Transcript
Speaker: works out to be about 60 cents in every dollar. That's what you would need to spend in order to make sure that you are seeing yourself through a renewal cycle.
Speaker: Welcome back to Infrastructure Connections. Today we're speaking with Jeff Cooper, the Chief Executive of the New Zealand Infrastructure Commission. And we're trying to answer three questions. Why is infrastructure so expensive right now?
Speaker: How much should we ideally spend on it? And where do we make those dollars count? He's earned his master's in urbanization, finance, and economics from Princeton University, and he served in roles for Auckland Council, the United Nations, the Reserve Bank of New York, and previously served as chief economist and director at PwC.
Speaker: Well, hi, Jeff, welcome to the show. Pleasure to be to be here. Thanks for having me on. Yeah, thanks for coming on. So we wanna talk about the National Infrastructure Plan today, but before we get to it, kind of paint us a picture of where we're at now and what normal is.
Speaker: You know, the challenge of infrastructure over the last few years has changed significantly from what we've seen over the last hundred years. um and that ah for a long period of time, our sectors kind of evolved in silos um and their in their own sort of sectoral areas. And increasingly, we're sort of asking these sectors to think much more across one another.
Speaker: And that has, I think, challenged um a lot of the sector, a lot of the um of infrastructure about how to go about that. So I'm thinking about things like how to, how to address resiliency issues, how to address housing affordability issues, decarbonisation. These are things that we need sectors to be talking to one another.
Speaker: um On the issue of ah like how we invest um and how much we invest in infrastructure, ah you know, our work kind of shows that interestingly enough, New Zealand is among the highest in the world for how much we are prepared to spend on infrastructure.
Speaker: I think that has come as a surprise to a lot of people um that actually we are high up in the league tables. And that has, I think, asked this question of, well, are we getting bang for buck and are we are we getting value for money from from our infrastructure? And of course, the the plan has plenty to say on that one.
Speaker: So then that brings us to the National Infrastructure Plan. um Tell us a little bit about ah how often it's released and especially what questions you wanted to answer in this plan that might have been different from what was explored in previous ones. This plan is much more focused around actually an ongoing work program for the commission. And I've sort of described it more as national infrastructure planning rather than a national infrastructure plan to get away from this idea that The plan's been done, like now we need to execute on the plan.
Speaker: one I mean, one of the things we found in all of this is that the information that we have on what our priorities are keeps changing.
Speaker: And actually, like we have a current example of that right now um with higher fuel prices. um Higher fuel prices ah you know has obviously very short-run effects, but also has very long-run effects. You can imagine a world where if fuel prices were to remain elevated,
Speaker: that it would really increase, and let's just say for the purposes of this, like holding technology constant, it would really increase the cost of commuting quite significantly.
Speaker: um And so what we would expect to see as a result of that is a real shift in the land gradient of the city, right? We would expect to see land prices close to the city center, close to those high paying jobs. We would expect to see those land prices go up and we would expect to see land prices on the periphery of the city go down.
Speaker: um And that is a signal to developers to develop more intensely in the areas with low transportation costs. This, of course, is at the beating heart of a business case for transportation in a city.
Speaker: And so um as these prices around us are changing, so too the asset owners need to to think about how the infrastructure needs to change. And there is nothing there is nothing that says um that transport costs have to remain constant. In fact, they're changing all the time on us. So so that that is why I think um ah this is about iteration um of, as we receive new information about what the infrastructure priorities um need need to be. How does that compare to the rest of the world? Yeah, I mean, interestingly, and I was at a World Bank conference not too long ago, speaking at that on the plan, and they had done some work that was quite similar to New Zealand's work, looking at benchmarking how much infrastructure we have against how many people we have. So you can think of that as sort of like ah um you know stocks per capita.
Speaker: And what was interesting about that work is that they had New Zealand ah in the area of transportation infrastructure, New Zealand and Australia were among the highest in the world um on on some of those stocks per capita.
Speaker: So I think some of those those benchmarking points are quite interesting. and Another one that came out in the benchmarking work we did was that New Zealand is among the highest um consumers of water per per capita in the world.
Speaker: um And so we it it appears, at least through that benchmarking, that that's an area where you know We talk a lot about having big infrastructure deficits, but you know as I think we'll kind of talk to here, that doesn't necessarily mean more infrastructure per unit. um There are areas across New Zealand's infrastructure services where we look like we we're right in line with um how much infrastructure you would expect to see.
Speaker: Whether we have that infrastructure in the right place and maintained to the right level, you know, these are these are much more challenging questions. Is that high water use due to agriculture per capita or is it just the leaks in Wellington?
