1. Summary
This document sets out the findings of the Infrastructure Audit component of the Ministry of Economic Development's infrastructure stocktake project. It has been prepared by PricewaterhouseCoopers with assistance from Montgomery Watson Harza and Wilson, Cook and Co.
1.1 Project Aims
The principal aim of this project has been to assess the quality of New Zealand's energy, water, transport and telecommunications infrastructure and the extent to which it contributes to or represents a barrier to achieving the Government's economic growth and sustainable development objectives.
Given the breadth of the brief, the evaluation has been undertaken at a relatively high level. The approach has been to:
- Assess the condition of the existing assets;
- Evaluate the extent to which the infrastructure meets current demand;
- Assess whether infrastructure is likely to be able to meet demand in the future, and the responsiveness of the infrastructure to changes in demand going forward;
- Provide some high level commentary on the sustainable development implications of the current and expected infrastructure stocks;
- Raise issues identified during the project for consideration in policy-making; and
- Provide a potential indicator framework for further development in the future.
1.2 General Approach
The general approach taken in this project has been to examine infrastructure at a national level. Many of the issues with the current infrastructure stock are often localised in their effects (e.g. road congestion), but such localised effects can have national implications. We have not sought to create a register of local problems or issues, but have used some examples, where identified as illustration of issues.
The research into each of the infrastructure sectors also focuses on issues of supply and demand, and so primarily takes an economic perspective. A number of sustainability issues are then identified, building on the analysis of each sector. This approach contrasts with that recommended in the Maarama infrastructure stocktake report1 (a sustainability-driven framework), but is taken as many infrastructure investment and usage decisions are still made primarily within an economic framework (i.e. markets constrained by law, regulation and the norms of acceptable behaviour), and sustainability concepts are recognised to the extent that they provide commercial benefit or are imposed through legislation or regulation.
1.3 Conclusions
Our general conclusion is that, at a national level, New Zealand's infrastructure is in reasonable condition. Subject to an ongoing appropriate level of investment, it should not pose a barrier to the Government's growth and sustainable development objectives. But, notwithstanding the overall positive message, there are significant local and sector-specific issues. These may have significant impacts, both locally and nationally. Of particular note are:
- Land transport, particularly roads in Auckland and deferred maintenance of the rail network;
- Water and wastewater:
- Security of potable water supply in drought-prone areas,
- Water supply and wastewater treatment in smaller communities with large tourism-driven seasonal fluctuations in population; and
- Competing demands for water supply (particularly agricultural and commercial/industrial).
- Fuel for future electricity generation and certainty of supply in dry periods.
Regulatory uncertainty is affecting investment decisions in a number of areas, particularly energy but also potentially telecommunications.
A number of the sectors, particularly roads, water and wastewater lack pricing mechanisms that can be used to manage demand and optimise infrastructure investment.
Continued investment across all infrastructure sectors will be required in order to maintain or improve existing quality and, ideally, pre-empt issues that may emerge in the future.
The key conclusions for each sector are summarised below.
1.3.1 Energy: Electricity
- The condition of the existing generation plant does not inhibit its ability to operate at acceptable levels of reliability.
- Some transmission constraints exist.
- New generation capacity is clearly required in the near future, but uncertainty in a number of areas is inhibiting investment:
- Kyoto Treaty and carbon taxes (which will affect the relative costs of fuel supplies),
- Regulation and the role of the Electricity Commission,
- Coordination of generation and transmission investment.
The changing mix of generating fuel also creates uncertainty (compounded by the potential impact of carbon taxes).
- Given the preponderance of hydro generation, the overall level of emissions from electricity generation is relatively low, but is highly sensitive to the choice of fuel supply at a few key assets (Huntly).
- Market-based risk management tools offer opportunities to improve demand management.
- There is a consensus that changes to household and workplace practices could reduce electricity demand. It is an open question as to whether education and persuasion are likely to be able to influence such practices.
1.3.2 Energy: Gas
- Processing and transmission infrastructure assets are relatively new assets. Their condition does not inhibit their ability to operate at acceptable levels of reliability.
