Tolls, user pays, congestion charges - how the Government will make you pay for infrastructure

Friday, 14 June 2024

ANALYSIS: New Zealand’s infrastructure finance settings are a mess and a boosted mixture of user pays and private investment have now been signalled as the clear direction of travel under the Coalition Government.

In what will likely prove a controversial speech by Infrastructure minister Chris Bishop to Local Government New Zealand at the Public Trust Hall in Wellington last night, Bishop outlined a significant shake up of how infrastructure is paid for in New Zealand.

And it isn’t just in a speech. In a paper that went to Cabinet on “Improving Infrastructure and Financing”, obtained by The Post, Bishop spelled out the failures of the current financing arrangements and the Government’s new approach.

Between the cabinet paper and the speech, toll roads, congestion charging, public-private partnerships, water meters and GST-sharing for pro-housing councils could all be on the cards for the Government as part of a suite of changes to the way infrastructure is procured and paid for.

“Decades of underinvestment have left us with significant infrastructure needs that we cannot buy our way out of,” the cabinet paper said.

The cabinet paper paints a picture of underinvestment in a system where the life of assets is short because money that should have been spent on maintenance has effectively been siphoned off by councils and the Crown to spend on competing political priorities.

It also says that existing infrastructure is not properly priced so current assets are not used as well as they should be. In order to fix this, councils and the crown will get new tools for “value capture and revenue enhanced transport revenue”.

That means tolls and taxes. Value capture works differently around the world but is mostly where the Crown “captures” some of the increased value of land created by favourable zoning decisions and development.

But he also gave the most explicit indication yet that councils will get a financial carrot to build new houses, possibly by giving them a share of GST revenue generated from building them.

“I repeat today that we are looking at direct financial incentives for councils who facilitate housing growth. We have a coalition commitment to look at ACT’s idea of GST sharing and that will be part of the conversation.”

Bishop, keen to make his mark as a reformer, unveiled an overhaul of infrastructure funding with an emphasis on private sector finance, sweating Government assets and paying for long-run assets with long-term debt or equity.

“I want to warn you in advance. The work programme is immense and ambitious. Some of it will be, as I like to say ‘edgy’. That’s political code for controversial,” he said.

“Rather than defaulting to the use of grants, our expectation is that every significant infrastructure projectthat seeks support from the Crown will consider opportunities for user-pays funding and private financing.”

While the details are expected to be worked out by September — a quick turnaround — he will be introducing new rules around when Government will fund infrastructure, broadening the financing tools available to both Crown and councils and making the Crown a “better customer” by overhauling the way it contracts for new infrastructure.

“So yes, that means congestion charging to manage demand. It means water meters. I want to be clear that this Government is open to PPPs, sale and leasebacks and unsolicited proposals for private sector infrastructure investment.”

He said that decades of underinvestment, poor use of price signals and a lack of private capital had hampered New Zealand’s development.

“The last government rejected private capital outright. Our approach is the exact opposite but it’s going to take some time to build up the commercial expertise and competence inside Government.”

A central theme of Bishop’s speech was that the current way government and council infrastructure is funded does not reflect its full economic cost – including putting money aside for older assets and maintenance of current ones.

“A classic is water infrastructure. For years water infrastructure has competed for scarce capital with other worthy and not-so-worthy council projects. With respect, some councils, including here in Wellington, have funded nice-to-haves at the expense of core business,” he said.

Bishop argued that councils do not sufficiently use their current assets and so rely on Government grant funding. Under the new regime, however, grant funding will become a last resort after private sector financing options such as public private partnerships or unsolicited bids to build new infrastructure are all explored.

“Grants will remain a core part of the funding mix, but we will preserve the capacity for investments where alternative options are not available or where it is more appropriate for the Crown to be the primary funder.”

Bishop signalled that all the new roads of national significance will be toll roads.

“The next step is time-of-use pricing and congestion charging, to better manage demand on our roads and get more out of our existing assets. Tolling reform is part of that.”

Bishop also touched on the Government’s much-vaunted ‘‘regional deals’’ and ‘‘city deals’’ which he said there was “a lot of excitement about” and which he viewed as being “about the Crown and councils sharing their aspirations, agreeing on shared objectives, and looking at long-term funding and financing arrangements centred on economic growth, productivity and housing”.