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• Appendix B

• Infrastructure Development

• Infrastructure Stocktake

• Infrastructure Audit
• Sustainable Development
• Linkages
• A Policy Framework
• Stocktake Reportback
• Media Statements

• B.1.1 Principles for Applying to Boundary Issues in Infrastructure Sectors
• B.1.2 How to Frame the Discussion of Infrastructure
• B.1.3 International Connectivity (External Infrastructure)

While there is no universally recognised definition of infrastructure, there is broad agreement about what it is and is not. Thus the MacMillan Dictionary of Modern Economics (1996) defines infrastructure as "The structural elements of an economy that facilitate the flow of goods and services between buyers and sellers". The Routledge Dictionary of Economics (1995) broadens the definition to include "the basic services or social capital of a country, or part of it, which make economic and social activities possible by providing transportation …[and other facilities]… in which community activities can take place."

The definitions are alike in identifying as infrastructure such assets as roads, railways, airports, ports, power systems, telephones, water and sewerage systems. The broader social capital definitions also take in housing, health and education services, and also some other social institutions that facilitate economic and social interaction.

In a February 2003 paper on Priority Outcome No 3, the Ministry of Economic Development draws distinction between economic infrastructure (the physical assets that provide services used in production and final consumption), social infrastructure (assets that support a healthy workforce with adequate skills) and institutional infrastructure (such as the legal system, culture and capital markets). From these definitions, the current study is focused on economicinfrastructure, although certain aspects of institutional infrastructure (market operations, legal property rights) are crucial to the operation of that infrastructure.

Further, given the emphasis in the terms of reference on forward-looking provision and resilience of infrastructure services, the capability to respond to changes, both predicted and the unexpected, is an important characteristic of infrastructure. This means the timing with which infrastructure can adjust to changing demands, and the long term risk implications of long lead times, are fundamental characteristics of infrastructure. Other characteristics commonly associated with economic infrastructure are:

• Significant economies of scale in production, reflected in high initial fixed costs and relatively low variable costs of operation.
• Common carrier/common supplier characteristics, such that there are economies in supplying diverse consumers jointly rather than in dedicated stand-alone facilities.
• Because of high fixed costs and declining marginal costs, infrastructure has natural monopoly characteristics, making it difficult for new entrants to compete with an incumbent supplier (and lack of the easy entry/exit needed for contestability).
• Because of natural monopoly there has historically been a high level of government intervention in infrastructure provision, either through direct provision or more recently regulation of prices and supply arrangements.

Infrastructure investment and consumption of infrastructure services have significant implications for achievement of sustainable development objectives, as infrastructure services underpin many aspects of economic and social activity and, as a consequence, infrastructure failures can have widespread impacts across the community. The severity of infrastructure failures is reduced by the availability of substitutes for those infrastructure services. Consequently, a checklist or set of criteria for defining infrastructure for this study could be identification of the following characteristics:

• Capacity can only be adjusted in large, "lumpy" increments
• There are high initial fixed costs and low marginal costs of supply
• There are high sunk costs and risk of assets stranding as conditions change
• There are multiple users of the services spanning production and final consumption
• There are externalities not reflected in service charges that have attracted regulation
• Scale and regulatory hurdles create long lead times for installing new capacity.

It is also a feature of infrastructure that it is difficult to find substitutes for the services provided, though this is a matter that can change over time with technological advance. As a consequence of the above listed characteristics and the lack of substitutes for infrastructure services, infrastructure service failures have potential for widespread disruption impacts and costs.

B.1.1 Principles for Applying to Boundary Issues in Infrastructure Sectors

The six criteria above could be used for defining the boundary of infrastructure in the different sectors. A preliminary assessment of how different infrastructure elements rate against these criteria is presented in the table below. This preliminary and of necessity subjective assessment nevertheless illustrates where the boundary lines of infrastructure may be drawn in the different sectors. Those facilities which have moderate or high assessments in most criteria are classic infrastructure; whereas those that have predominantly low assessments are not.

In transport, tracks and modal interchange facilities exhibit most of the characteristics of infrastructure; but rolling stock and vehicle fleets do not, even on a rail system with a monopoly operator. Navigation and traffic control assets for air and maritime transport are borderline cases: the equipment itself does not have the high lumpiness and sunk costs of classic infrastructure, but as they are integral to operation of port facilities they could be included in the coverage of infrastructure.

In energy, the availability of gas is not something that policy can control, but it may have some influence over the rate of exploration, discovery, and exploitation of new gas fields. The size of the known reserve base therefore has some similarity to classic infrastructure, and could be considered as part of the picture of the current infrastructure stock-take. Electricity generation and delivery are infrastructure services down to the local network, but retailing appears as almost a tolling operation with little infrastructure characteristic. In contrast, the distribution of retail outlets for petroleum fuels has more of the characteristics of infrastructure and this can affect ability to respond to changes in market conditions (e.g. the availability of liquified gas fuels).