- Sources of natural gas supplies remain an issue.
- There is concern as to whether current exploration and discovery levels will be sufficient to ensure gas supplies are secure.
- Without secure gas supplies, thermal generation capacity in New Zealand will need to rely on coal or imported LNG.
- Major discoveries outside of the Taranaki region would require substantial infrastructure investment (processing and transmission), affecting the economics of exploration and commercialisation, or major new gas consumers to be located nearby (e.g. electricity generation).
- Consumption of gas in the home is generally the most efficient use of fossil-fuels energy (particularly compared to conversion to electricity). A number of commentators indicated that there appears to be little expansion in domestic gas usage, although the reasons for this are unclear.
1.3.3 Water Supply
- The quality and security of supply of residential reticulated water is generally at a level necessary to meet demand (although there are exceptions).
- There has been substantial investment in treatment plants over the last 10 years.
- There are issues with competing demands for water (particularly between agricultural and industrial users);
- The current mechanisms for water allocation, via the Resource Management Act, have limited ability to prioritise competing water uses; although the creation of integrated water management plans can assist with allocation processes (essentially by pre-empting a large part of the debate over the priority of use).
- Water allocation processes, undertaken at local or regional levels do not contain incentives to balance local and national benefits and costs in the allocation of local water rights.
- Few market mechanisms are in use in the water sector: there is no charging for water abstraction and charges to end-users are most often via the rating system. There is very little residential water metering.
- In the absence of pricing signals, demand management is confined to rationing or regulation (e.g. the Building Act requiring use of water-efficient systems). Lack of pricing signals also has implications for determining the optimal level of investment (within the requirements of health regulations).
- Small communities servicing comparatively large tourism activities may be faced with the need for, but not have the rating base to support, necessary investment in processing plant and systems (or such investment may consume a disproportionate amount of a rating base, diverting expenditure from other activities). These issues are likely to become more acute with the projected growth in tourism.
1.3.4 Wastewater
- As for water supply, the condition and capacity of wastewater assets is generally at a level to meet demand. There has been substantial investment in treatment plant over the last 10 years.
- The Resource Management Act provides considerable flexibility for treatment processes that are appropriate to given regions.
- However, there are no national benchmarks on the level of discharges into the environment, which makes an assessment of the environmental impact of wastewater treatment difficult across the country.
- There was some anecdotal evidence given during the study that some wastewater treatment systems are in breach of their RMA consents.
- As for water supply, tourism activities heavily influence effluent output in some small communities that may lack the rating base to make the necessary investments.
1.3.5 Transport: Road
- Transit's measures of road condition indicate that, overall, the condition of roading infrastructure is generally good, although there are exceptions.
- Congestion affects the Auckland region most highly. There are some issues of congestion in other parts of the country.
- The structure of road use charges is such that there are few pricing signals that affect driver behaviour and, likewise, investment decisions cannot be based on pricing signals sent by road users.
- Use of the roads gives rise to a number of environmental and other impacts including noise, emissions, contaminated water run-off, accidents, congestion etc). A study is underway to estimate the costs associated with these impacts and the extent to which they are factored into existing charges for using the road network.
- Governance arrangements, particularly in Auckland, have been raised as an issue in terms of the responsiveness of planning and investment to growing road and other land transport issues.
- Funding of roads projects is essentially on a pay-as-you-go basis.
- This inevitably constrains the volume of investment within a given period, particularly when facing investment "humps".
- Without some other source of revenue (e.g. tolls) or funding (e.g. Crown contributions), borrowing allows optimised scheduling of projects. Within a fixed budget and time horizon, borrowing to fund more current investment inevitably constrains future investment. However, it would be assumed that the decision to bring forward investment would be based on cost:benefit analysis that concluded in its favour.
- There is a growing acknowledgement of the need for integrated planning and transport management, particularly in urban areas, so as to mitigate the potential for increasing traffic volumes.
1.3.6 Transport: Rail
- The rail network is suffering from low and declining levels of asset replacement. This has implications for the quality and reliability of services.