Speaker: Yeah, exactly. I mean, there's certainly, I think, agriculture and irrigation um contributes a lot to that. um But ah there are quite substantial differences in water consumption um by ah by jurisdiction, which is quite interesting. um The commission has got very interested in understanding what this looks like according to how we pay for ah water services. And of course on that,
Speaker: on that measure there's quite a quite a few discrepancies i mean up in auckland you're paying volumetric charging um per unit that you that you use in wellington um you're paying through your rates and so there's no clear um sort of channel between how much you're using um and how much you're paying for and of course you know This creates, um I think, it is a bit of a problem for what what would be termed like demand management. right If you don't see the price, you won't you won't sort of manage your your use and you you might end up using too much. um
Speaker: So that seems to be um a ah driver of infrastructure investment, which is actually... You know, you can think about this across infrastructure services um and how you pay for them. And the the I'd say that the services where you don't see a price, um you're more likely to have a sector that's focused on building, probably overbuilding, um i would I would say.
Speaker: um Whereas sectors that have more sophisticated pricing approaches and demand management approaches, um are more likely to ask the question, do we need that infrastructure? um is it Is it necessary or can we find ways to make better use of what we what we already have?
Speaker: Yeah, right. And i I thought it was interesting. You went back to basics in one point that you made that modern infrastructure is more incremental and invisible and change, whereas a century ago, ah infrastructure was much more visible and had larger impacts.
Speaker: Can you talk about that a little bit? Yeah, this is a very salient point, and it's one that you can only i i've sort of only appreciated it by looking back in history over the last um you know we went back and looked back to to the 1870s to try and understand um how our infrastructure has has evolved. But well, an example of this is something like that we mentioned in the plan is something like regional electrification, um where ah you know this service of bringing electrons out to to the regions was the difference between using candles and using light bulbs, right?
Speaker: um And these are like transformational shifts. um The ability to move water into the home so that you don't need to need to go and get it. Or in, I suppose, say in the transportation space,
Speaker: um some of these early investments are taking us from travel times that might be in the days um to now in the hours. um And these are ah such big structural changes that they are market movers in many ways. They create markets that might not have existed before.
Speaker: um when we look around at the ah project landscape that we're kind of contemplating at the moment, um you it's very difficult to find these kinds of enormous transformative um changes.
Speaker: um You know, we're talking about transportation investments that largely are saving us, you know, 10 minutes, maybe if if we're lucky 15 minutes, this this kind of travel time savings, which is very much more um at the at the margin.
Speaker: And at the same time, our infrastructure costs have gone up quite quite considerably. um And so this is, I think, created a bit of ah a gap between um our perceptions of what we need or would like and as a country what we can sort of afford to to maintain given given the benefits of of some of these projects.
Speaker: Does that mean we expect more out of more spending and it's harder to show that benefit when it's incremental? what What we see is sort of the areas that have the highest cost escalation are the ones that rely heavily on on land, um that it becomes a sort of land management issue.
Speaker: um And you can imagine that as ah as an infrastructure project is needed more and more and more, the land price is going up at the same time as the kind of, you know let's say we're thinking about a um a new suburb on the fringe of a city, for instance.
Speaker: And as the sort of impetus to grow the city and push out ah increases, the land value goes up on the edge of the of the city as well. And that means that infrastructure is sort of in a world of chasing its own tail because um just as the service is is needed on the edge of the city, the land price is going up as well and is making it more expensive to um to deliver that service.
Speaker: And so, you know, in a world where you've got forward looking infrastructure planning, you might have purchased the land before um the prices went up. But if you didn't, you're going to see you're going to see it quite difficult to make the the business case um to actually afford the land. And that's kind of ah a world where we um well we see a lot of that in in New Zealand at at the moment.
Speaker: I suppose the other the other thing that comes up from time to time is this idea economists talk about Bomar's cost disease. um And this refers to um that the sort of pinup case study of this is the, I think it's the violinist in the orchestra, right? um And the violinist in the orchestra, um you know, 100, 200 years ago is in many ways doing the same thing that it is today, but the the wage of the of the violinist has gone up considerably.
Speaker: And as the sort of argument ah ah goes, that's because productivity in other sectors has meant that um if you want to safeguard the violinist, you need to pay them more as well.
Speaker: um And so this kind of hypothesis that if you see productivity in other areas, it's going to create cost drivers in areas of low productivity. Now, when you sort of look around at New Zealand's infrastructure services, one of the things that you'll notice is that these are not, generally speaking, um the key drivers of productivity in the economy.
