ANALYSIS:
In May 2020, in the early days of Covid-19, Minister of Finance Grant Robertson delivered a surprisingly frank speech to the Wellington Chamber of Commerce.
“We should all acknowledge things weren’t perfect before Covid-19 hit us,” Robertson said. He added: “there were ways in which we had not reached the standards we aspire to as a country”.
In those first few months of the pandemic, commentators asked big and probing questions about the state of contemporary economies and societies. In the Financial Times in April 2020, Indian writer Arundhati Roy called the pandemic “a portal, a gateway between one world and the next”.
Robertson echoed this view. “There are few times in life when the clock is reset,” he said. “If your house were to burn down,” he asked, “you probably wouldn’t build it back exactly the same, would you?”
Over two years on, some of that imaginative spirit seems to have been sapped in public conversation.
There’s no question that there have been moments of creative and courageous policy-making. A generous, speedily administered wage subsidy. Effective collective messaging: “the team of five million”. An active state mobilised to deliver a public health response that kept the country covid-free for months.
But inequality has widened. Our masks are off. There’s a sense of the old normal setting back in.
Can we still talk about building our house back differently?
In my view we don’t have a choice. Our deepseated housing and infrastructure problems have persisted. Across the economy, we continue to be dependent on a small number of industries.
In the 1930s and 1970s international developments prompted a rethink at home – and major moments of economic reconstruction. Without being unduly nostalgic, we can learn from those moments of reconstruction. In particular, we can learn from the Ministry of Works and Development Finance Corporation we once had.
Could we update these institutions and learn from their failings? We could call them, in our different twenty-first century context, a Ministry of Green Works and a National Investment Bank.
The Government has made some inroads into the housing crisis. The extension of the ‘bright-line’ test and the removal of interest-deductibility seem to have cooled house price increases. Building consents have increased and new public housing initiatives have been championed by Housing Minister Megan Woods.
But house prices remain stubbornly high. In May there were more than 27,000 people on the public housing waitlist. A stepchange is needed to address the depth of housing deprivation and unmet need.
The scale of the Government’s response has been limited by how it’s chosen to address the crisis. The approach across the housing spectrum has been to rely on private sector builders, developers, and providers. Hostels and motels have been relied on for emergency housing. Leading developers have emphasised that a reason that KiwiBuild was unable to deliver at scale was because it was too dependent on the private market.
This contracting-out model relies on contractors and consultants, increasing costs. It leans on a construction industry with well-documented productivity and innovation problems. It means the response to the housing crisis is fragmented.
There is another way. The alternative is direct government construction without mark-ups, integration of the supply chain, and coordination of building. This is how the Public Works Department and Ministry of Works operated at different points in New Zealand history (although the Ministry of Works did contract out some work, as Rosslyn Noonan’s book By Design observes).
A public entity charged with building directly could bring in expertise from the private sector – top-flight architects, developers, engineers. Some of the best surviving council housing across London involved partnerships between architects and local government. A public entity could take advantage of economies of scale and lower borrowing costs. It would have standing capacity to adapt to infrastructural needs, including future health crises or natural disasters.
Two obvious focus areas are public housing and passenger rail. Over a 10-year period from 1965 Sweden build a million public rental homes in a scheme known as the Million Programme (Miljonprogrammet). Historian Andre Brett has written about under-used rail infrastructure in his book, Can’t Get There from Here: New Zealand Passenger Rail Since 1920. The Transport and Infrastructure Select Committee is undertaking an inquiry into the future of inter-regional passenger rail.
In September the Council of Trade Unions proposed a revamped Ministry of Works, a Ministry of Green Works, in a report called Building a Better Future. Last year housing expert Jacqueline Paul and I found widespread interest in a Ministry of Green Works among engineers, house-painters, and planners, in a report we wrote, A Ministry of Green Works for Aotearoa New Zealand, backed by FIRST Union.
We proposed a Ministry of Green Works with design, construction, and oversight arms – and a training and materials strategy. We called it a Ministry of Green Works because we suggested it could ensure all new public infrastructure meets sustainability (as well as accessibility) standards.
Jacqueline Paul and I urged that any new ministry learns from the mistakes of the 21st century institution. The last Ministry of Works was a vehicle of colonisation. We proposed that a Ministry of Green Works be restricted from acquiring new land, and resourcing be allocated to iwi, hapū, and Māori authorities for housing and infrastructure, consistent with Te Tiriti o Waitangi.
To avoid the ministry being overly top-down, devolved offices could be set up – with headquarters in Northland or Christchurch. Close relationships would need to be built with Kāinga Ora, KiwiRail, and the NZ Railways Corporation. The Ministry of Works would require upfront investment from the government, but costings suggested money could be saved in the long-term by eliminating markups in the construction supply chain, with debt repaid over time.
A Ministry of Green Works is the kind of proposal we should be seriously considering if we want to lift the ceiling on action to tackle the housing crisis. It would be a way to help kickstart the economy again after covid. A way to reclaim ambition as a collective value.
A Ministry of Green Works could provide a step-change in delivering public infrastructure and housing we need now. How, though, can our economy as a whole be upgraded in the long-term?
