Macquarie: New Zealand needs private investment lift to beat infrastructure deficit

26 July 2004

A significant lift in private infrastructure investment is required to raise New Zealand's growth rate, according to a new report identifying the extent of the gap between what the Government can afford, and what the country needs to invest to overcome its infrastructure deficit.

Macquarie New Zealand's 2004 Infrastructure Report “Greenlight for Growth” (released today by Macquarie New Zealand Executive Chairman, Jim McLay) says that addressing the country's infrastructure investment deficit has the potential to raise New Zealand's average GDP growth rate by 0.5 percent a year.

Lifting New Zealand's 10-year real growth rate by 0.5 percent – from its current 3.5 percent per year – would add around $6 billion to the country's GDP in the first year and these gains would compound over time. This would greatly assist in reaching the Government's goal of raising New Zealand to the top half of OECD growth rankings.

But the report, prepared by Macquarie's economists, also examines the realistic limits to additional spending by the Government, which is already boosting investment in infrastructure, to identify the additional private sector investment required – around 3 percent of GDP.

The report's analysis suggests that New Zealand requires infrastructure investment at a level of 5 percent of GDP to overcome past neglect.

While conceivably the Government could fund infrastructure investment in its entirety, says the report, its overall approach to fiscal responsibility, as well as other funding priorities, means that 2 percent of GDP seems sensible.

Mr McLay said, “The Government cannot be expected to provide finance of more than about two percentage points of GDP, whereas the financing requirement is about 5 percent”.

“It is clear that the investment shortfall of 3 percent should be made up by the private sector”, Mr McLay said.

The report also says that regulatory reforms since 1984 have played a constructive role in boosting productivity growth, but significant legal and regulatory disincentives remain. Further reform (particularly to the Resource Management Act and the Land Transport Management Act) should be a key Government priority.

The report notes that, over the decade to 1997, insufficient business investment has meant that New Zealand's capital-output ratio has declined by 10 percent. The stock of capital across all industries (except property services) has declined, with the steepest deterioration in the sectors crucial to the economy's productive capacity and its ability to trade.

New Zealand's lagging labour productivity growth seems due to less capital investment per worker, a measure in which New Zealand lags within the OECD.

The report notes that investment in infrastructure is one of the soundest investments for economic growth, and identifies land transport, energy – particularly electricity – and water as the three areas of concern in New Zealand.

The Government's Infrastructure Stocktake identified many sector-specific infrastructure issues. These indicate that the quantity of infrastructure investment has been inadequate. Given the number and seriousness of the infrastructure problems identified in the report, it is likely that these “ significant issues ” are already posing a barrier to the Government's growth objectives.

Infrastructure sectors most important to economic output and trade (perhaps with the exception of telecommunications and airports) appear to be facing serious capacity issues, in part the result of inadequate levels of capital replacement and expansion.

The private sector is essential to delivering the necessary infrastructure as it provides:

• capital in a manner consistent with the Government's fiscal strategy, (the Government can continue to pay down debt and boost national investment in infrastructure); and
• improved efficiency and innovation resulting from increased and appropriate incentives and competition.

The report says the Government needs to take stronger actions to encourage private sector participation in infrastructure projects. A change in approach is needed.

Creating the conditions necessary to support the programme of investment recommended in this report will require the Government to:

• put in train mechanisms that allow the private sector to participate in infrastructure investment, such as undertaking seed projects to develop the capital market and preparing concession arrangements;
• provide certainty that there will be a regular flow of projects, to enable industry to allocate skills and resources on a long-term basis; and
• provide a level playing field between government agencies and the private sector, possibly using a Public Sector Comparator to ensure that projects represent real value for money.

For further information :

Hon Jim McLay
Executive Chairman
Macquarie New Zealand Limited
Telephone +64 9 377 0633 (office)
Home +64 9 575 9418
Mobile +64 21 754 787

Hamish Anderson
Marketing Manager, Financial Services Group
Macquarie New Zealand Limited
Telephone +64 9 363 1435
Mobile +64 21 513 431