Do we need to rethink how we’re investing in our network infrastructure?

In this article, Chief Executive Geoff Cooper provides an update on some of the New Zealand Infrastructure Commission’s recent work.

In November, the New Zealand Infrastructure Commission released ‘Testing our thinking: Developing an enduring National Infrastructure Plan’ to share how we’re aiming to develop the National Infrastructure Plan.

The Minister for Infrastructure asked the Commission to lead this work, but we’re working across central and local government, the sector and industry, and with the public to ensure the Plan is enduring. And while the final Plan will be delivered to the Minister in December 2025, we’re keen to keep stakeholders and the public informed throughout the process.

A National Infrastructure Plan can give us this long-term view, and answer some key questions:

• What’s needed and what should we be spending over the next 30 years?
• What’s our planned investment over the next 10 years?
• What’s the gap between the long-term infrastructure need and planned investment? And importantly, how do we address that gap?

The National Infrastructure Plan is an opportunity to build broad support for an approach to infrastructure investment that will affordably meet our needs. This isn’t just about projects – this is about how we plan and invest.

We’re not starting with a clean slate when it comes to our knowledge base for the Plan. Instead, we’re building on the work that the Commission did on Rautaki Hanganga o Aotearoa, the New Zealand Infrastructure Strategy, that was published in May 2022. The Plan will also incorporate much of the research we’ve been doing over the past five years.

I encourage you to engage with the various components of ‘Testing our thinking’ and send through your feedback. This will help us know if we’re on the right path or if there are issues or topics that we need to give more consideration to. In this article, however, I’d like to explore one area that we cover in ‘Testing our thinking’ in more depth – and that’s how we price our infrastructure networks.

We’re particularly interested in this area because New Zealand currently spends more than the average OECD country on infrastructure, but lags on measures of value. That means we need to get creative. If we can build the right infrastructure and use it more efficiently, we’ll be better positioned to meet our current and future infrastructure needs.

All infrastructure services have costs, but how we pay for our infrastructure services varies. Some funding approaches are obvious and connected to how much we use, like monthly electricity bills and mobile phone bills. Other times they are far less visible, like fuel excise that’s included in retail petrol prices or rates and taxes, which pay for many of the infrastructure services that we depend on.

How we pay for infrastructure is something we’ve been giving a lot of thought to at the Commission. In May we published a study on network infrastructure pricing that provided a baseline view of pricing across four sectors – water, transport, telecommunications and energy (electricity). The study identified three best practice goals for how infrastructure networks should be priced:

• Pricing guides infrastructure investment.
• Pricing sends signals to users.
• Pricing is used to share the benefits.

The study found that infrastructure pricing is better aligned with best practice goals in the electricity and telecommunications sectors, and less well aligned in land transport and water.

Specifically, energy and telecommunications rely more on direct-user charges and perform far better against best-practice pricing principles as a result. Like shopping in a supermarket, customers can pick and choose how much they consume and pay accordingly. These are also the sectors that have kept project investment levels in check with population growth over the last three decades. Pricing is also a powerful tool in sending signals to suppliers about where and how they should invest, as well as to users about when, where, and how they can access infrastructure services.

The reality is stark in terms of what we’re paying for infrastructure services. Since 1990, our investment has grown rapidly in water and land transport sectors where the way we charge is less aligned with best practice pricing principles compared to sectors like electricity, gas and telecommunications.

In August, we followed up on the pricing study by looking more closely at the water and land transport sectors. Our research shows how water and transport pricing can help us afford more infrastructure and make better choices about what we build.

In our water pricing report, ‘Valuing water: sustainable water services and the role of volumetric charging’, we found that charging for metered water can significantly reduce the infrastructure we need by moderating household consumption, improving leak detection, and ultimately deferring the need for expensive upgrades.

New Zealand is one of the world’s highest per-capita water users, but in communities where there’s volumetric charging, use and leakage is lower. In Kāpiti, for example, water savings through volumetric charging have allowed its council to defer construction of a proposed $30 million dam by an estimated 40 years.

