Eric Crampton: Why is NZ so helpless when it comes to funding infrastructure?

A century ago, if a community wanted a town hall, or improved pipes, or flood protection works, they could just get on with it.

OPINION:

Experimental psychology was a bit wild in the 1960s. Scientists would run experiments on beagles, giving them painful shocks. If a beagle learned it could not avoid a painful shock, because the experimenters designed things that way, the pup would stop trying. Even if the experimenters later made it easy to avoid the shock, the beagle had learned helplessness.

Over the past few months, I’ve been reading about how New Zealand’s communities used to be able to get things done.

A century ago, if a community wanted a town hall, improved pipes or flood protection works, they could just get on with it.

Changes to local government in 1989, and to local government debt financing in 1995, blocked the mechanisms that communities once used to pay for projects that they considered important.

Councils took over a lot of the functions that communities once provided on their own.

Once councils started getting near their debt limits, funding and financing even basic infrastructure got hard.

And I wonder if we’ve learned a bit of helplessness as a consequence. This week, the New Zealand Initiative released a research note on better funding and financing for infrastructure projects.

New Zealand’s housing shortage has a lot of underlying causes. One important underlying cause is infrastructure funding and financing.

In an earlier era, it was easy to ring-fence debt for infrastructure projects so that those benefitting could pay off the debt over decades.

Under the Local Bodies Loans Act, a neighbourhood or community would propose a project. A vote would show whether benefitted property owners would be happy to pay a levy over the next decade or more to pay off the loan needed to fund the work. And the project could proceed. Ngaio Town Hall in Wellington, not far from my house, provides a great example.

After Wellington City Council was established, residents in the northern suburbs set up the Ngaio Progressive Association – a voluntary society.

In the early 1920s, the Ngaio Progressive Association wanted a town hall for local social occasions.

Rather than beg Wellington Council for money, they just got on with it.

They held a vote. Ratepayers were happy to pay a higher rate on their properties over the next decade to pay off the debt for a hall. Construction started in 1924, finished in 1925, and the community continues to enjoy the hall a century later.

Project-based financing enabled all kinds of infrastructure. Projects had to be notified in the New Zealand Gazette. The March 5, 1924, issue included 10 projects from seven different councils and boards: the Mount Wellington Road Board, the Franklin Electric-Power Board, the Wairau River Board, the Pukeokahu-Taoroa Rabbit District, the Otorohanga County Council, Masterton County Council and Avondale Borough Council.

Avondale Borough Council took on debt to fund sewerage works and street improvements in the borough’s north ward.

The ward’s ratepayers wanted the project and were willing to pay for it through a special levy on their properties over 36 years. Spreading the cost over time made annual charges affordable.

The Local Bodies Loans Act was flexible. Councils could initiate projects but communities could set up special-purpose local boards to take on projects as well. In those cases, council’s main job would be to collect the rate that the community had agreed to take on to pay for the works.

Ratepayer assent to the project, debt and levy provided an important check: did the community really want the project, including its cost?

It all made for a virtuous circle. If a set of farms needed flood protection works, they could levy themselves to pay for it over time. They didn’t need to worry about whether the council could afford the works or where it might sit on council’s priority list. They could bank on being able to finance viable works, so they could just get on with it.

The opposite of learned helplessness.

The kind of project-based financing that New Zealand used a century ago remains the norm in American local government. Projects as small as a parking garage in Albany, New York, are funded by long-term bonds paid off by garage users over time.

But New Zealand today seems neither able to look to workable policy from its own past, or across to America. A century ago, Kiwis were able to build infrastructure while making sure that those who benefitted from it paid for it over a long period. The combination was enabling.

Now, it seems generally impossible to fund useful projects.

Are we that much stupider than we once were?

Or have communities and councils learned helplessness because the tools they needed to pay for important works were taken away?

We just sit with the experimental psychologist’s beagle in the cage, putting up with needless self-imposed pain.

Workable infrastructure funding and financing would help unlearn a lot of helplessness.

- Dr Eric Crampton is chief economist with The New Zealand Initiative.