doesn’t make people sick. We need to stay focused on this and not get obsessed with outputs and targets that might be right for one part of the country, but not another.
“We want financial resilience; we want to pick the right projects. We need a robust process to prioritise which projects get done first.”
Cost escalation is another burning issue when it comes to financial resilience. Norman is working with clients who face cost escalations and are trying to mitigate the risks. With large projects, it’s possible to go direct and bulk-buy materials, which (to a degree) can reduce the risk from geopolitical changes.
“Cost escalation is a function of two things. First, the lockdowns. It’s not that they were the wrong thing to do, but we are now reaping the consequences,” Norman observes.
“China still runs an elimination policy and is shutting down factories and cities. That’s having an impact on global supply chains.
“It’s like a little stone dropped in the pond - the ripples keep going for months, even years.
“Second, we’ve come through a period of incredibly cheap money. That was a good time to invest in infrastructure. So, everyone in the developed economies worked their way through the onerous decision-making process and we all got there at the same time, just as the supply chains were disrupted and borders were closed to workers.”
It’s not all bad news. Norman thinks there could be a few more years of readjustment and inflation.
“We’ve seen the risks of a highly-integrated global supply chain, and there is work going on around the world to improve the resilience of these chains.
“If another large disruption occurs, maybe another pandemic or a war, we have lessons from this experience to help plot a new course.
“Overcoming the climate resilience challenges faced by the sector means looking again at where to invest in infrastructure.”
Norman says the world is unlikely to meet the goal of limiting warming to 1.5C, and there’s a case for moving from mitigation strategies to adaptation strategies. He says we need to think about not building infrastructure in locations that are at risk of coastal inundation.
“Common sense needs to prevail as to how much investment goes into areas we know are significantly at-risk. The infrastructure sector typically builds assets that have an expected lifespan of 50 to 100 years. Does it make sense to put a brand-new asset in a place that might be at-risk?”
At the same time, dealing with climate resilience will have a huge impact on the cost of infrastructure products. Norman says he is working with local councils who say they don’t have the money to manage all the climate change risks.
“It’s not a secret, but in the past, communities have assumed that we would invest in, say, flood mitigation to protect properties.