In our transport pricing report, ‘Buying time: toll roads, congestion charges, and transport investment’, we found that pricing (through ‘time of use’ charging) can reduce peak-time use, and improve the efficiency of our urban road networks, again deferring or eliminating the need for upgrades. Our research also found that road tolls can help identify the most valuable roading investments. Tolling can also help fund new roads, but full cost recovery is only possible in certain circumstances.

Projects need to benefit large numbers of people, keep costs down and offer meaningful service level improvements to users over the alternative. On these metrics, it is likely that most roading projects, will recover less than 25% of the capital costs – which is a challenge to planners and design teams to think more broadly about the value proposition against competing priorities, as well as thinking carefully about options to value engineering and/or lower the cost base.

Through our work on asset management, we also know that pricing matters for the incentives to maintain what we have. When we earn revenue from an asset, the incentive to look after that asset is arguably stronger. When asset owners are generating revenue streams from other sources, like general taxation, the incentives to look after what we already have might become less clear. We see that in commercially regulated sectors, spend on maintenance is in line with expectations; in contrast, in local and central government, underspend against depreciation is common. If we get pricing right, we can also help maintain the assets we have.

How we pay for our infrastructure is an important piece of the puzzle when it comes to ensuring we’re building and maintaining the right infrastructure, in the right places, at the right time. That’s why it’s an area of focus in the National Infrastructure Plan with the aim of giving New Zealanders greater confidence that the infrastructure we all rely on is well planned, provides value for money, and meets the needs of today and tomorrow.

Testing our thinking – a close-up on land transport’s funding sustainability challenges

Under our current model, the land transport system – our roads, urban public transport and rail – was designed to run on a cost-recovery, user-pays model. Under this model, the money transport users pay through fuel taxes and other fees is ring-fenced and expected to cover the full cost to the Crown of providing transport infrastructure and services. If we adhere to this model, we could only invest as much as we collect from transport users and ratepayers.

But that’s not what’s happening. We’re currently spending or planning to spend more than we’re collecting from transport users. This funding gap is topped up with loans and grants from the government. We’ve been doing this since the 2010s, but it is expected to increase even more acutely in the future. The New Zealand Transport Agency’s recent projections suggest that, if nothing changes, we’ll be spending around $6 billion more than we collect from transport users each year from the late 2020s onwards.

Land transport prices would need a big increase to cover the full cost of the investment planned for transport. In land transport, user charges currently only cover about half of the costs of personal transport. This means that prices would have to roughly double to fully cover costs.

Measures such as time-of-use charging and tolling of new roads can help, but they are unlikely to fully close the gap. For instance, the most extensive time-of-use pricing option for Auckland would raise around $260 million per annum – less than 5 per cent of the $6 billion annual funding gap outlined by the NZTA. Our research together with recent project experience, suggests that tolling new roads may pay for 10 per cent to 25 per cent of the cost to build those roads, leaving a need to find most of the funding elsewhere – which means competing with other priorities.

Other measures, such as replacing Fuel Excise Duty for petrol vehicles with Road User Charges, will help by making sure we don’t collect less money as cars become more efficient. But this will not raise substantially more money unless user charges are increased from current levels.

If it’s not possible to raise more money from transport users, then there will need to be trade-offs between what we spend on transport and other types of public infrastructure.

Learn more and let us know what you think:

Valuing water: Sustainable water services and the role of volumetric charging

Buying time: Toll roads, congestion charges, and transport investment

Network infrastructure pricing study

Geoff Cooper

Geoff is the Chief Executive at Te Waihanga. He has a background in global policy having worked for the United States Federal Reserve, the European Bank for Reconstruction & Development and the United Nations. He is a former Chief Economist for both PwC and Auckland Council, where he worked on infrastructure, housing, regulation and financial policy, including business case development for Auckland’s City Rail Link.