This post from Matt was originally posted in July 2019. It reads particularly interesting considering that six months later the government announced New Zealand’s upgrade program.
Over the past week, there has been a flurry of media discussion about the country’s transport priorities following the release of a letter from the government’s Business Advisory Council (BAC). There are a number of areas of concern to BAC when it comes to infrastructure, but the main point of contention can be easily summed up by the title Direct message from the Business Council to the government: we need more roads. The article is behind the Herald paywall, but helpfully the main issues are in the first two paragraphs listed.
The Prime Minister’s Business Advisory Council has called on the government to go ahead with the 12 road projects currently on hold or under review and open them up to private investment.
He also called on the government to investigate the “responsible and sustainable” use of international expertise, capital and labor (skilled and unskilled) for future high priority projects of national importance and existing infrastructure projects, and, an initiative by the government in “asset recycling – the sale of mature assets to finance new infrastructure.
Let’s look at some of the issues.
The 12 projects
There seems to have been some confusion as to the exact nature of the 12 projects. These are shown below and all but one have been reassessed.
In most cases, the reassessments have refocused projects on delivering urgent safety improvements, especially since the traffic volumes on many of these corridors simply do not justify some of the significant improvements planned.
I think there may have been more confusion because some people counted the projects as campaign promises in the last election. Here are some examples :
- In 2016, the former government announced a $520 million package of upgrades to the SH2 Corridor between Tauranga and Waihi – although $286 million is for the 6.2 km, 150 km Tauranga Northern Link highway. million additional dollars for approximately 6 km of LNP upgrades at Omokoroa. This left $85 million to improve safety on the remaining 40 km north of Waihi. In 2017, during the election, National then promised to turn the entire road from Tauranga to Katikati, about 30 km long, into a highway. The reassessment of the project has allowed the project to focus much more on addressing pressing safety issues, but some argue the freeway was always the plan and it’s a big step backwards.
- Yesterday in Stuff where Mike Yardley criticizes the government for not having extended the motorway south of Christchurch for about 60 km from Rolleston to Ashburton. Only it was not even a road to be evaluated because it was only an electoral promise, not a project currently in the plans.
- A similar silly opinion comes from Heather Du Plessis-Allan who actually seems to blame these projects for the congestion between Pukekohe and central Auckland.
Perhaps the most valid comments I’ve seen come from the AA yesterday, noting that having been reassessed to focus on quick safety results, these projects have still not progressed. The fault here does not seem to be an ideological fashion issue, but simply a funding issue. Other projects currently under construction are seeing their costs and scope increase, putting pressure on the amount of funding available for other projects. These funding pressures seem to exist at all levels and do not only exist with these state highway projects.
Open projects to private investment
Building more projects with private investment, also known as public-private partnerships (PPPs), has long been a stable of business lobby groups. But PPPs are not the silver bullet they are supposed to be.
In the past they were sold as a way to transfer the risk of projects to the private sector, but particularly following the high-profile series of failures in Australia a decade ago, PPPs today primarily consist of providing funding with the government. pay the debt plus the commercial interest rates it incurs. As such, the problem with this perhaps boils down to:
- The government can borrow the money cheaper
- They need a source of money to pay off this debt
There are two PPPs going on at the moment with Transmission Gully and Puhoi to Warkworth funded this way. To put the costs into perspective, when the Transmission Gully PPP was signed in 2014 it had a net present value of $850 million, but due to the structure of the PPP we will be paying approximately $125 million per year for 25 years. I can’t find what Puhoi’s annual payments to Warkworth are, but the net present value of the project in 2016 was $709.5 million.
As Phil Twyford said in response, the question is how to find the money to pay off that debt.
“It would be really bad policy to do what they are advocating in this particular area,” he said.
“If we were to do what the Business Advisory Council says, it would mean spending a lot of money, over $12 billion, on projects that have very little economic value.”
Allowing private investment in roads also doesn’t make sense, he said.
“Borrowing money is not the problem here. It’s never been cheaper to borrow money than it is right now… It’s really about having the income to be able to pay off that debt.
That money can only come from the National Land Transport Fund, or tolls, he said.
“None of these roads have enough traffic to generate anything like the kind of revenue you would need to pay for them, to pay off the debt. It’s just not realistic.
Perhaps the government should calculate how much fuel/road taxes would need to increase to cover the debt needed to build these projects. I wonder how many people would still support them then?