Speaker: um ah The pinup example is something like health services, right? You don't sort of go to to health services um and expect to see large productivity gains. And indeed, you know, that hasn't that has not occurred. But as a result of productivity in other areas,
Speaker: you see those costs going going up. And so in some ways, um governments in New Zealand, both central and local government, have kind of been caught in this sort of cost disease, Beaumont's cost disease, which ah which afflicts infrastructure services probably.
Speaker: You'd mentioned that over the course of the last 150 years, on average, there was a 5.6% spend on GDP for infrastructure. um How did you come up with that number?
Speaker: And um how does that affect kind of the politics of swinging on either side of that number if we want to spend more or less? Yeah, well, first we we looked over the last 30 years and it was quite helpful statistics. New Zealand actually had quite a good database that hadn't been like previously mined for this kind of information that resulted in a in a paper called um build or maintain which gave us our first kind of and sort of aggregated look at all of new zealand's sectors and where we have been spending i think we were
Speaker: we sort of saw the value and in that because we were able to talk to New Zealand's infrastructure as ah as a portfolio. We then like mined yearbooks, um many, many yearbooks. So this looks like like people sort of going to libraries and looking at um at records of investment. And it turns out New Zealand's um record keeping on capital stocks in New Zealand it was very, very good.
Speaker: And that allowed us to um to go back far further than the 30 years and start to piece together um investment trends over over the sectors over a much longer period of time. And you can go and and do that. And we kind of looked at like different booms that have occurred and different as as technology has changed in different sectors.
Speaker: um I've already talked about sort of regional electrification and piped water into homes. That resulted in sectors that went through quite significant increases in capital expenditure.
Speaker: um But what is interesting about this is that those things are never maintained, right? You can't keep doing regional electrification. You you do regional electrification or you roll out UFB.
Speaker: And unless there is another big technological change, um you would expect to see investment levels start to moderate back down to a level that's... some much more around maintenance and renewals of those assets and like some tactical um increases in capacity for for growth essentially, among among bits and pieces of other things, but essentially a renewals and maintenance story for mature um for mature networks.
Speaker: So when we brought all of this together, um one of the observations we made was that, yeah, you're quite right, New Zealand's historic spending is in the order of 5.6%.
Speaker: five point six percent um But more than that, we were able to see that um most of the time, New Zealand spends somewhere between five and 7% of GDP.
Speaker: of gdp um So we sort of stepped back and said, you know, what is this telling us about the guardrails of investment as it pertains to the household and how much they can afford um and the kind of social license to to spend on infrastructure?
Speaker: Vis-a-vis other concerns and and like OPEX costs that like a modern economy um has, um like healthcare or a welfare state and so on and so on. um There's a great many great many other things um that are that a country might choose choose to have. so um So we're trying to use this to help um show like where levels of um consensus might might be found.
Speaker: um And so the the the guidance on the plan essentially is that if you if you come up with ah an investment um program that pushes towards the upper end of that, towards the 7%, what we're saying is that expect contestability, expect that you're you're kind of gonna be thinking about projects that actually is testing willingness to pay,
Speaker: probably maybe is starting to get into a world where the benefits are not high enough or people aren't prepared to pay for those benefits and you're you're likely more likely to have political contestability on the downside similarly if you're too close to the five number you're likely to have political contestability come in over the top and say um actually we're gonna we're gonna do more um ah and um And this has been, I think, a useful frame for helping to identify
Speaker: like um what to do with an enormous program of work that we have that is like pushing much more towards the upper the upper end of that. um And of course, that then becomes a motivation for um advice on how to stage and phase this stuff through time so that you end in a world that is has more consensus.
Speaker: And that repairs and renewals you mentioned turned out to be a big part of what the plan's recommendations were. You covered, I think, 17 sectors, and all of those sectors said they wanted more. And it wasn't they wanted more because they just felt like it would be nice to have a new hospital or a new school. It's because they were in dramatic need of repairs and renewals. How is that going to be solved within that 5.6% of the GDP or without going deeper into debt?
Speaker: So our assessment of like renewals as a total function of the infrastructure budget, once you do the math on a lot of this, works out to be about 60 cents in every in every dollar. It's a little lower for horizontal. It's a little higher for vertical. So this is an aggregated number.
Speaker: but that's like a baseline number of what you would need to spend in order to make sure that you are seeing yourself through a renewal cycle. um Now for any one asset, new asset that you bring on board, what the commission's sort of saying is like, this thing will need to be rebuilt um or renewed in another 30 60 years time,
Speaker: right um which if you're just thinking about one asset, you might say, oh yeah, like we can, we don't need to think about that now. Like future generations can think about that one.