- Despite increasing productivity in the mid-1990s, the rail business has not been able to recover its cost of capital.
- The quantity of freight carried on rail is increasing.
- Parts of the rail network, usually tunnels, are not capable of taking the longer or higher containers that are increasingly used internationally.
- The proposed Government investment in the railway network is expected to reduce the level of deferred maintenance. Two particular issues arise for policy in this area:
- The basis of allocation of investment to specific lines; and
- The access charges regime for use of the network.
- The historical layout of the rail network does not favour commuter services, particularly in Auckland.
- The negative externalities from rail are generally lower than negative externalities from road. This needs to be balanced against the lack of door-to-door flexibility of rail compared to road transport.
- The Alternative to Roading framework for funding rail investment focuses on benefits to road users, rather than wider national benefits.
1.3.7 Transport: Ports
- Generally, there is excess capacity in the sector, and there has been significant investment undertaken over the last ten years (particularly to accommodate the containerisation of trade, but also driven by growth in dairy and forestry industries).
- Assets are generally maintained to meet commercial demands and previous issues of under-maintenance have generally been remedied over the last 10 years.
- Many ports do face constraints on their operations or ability to expand:
- The availability of land affects most ports to some extent.
- As trade grows, transport links are increasingly important, with consequential difficulties arising from the location of most ports on central urban waterfronts. To some extent this can be ameliorated through management of deliveries and the development of inland ports.
- Internationally (particularly in the container trade), there is a steady trend towards fewer, larger vessels, making fewer calls at fewer ports. Many ports face constraints (in berths, or channel draft or width) in being able to accommodate these larger vessels.
- In the long term, this could imply that international (particularly inter-continental) trade will consolidate increasingly on fewer ports, although this is uncertain and there is a range of views on the matter. If such hubbing did occur at a few ports, the impact on other ports will be site-specific, depending on the relative economics of coastal shipping, road and rail transport.
1.3.8 Transport: Airports
The study focussed on New Zealand's international airports and the air traffic control system.
- Over the last 10 years, the number of international airports has increased from three (Auckland, Wellington and Christchurch) to seven (adding Dunedin, Hamilton, Palmerston North and Queenstown). Other airports such as Invercargill and Rotorua also have plans to offer facilities capable of supporting services. Only Auckland and Christchurch are currently used for intercontinental services (excluding trans-Tasman travel as intercontinental).
- Of the airports included in the study, Auckland and Wellington currently face the greatest constraints on aircraft movements. Auckland has far greater capacity to expand capacity, with land reserved (and included in the district plan) for a second runway.
- The ability of the sector to accommodate growth in passenger capacity depends in large part on the airlines:
- Being able to schedule international/intercontinental services outside of busy periods (not a simple task, as New Zealand is generally a schedule-taker);
- Increasing plane sizes on domestic routes. The trend has been to use smaller planes and more frequent flights. Overall using larger planes could increase seating capacity on some routes.
- There is considerable ongoing investment in the sector, with terminal expansion planned at Auckland, Hamilton, Christchurch and Dunedin. Queenstown would benefit from terminal expansion (as would Rotorua) and runway extensions are planned at Invercargill and Rotorua.
- Most new terminal developments are specifically designed for (relatively) simple modular expansion.
- Terminal expansion can be expected to trail passenger numbers (airports and airlines want the greatest possible utilisation of current assets before further investment is undertaken).
- New Zealand has an array of smaller regional airports that play a key access role. Maintenance investment in these will be a continuing requirement.
- Airports must operate within noise constraints set out district plans. Some (e.g. Wellington) operate under a curfew. Airports report that they can continue to operate within current plans for the foreseeable future, but tightening of controls (particularly the imposition of curfews) would cause significant problems.
- The air traffic control system (oceanic and domestic) has considerable capacity (including high levels of redundancy in the system). The system is also generally scalable to allow operation of a larger number of airtracks if needed.
