Exploring whether infrastructure can pay for itself

Public infrastructure is essential to New Zealand’s social and economic well-being, but with tightening fiscal conditions, the question is increasingly whether new infrastructure projects can help pay for themselves.

In its latest research, Paying it Back, the New Zealand Infrastructure Commission – Te Waihanga (the Commission) explores this question in depth. The report evaluates the extent to which infrastructure investments generate fiscal returns that can offset their capital and operational costs, drawing from case studies on local government growth infrastructure, major transport projects, and value capture mechanisms.

The Commission begins by acknowledging that the value of infrastructure often exceeds direct economic returns. Investments in roads, for instance, improve freight efficiency and safety, while hospitals and schools provide foundational public services.

However, all infrastructure projects must ultimately be paid for, whether by users, taxpayers, or future debt. Some may generate new revenue streams through user charges or by expanding the tax base, while others offer broader but non-monetary public value.

A key challenge is public resistance to higher charges. Survey data cited in the report show New Zealanders strongly support infrastructure development but are reluctant to pay more for it. This fiscal constraint means that governments must increasingly look for ways to generate additional revenue through growth, not just through taxation.

How infrastructure grows the revenue base

The report outlines two main avenues for generating revenue: increasing charges on existing users or expanding the user/tax base. The latter is more politically feasible and central to the Commission’s analysis.

For instance, investment in public transport might not only increase fare revenue but also raise nearby land values, thus broadening the local government’s rating base. Similarly, healthcare infrastructure can boost workforce participation, leading to higher income tax receipts.

However, the Commission notes that not all projects generate enough fiscal return to cover their cost, even if they produce societal benefits. The research focuses on three areas: local government growth infrastructure, selected large transport projects, and the potential of land value capture tools to close the fiscal gap.

The Commission studied seven urban councils (Auckland, Wellington, Christchurch, Hamilton, Tauranga, Queenstown, and Dunedin) over a 25-year period (2007–2031, or from 2012 for Auckland). It compared their growth-related capital and operational costs with revenues from development contributions and rates on new buildings.

The results varied significantly. Dunedin and Christchurch managed to fully recover their costs from growth-related revenue, with Dunedin exceeding 180 per cent recovery. Wellington came close at 84 per cent. In contrast, fast-growing councils such as Auckland (45 per cent), Hamilton (35 per cent), Tauranga (32 per cent), and Queenstown (51 per cent) fell short and required top-ups from general revenue.

Three key factors influenced whether growth “paid for itself”:

• Alignment of charges with actual costs. For example, Tauranga and Hamilton would have needed rates on new development to be five times higher to break even.
• Infrastructure growth in proportion to population growth. Hamilton and Tauranga are planning infrastructure expansion four times faster than their expected population growth.
• Scale of private development. In slower-growing councils, the ratio of private investment to public infrastructure cost was significantly higher, enabling better cost recovery.

Major transport projects: High investment, low payback

The report also examined fiscal returns on four major transport projects using publicly available business case data: Ōtaki to Levin, Pūhoi to Warkworth, Warkworth to Wellsford, and Auckland’s City Rail Link (CRL).

Across all projects, government revenue recovered just 9-25 cents for every dollar spent. While the CRL showed the highest recovery (21 per cent – 25 per cent, depending on the funding share), others, such as Warkworth to Wellsford, came in below 11 per cent.

Even when benefit-cost ratios exceeded 1.0 (typically considered a threshold for investment), most of the benefits were non-fiscal, such as time savings, reduced emissions, or safety improvements.

The Commission concluded that for a transport project to fully pay for itself fiscally, its benefit-cost ratio would need to be 5 or even 9 – far higher than standard practice. Projects with more users (like Pūhoi to Warkworth) delivered better returns, reinforcing the need for demand-driven planning.

The third scenario tested whether value capture tools, such as targeted rates or levies, could help bridge the fiscal gap. The rationale is that infrastructure often increases nearby land values, but this uplift is not typically taxed or captured.

The Commission modelled different project types (motorways and light rail) in both dense urban and rural settings, testing cost recovery under varying levy amounts. Results showed that value capture can be effective, but only under two conditions:

• Relatively low project costs (high capital costs make full recovery via levies difficult).
• High population and development density (Denser areas generate more uplift and a broader rating base).

Under the right conditions, levies of $1,000 to $4,000 per household could cover a significant share of infrastructure costs, especially in dense urban environments.

Four lessons for fiscal sustainability

The report concludes with four broad takeaways. First, the project quality matters. Cost-effective, high-demand projects are more likely to generate revenue.

Second, a high bar for fiscal recovery is required, as many projects with positive societal benefits do not recover their costs financially. Third, incremental investment pays off. Scaling networks gradually may yield better long-term returns than large, one-off builds.

And lastly, revenue tools are essential. Attaching direct revenue streams, through user charges or targeted rates, can improve fiscal outcomes.

While infrastructure remains vital for New Zealand’s well-being and growth, Paying it Back underscores the importance of aligning public investment with fiscal realism.

Not all infrastructure can or should pay for itself, but when planned wisely and supported with appropriate revenue tools, some can go a long way toward easing the fiscal burden.

Read the report in full