Speaker: um But if you're a mature sort of economy and you have grown your stock of capital up over the last 150 years, um it turns out that, you know, this becomes the lion's share of everything you need to do, not just in future years, but today.
Speaker: yes um And ah so this became something that is is sort of unavoidable. We've come to term this the sort of me the mega project you can't avoid, right?
Speaker: um Because if you kick the can on this, it only gets more more expensive. The sort of metaphor here is, is um you know, if you don't paint the weather boards, you're going to have to replace them. And that's a lot more a lot more expensive.
Speaker: um And so ah so this becomes front and center. So when you think about all of the demand for services that we have, um and I think you know we list sort of five main ones, um you know income growth,
Speaker: um ah ah resilience, building for um a change in climate, decarbonization, um and and so on, the one and and population growth and demographic change. The one that is ah the largest and is actually driving just the most significant amount of investment but by by country mile, by long way, is is this renewals piece. And so the growth part actually doesn't change the story as much as you might expect it to.
Speaker: um So I think... You know, we have tried to just right size um like what the sort of story of investment looks like here.
Speaker: Just on your earlier comment though, you sort of made this comment that many sectors ah say that they want to invest more in new services. That is broadly speaking true. um There is an exception though.
Speaker: um The exception is in the area of regulated utilities, right? um And you can think of regulated utilities as being um areas where the revenue is ring-fenced to the asset, right?
Speaker: They need to generate enough revenue off the asset base to fund the operation and maintenance and renewal of the asset.
Speaker: And of course, it's a competitive world out there, right? so if they over invest in infrastructure and as a result need to charge higher prices to recover um ah the costs of of holding that infrastructure,
Speaker: And as a result, the price is really high and so the demand falls. um They are in a very precarious situation um of not having enough revenue to to sustain their infrastructure and that's called like going out of business. That's where we're at with the gas infrastructure, right? Yes. I mean, this is, you know, this is what's happening right now. And not not what's happening, but this is the context for um airports and airlines right now.
Speaker: Regulated sector, right? ah with a certain amount of infrastructure, higher prices still need to recover to pay for the infrastructure, but the higher prices are resulting in in less demand. And so I guess what I would sort of say about this from these sectors,
Speaker: we have a much more cautious representation of what is required on the infrastructure front front because um the consequences of overbuilding are can be disastrous.
Speaker: And so it is interesting to contrast what the what the governance model of a particular service does to the projection of whether or not you need more infrastructure.
Speaker: So it sounds like repairs and renewals are the mega project that we have to build every year. And that doesn't leave much leftover for the other mega projects that we wanna build. How do we approach building the right ones at the right time, the ones that we really need?
Speaker: What we we did in this space is look at ah actual growth paths for different services and projections for growth over the last 10, 20 years for for different services.
Speaker: the The example here is something like our projection on um inmates ah for prison capacity. And this is an area where we can't get the direction right. Like regularly we're saying it will grow and then it declines or we'll say it declines and then it grows.
Speaker: um So these things are much much more uncertain than I think is is obvious probably to the public. um Another example is in the education space ah where schooling projections at the high end are growing, in the base case are sort of like stagnating or slightly declining, and in the low case are significantly declining.
Speaker: So this again, this is a sector that probably looks more like type two than than type one. And you mentioned that was largely because of the population aging that's becoming a challenge.
Speaker: Yeah, that's right. and This is one of the big structural changes that um New Zealand is is undergoing, but actually not just New Zealand, like all of the West, that as we're aging, we use infrastructure services so very differently.
Speaker: um you know If you think about schooling infrastructure, that's something that predominantly we use under the age of 20. there or thereabouts, maybe 25.
Speaker: um ah Hospital infrastructure is something we use a lot more over the age of 65. But then you can think about something like um transportation infrastructure, right?
Speaker: Commuting, that is something that we use overwhelmingly in the working age population. And that is what's reflected in our forward guidance. you know um ah It's why we see um a ah relative decline um in the amount required for land transport compared to um a doubling ah for aged care services.
Speaker: But when you look at Japan and how it is ah ah adapting to demographic change, I think it's i think what they're doing is very, very interesting.
Speaker: um The first thing is that ah they are trying to shrink their cities. um and they are looking at the areas where there's a lot of infrastructure but not enough users, and they afford signaling that these are going to be areas that they're no longer going to look through a renewal cycle.