1.3.9 Telecommunications
Telecommunications has a number of characteristics that are different from the rest of the sectors under examination, not least as the systems tend to be far more flexible and scalable than other infrastructure. This is not to underestimate the complexities of upgrading and managing a telecoms network: it is just that by comparison, it is likely to be subject to fewer external constraints than, say, building a new power station or motorway.
- New Zealand avoided the excesses of the recent telecoms boom, and its consequent losses. A corollary is that New Zealand does not have the vast quantities of unlit or barely used fibre that are reported elsewhere in the world (particularly the US).
- Uptake of advanced services (broadband), particularly by households, is low by international standards. This would appear to be attributable to pricing structures and relatively low-cost dial-up internet access, rather than the availability of infrastructure.
- Competition in infrastructure provision appears to be increasing, with the roll-out of wireless services in particular. This has been assisted by Project Probe. It is too early to say whether this increase in competition will prove sustainable.
- Regulation can be expected to continue to play an important role in the sector, both in relation to interconnect, but also the potential unbundling of the local loop ("LLU").
- The issue of LLU is highly contentious, not just with Telecom New Zealand ("TCNZ"), but also with those companies that are investing in wireless networks that bypass TCNZ's local loop.
- Mobile services cover approximately 97% of households, plus central business districts, major business areas and major transport corridors. The introduction of Third Generation Mobile (broadband for mobiles) is highly uncertain, and the two operators (Vodafone and TCNZ) were not willing to disclose details of roll-out plans.
One notable factor of the sector is the speed with which it develops: conclusions drawn in this project are likely to be bypassed by events relatively rapidly. This illustrates the differences between telecoms and the other infrastructure sectors under examination. Telecoms is much faster moving, investment is often in much smaller "lumps", the pace of technological change is far faster and systems are scalable to an extent not seen outside of ICT.
Our judgement at this stage is that New Zealand's telecommunications infrastructure itself is unlikely to pose a barrier to growth or sustainable development objectives. The level of competition, regulation and the business models pursued by the sector will critically affect the uptake of advanced services and the potential that these offer.
1.4 Policy Issues
Each of the infrastructure sectors raises particular issues. Some themes can be drawn out that often cross sector boundaries. Some issues tend to be apparent in publicly owned and managed infrastructure. The Government's ability to affect or influence infrastructure varies across sectors due to the difference in ownership and varying control over funding regimes: central government (State Highways; State-owned Enterprises in the energy sector; participation in some airports; likely to now extend to the rail network), regional or local government (local roads, water and waste-water infrastructure, ports and airports) and the private sector (telecommunications, energy, some ports and airports).
Substantial policy efforts are underway in many sectors and this report does not seek to comment on these. Key issues, particularly for publicly owned and managed infrastructure include:
- Pricing mechanisms and their impact on demand and investment decisions (particularly in the water, waste-water and roads sectors, where charges tend to be in the nature of taxes rather than prices).
- Public procurement mechanisms, which do not always incorporate whole-of-life approaches to design, construction and responsibility for long-term functioning.
- Funding mechanisms, which are often not informed by pricing signals and operated on a pay-as-you-go basis.
Issues affecting both public and privately owned infrastructure include:
- The appropriate level of regulation of potential natural monopolies, but above all the need for clarity and certainty over regulatory interventions.
- The incorporation of externalities into pricing mechanisms, and the impacts that this might have on demand and on future investment decisions and the balance of investment.
- A particular issue is access pricing which affects telecoms and may become an issue with the transfer of the rail network into public ownership.
- The potential for demand management (to reduce demand or to increase efficiency of resource utilisation, or both), either through pricing mechanisms, education and persuasion, or specific regulatory interventions.
- Emergency management, where the key question is whether the current balance of risk, cost and redundancy is appropriate, and if not whether policy has a positive role to play in improving such outcomes. A key issue that will influence policy in this area is that infrastructure failure will manifest itself in different ways and will be of differing importance depending on the nature of the infrastructure, the period over which consequences will occur, and so on. For example, failure of a distribution network or traffic congestion would, in the first instance, have localised consequences. Failure of the electricity transmission network or Auckland Airport's runway would have national consequences.
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