Commentator and writer Bernard Hickey has called New Zealand’s economy “a housing market with bits tacked on”. The figures back him up. A 2022 analytical note from the Reserve Bank found that the aggregate value of land and housing in NZ is around $1.5 trillion, over seven times the value of all companies listed in the New Zealand stock exchange.
The Government has taken some steps towards building a more productive economy. A Provincial Growth Fund has channeled money into regional development, and Industry Transformation Plans have boosted strategic sectors like digital technologies, and forestry and wood processing.
But the Provincial Growth Fund lacked structure, and the money committed to Industry Transformation Plans is modest. Similarly situated countries are moving towards more hands-on industrial policy, recognising the government is never neutral in the economy and that a more strategic approach is needed.
One tool increasingly deployed around the world are national investment banks or national development banks. The British Conservatives established a UK Infrastructure Bank in 2021. The New Zealand National Party proposed an Infrastructure Bank in its 2020 election campaign.
A national investment bank is established with a significant initial injection of government capital, and it lends to strategic industries, and can provide grants and advice. Around the world, national investment banks often have a focus. Germany’s KfW (originally Kreditanstalt fur Wiederaufbau, Credit Institute for Reconstruction), for example, has focused on energy transformation.
I spoke to Jen McArthur, a New Zealander who’s now an Associate Professor in Urban Infrastructure and Policy at University College London, about her published work on public banking. She described national investment banks as a “powerful policy tool” for financing projects that commercial banks won’t support, and providing long-term support to strategically important sectors.
New Zealand once had a national investment bank, the Development Finance Corporation (DFC), which was expanded under Norm Kirk’s government in 1973 before being privatised in the late 1980s.
There is very little publicly available research on the success and failings of the DFC, with the exception of one Reserve Bank research note examining the demise of DFC NZ Ltd in 1989 once the government-owned bank was privatised.
I called John Hunn, the general manager and chief executive of the DFC from 1973 until 1986. Hunn explained how the DFC was “driven by New Zealand having to re-engineer the whole economy” as Britain joined the European Economic Community in 1973, and by the limits on commercial bank lending.
Hunn noted the DFC played a key role in regional development and export expansion, in particular through “suspensory loans”: loans that were written off when job targets and export sales were met.
Hunn did not romanticise the DFC, but observed that the DFC expanded business into some of the most depressed regions in New Zealand.
Hunn pointed out that industries that are important in the economy today – including wine, kiwifruit, and tourism – were built up with the support of the DFC. The DFC provided advice and financing, and expanded its balance sheet from $20 million to $1.2 billion over time.
Another ex-DFC analyst told me that the DFC provided a “fantastic training ground” for young analysts and provided “certainty of funding ... which allowed a company to invest in the longer term”. Neither this analyst nor Hunn are one-eyed in their politics: Hunn went on to become chief executive of Todd Corporation, and the analyst was highly successful in private equity.
Economist Mariana Mazzucato has written in her book The Entrepreneurial State about how US and European economic innovation can often be traced back to some element of government funding. She demonstrates that key elements of the iPhone – including the touch screen and the internet – can be linked back to US public science and research funding. Another economist Ha-Joon Chang, similarly, has examined the effectiveness of export targets in countries like South Korea in the build-up of industry. John Hunn’s account of the DFC suggests that Mazzucato and Chang’s insights apply in New Zealand. New Zealand also had an under-examined Rural Bank, which supported the agricultural sector, and other institutions like the Import Export Corporation.
All of this suggests there may be a case for a rejuvenated national investment bank, at another time of economic reconstruction. A separate Māori investment bank could be established to facilitate lending, in particular to Māori collectives. The national investment bank could be developed out of the Provincial Growth Fund and the existing Green Investment Finance Ltd, with strategic focus on innovation, decarbonisation, and regional development.
There are risks. Hunn noted that the DFC was “run at arm’s length by commercial people”. Jen McArthur underscored the need for a national investment bank not simply to de-risk and prop up private investment. McArthur acknowledged that a national investment bank could be seen as replicating private venture capital, but pointed out that venture capital “isn’t necessarily geared towards long-term, public value creation”.
Some might recite the line that the Government shouldn’t pick winners. But the Government is always involved in the economy. The question is not whether public investment should support sectors, but how this can be done strategically and effectively. The metaphor of ‘picking winners’ suggests that policy is backing individual companies in an economic race. A national investment bank is involved in the more fundamental task of industrial development and economic transformation.
After speaking to John Hunn on the phone, I realised I hadn’t asked him about political interest in the DFC, since it was privatised. I sent him a text: “have politicians since the 1990s ever asked to speak to you about the DFC?” He sent me back a simple one word answer: “No.”
There are no silver bullets in economic reconstruction. But we should learn from our history, and be specific in proposals to move the conversation forward.
A Ministry of Green Works and a national investment bank could at least be part of a plan for how we might build back our house differently.
Max Harris has worked in law, economic policy, campaigns, and academia. He is the author of the book, The New Zealand Project, and now splits his time between legal research and campaign work for ActionStation. He was the campaign manager for Efeso Collins’ mayoral campaign.
Huge crowds gathered at Christchurch's Bridge of Remembrance and crossed over Auckland's Harbour Bridge on Wednesday.