Speaker: In other words, we can't, as a society, afford to keep maintaining and renewing infrastructure that has less and less people around it, and they're kind of identifying that those areas are on the periphery of cities.
Speaker: um that it is the areas closer to the center with more density that have more users around the infrastructure that can then see it through a renewal cycle. i I guess it's also useful that the that age is entirely predictable. So you can predict when that's going to become an issue because people age at a very regular rate. I mean, I think that's right. I mean, of all the kind of like uncertainty that you see for services, one thing that's very striking about demographics and aging particularly is that the confidence interval around the projection is very tight. Well, I did want to bring into the discussion the resilience and the sustainability issues. um One of the most interesting things to me about the report was that it found that the cover for annual loss events such as large storms and and climate change events are 0.27% of GDP. That's the cost. Can you talk about that a little bit? How that how you came to that number and what that means?
Speaker: Yeah, so this is um some work we did with with Earth Sciences, um looking at annual expected losses for infrastructure. So this is kind of like the way to interpret this number is that if you kind of smooth all of the um ah natural hazard events that we that we experience in New Zealand over over time, then every year you can expect to see sort of an additional kind of depreciation on the asset of about 0.27%.
Speaker: percent um It's a sort of, um it's ah like it's a smaller number than I think people were expecting. And and one of the reasons for that is because the renewal number is is in addition to that. And so if, you know, in a world where you sort of a bridge gets taken out,
Speaker: um we're not counting the full cost of the bridge because the bridge needed to be renewed anyway, right? So essentially what we're doing is we are bringing the renewal cycle, and we're shortening the renewal cycle.
Speaker: um So it's a little bit like having ah having a higher depreciation rate than than you might otherwise have thought. um So if you if you are sort of managing your assets through a renewal cycle really well, this looks like actually quite a manageable um problem. It does require thinking about 0.27% of GDP, and which is not an insignificant number, um but it shouldn't it shouldn't break the bank if if it's like managed well.
Speaker: ah But the the sort of, i think, um salient point here is that these events don't happen um consistently in a smooth way year after year.
Speaker: They are quite lumpy. um And what it means is that if you are not saving and planning in those good years for the bad year, you're going to get to the bad year and it's all going to come at once. And the number is going to be a lot higher than 0.27. And, um and, you know, the hands will go in the air and and maybe um what you'll need is is some sort of government, government bailout.
Speaker: um Now, This sort of comes back to how asset owners um think about these costs and and how they ensure their assets. um And some parts of our infrastructure system are very well insured.
Speaker: um We saw that with the Christchurch earthquake. um either sort of publicly or or privately in many in many cases. um But a lot of our assets are not, right? The the Office of the Auditor General looked at public infrastructure.
Speaker: um This is getting pretty old now. It's about 10 plus years ago and concluded that in the order of about half of our public infrastructure is not insured. What does this look like?
Speaker: It looks like places that are having service outages of expensive assets that ah have relatively low usage to get harder and harder to deal with shorter renewal cycles.
Speaker: Right? So think about um roads and highly exposed locations that are connecting pretty small places. These are ones that start to look really difficult to fund in a world where it's a repeat event taking out the road every every few years.
Speaker: So looking out at the plan and how it impacts the public, what's the one thing that you think our listeners could do to actually make an impact on the infrastructure that gets built and how that money gets spent? My sort of, ah I suppose, appeal to folks working in the infrastructure space is to like really cast your eye over the broader horizon, like not just the project or the sector that you're working on, but what is going on across all of the many needs that New Zealand has, what are the pressures on the household balance sheet and really be system thinkers about infrastructure, not just here's my thing and my thing is like really important. um That sort of holistic view across ah everything that we're kind of dealing with here seems to me to be really important. We've termed this as being like portfolio management, thinking about cross portfolios.
Speaker: And um the world that we are looking at now is going to need much more of this thinking um than it has that it has in the past for the reasons I've kind of outlined previously. So I think that this is like a very good place to to end, right, is to this provocation of like cast your eyes and look around and and see the challenges that are that are outside that that people are sort of facing or will be facing.
Speaker: This has been a fascinating conversation. I think I could talk to you about this for hours, but yeah we do have to end somewhere. So yeah, thank you very much for being on the show. Cheers. Thanks, Ed.
Speaker: And thank you for listening to another episode of Infrastructure Connections. Please take a moment to follow us wherever you get your podcasts, and we want to know what you think. Leave a message down below or write to us at the Infrastructure Sustainability Council, and let us know who you'd like to listen to next.
Speaker: Until then, stay tuned for the next episode of Infrastructure Connections.
