Days of easy money are 'over'

Bill English. Photo / Mark Mitchell

Finance Minister Bill English is known for his dour Southland humour, but even this most sanguine of politicians must have worried that the Government would find it difficult to stump up sufficient funds to rebuild Christchurch after the February 22 earthquake.

Since it came to power in December 2008, the National-led Government has made major moves to close the nation's infrastructure deficit. It has designated seven "Roads of National Significance", signed contracts to deliver $1.5 billion in ultra-fast broadband projects and instigated the long-overdue upgrade of Transpower's national electricity grid.

Chief executives of major NZ and offshore firms no longer complain that they can't take the risk of investing in major new industrial plants here because our infrastructure is either not up to scratch or unreliable.

But it's also a measure of English's skill that despite borrowing some $380 million weekly to fund Government spending, the international credit ratings agencies have not followed through with a feared downgrade.

English does admit to a period of uncertainty over the impact of the major quakes on the Government's balance sheet. The problem is, discussions with insurers are still going on behind scenes over how much they are prepared to stump up for to underpin the lengthy rebuild of Christchurch homes, business buildings and infrastructure.

"It's a period of uncertainty," he says. "Uncertainty over insurance and uncertainty over costs."

"The issue there is that there have been ongoing shakes - it's really a matter of timing. We are confident the insurers will be back in the market but the landscape keeps changing and they are constantly under review.

"Three of four weeks ago it was all around local body assets, now the focus has shifted to how you build new houses."

English recently released the Government's second National Infrastructure Plan. It's a statement of principles that underlines the factors the Government will weigh up as it prioritises its infrastructure spend.

He notes local government is also undergoing financial pressure and there is practically no large private investment partly because of the slower economy and the availability of credit.

"So, it's not about the big spend but a strong focus on the quality."

English emphasises the Government still faces considerable fiscal constraints. It is important to use existing infrastructure in an efficient manner and ensure any additions are well planned because the "days of easy public or private money are over".

At the May Budget, English issued an update on the Government's Investment Statement. It showed assets worth $223 billion at June 2010, liabilities of $128 billion and a net worth of $95 billion.

Over the next four years the balance sheet will expand, but Crown net worth will fall slightly. Net assets are projected to increase by $34 billion, but liabilities rise by $45 billion, mostly through debt issuance.

What is notable is how the statement details that the Crown will accumulate an additional $78 billion of gross assets between 2010 and 2105. This includes substantial infrastructure investment already under way, including roads, rail, ultra-fast broadband, schools, hospitals and electricity transmission and generation. The projected increase in physical assets is $38 billion by 2015. The majority of the balance includes growth in Crown financial institutions, investments and new student loans.

A large portion of total new investment, $57 billion, will be funded from sources outside the core Crown. This includes investments by State-owned enterprises (SOEs) funded from debt and retained earnings, investment gains by CFIs and levies that fund transport, the Accident Compensation Corporation (ACC) and the Earthquake Commission (EQC).

The remaining $21 billion represents the funding requirement for the core Crown, financed from general revenue.

English's officials predict that selling down stakes in Mighty River Power, Meridian, Genesis Energy and Solid Energy will bring a number of additional benefits; sharper commercial disciplines on the companies, easier access to capital, wider investment opportunities for New Zealand savers and deeper capital markets.

Proceeds are expected to be in the order of $5 billion to $7 billion; English says one of the big challenges is to get capital moving to where we think it will have a positive impact. He instances newer, better schools and modern well-organised hospitals. "To do this we need to look at ways of reprioritising poorly performing capital.

"But we clearly can't continue building up debt indefinitely, so we want to look at where we might change the mix of the assets we already own."

English - who also holds the infrastructure portfolio - is confident the infrastructure investment that New Zealand businesses had long been crying out for is now well under way.

"But we haven't really had a good look at infrastructure for growth - we've been catching up."

The latest national infrastructure plan is wide-ranging and gives a good insight into the Government's priorities. But it doesn't identify the crucial funding gap or explicitly set-out a proposed pipeline of projects. What it does do is indicate the Government is prepared to have a public debate on critical issues like whether to bring in demand pricing for infrastructure.

Stephen Selwood, chief executive of the influential NZ Council for Infrastructure Development, warns a bi-partisan approach would be needed to confront difficult pricing and funding challenges.

Selwood points to the opportunities to expand New Zealand's agricultural production footprint through investing in big irrigation projects. But he notes that even talking about water pricing quickly descends into accusations by left-leaning parties that it is "privatisation." He says pricing will help manage supply and demand, and the ability to increase supply through storage will help keep a lid on excessive prices.

Try forging a consensus on that with an election just over three months away.