In energy, the availability of gas is not something that policy can control, but it may have some influence over the rate of exploration, discovery, and exploitation of new gas fields. The size of the known reserve base therefore has some similarity to classic infrastructure, and could be considered as part of the picture of the current infrastructure stock-take. Electricity generation and delivery are infrastructure services down to the local network, but retailing appears as almost a tolling operation with little infrastructure characteristic. In contrast, the distribution of retail outlets for petroleum fuels has more of the characteristics of infrastructure and this can affect ability to respond to changes in market conditions (e.g. the availability of liquified gas fuels).

B.1.2 How to Frame the Discussion of Infrastructure

The above table provides a fairly long list of items that may be considered as infrastructure. We suggest that applying these criteria to particular assets or structures should be approached through a two stage discussion:

• A theoretical consideration of whether the particular assets have the characteristics of infrastructure defined above; and
• A practical consideration of the extent to which the particular assets are relevant to policy development.

By way of illustration, many of the assets used in petroleum products distribution have the characteristics of infrastructure, but the policy relevance of this finding is questionable. Most of these assets are privately owned, and the potential "choke points" all have substitutes available. The most obvious choke point is the refinery, but it has a ready substitute in imported products. Bulk storage facilities and local retail outlets are all localised choke points, but they are substitutable by facilities in other locations. The likelihood of a petroleum products crisis occurring through causes within the reach of New Zealand policy is therefore small, and from a practical policy perspective there is an argument for excluding petroleum assets from consideration altogether.

Such two stage discussion can help to define the boundary in borderline cases in the table above. For instance, in aviation and maritime transport the cost of GPS technology for individual users has come down in recent years, and their accuracy has improved sufficiently, for them to be readily available substitutes for collective navigation aids (lighthouses etc), so despite infrastructure characteristics the "choke" aspects may no longer warrant priority as part of infrastructure policy, at least with respect to commercial transport. Traffic control involving allocation of air space or pilotage into harbours is not so readily substituted by individual technologies, so this would attract higher priority than navigation alone. The principle requirements of marine pilotage (pilot boats, trained staff) arguably have fewer characteristics of physical infrastructure than those of air traffic control (radars, international connections, skilled personnel) that could justify including air traffic control within infrastructure but excluding maritime traffic management.

The above discussion suggests that the most clear-cut economic infrastructure are:

• All categories of water assets in the table above;
• All categories of gas assets, and all categories for electricity except retailing;
• Cellular towers, local loops and international connections; but technological change is increasing the substitutability of landline and cellular services, reducing disruption potential of infrastructure failures;
• Airport runways and terminals, dock facilities, roads, rail tracks and inter-modal interchange facilities.

B.1.3 International Connectivity (External Infrastructure)

International connectivity fits within the broad definition of "structural elements of an economy that facilitate the flow of goods and services between buyers and sellers", but fits less well with the 6-point criteria identified above. It also poses particular issues for boundary definition for a practical infrastructure policy framework. "Choke points" in external infrastructure become policy relevant if there is some market failure or other distortion in pricing that prevents the choke from being released. Also, key parts of the "external infrastructure" may be driven by forces external to New Zealand, over which domestic policy has little or no influence. So changes in the external infrastructure, such as international freight capacities and trade patterns, form part of the megatrends that domestic infrastructure needs to be responsive to, rather than part of the infrastructure itself.

Although planes and ships are expensive items, freight capacity on these vessels does not appear particularly large, lumpy and slow to respond to changing circumstances. Dedicated freight planes can be chartered if need be, at a cost. The choke point, if there is one, is more likely to be in obtaining the necessary airport slot and berthing capacity (classic infrastructure) than in the aircraft and crews themselves. The interchange arrangements (including approach roads and temporary holding facilities) may also constrain some locations. The key question for policy is whether pricing can resolve congestion and provide an efficient allocation of constrained capacities. In the case of road congestion it currently cannot; in other airport and port facilities pricing is more able to allocate access and resolve constraints, at least in the short term.

The extent to which air freight is constrained by being carried in the holds of passenger aircraft could be examined through a number of questions.

• Are tourist arrivals to New Zealand expected to fall? The answer is probably not. Although some carriers have stopped flying to New Zealand, remaining carriers now put on more frequent flights in smaller planes, so the timeliness of connectivity has improved. Perceived constraints on freight space may therefore be more a function of growing demand than of limited supply of hold space.
• Is there a significant mismatch between destination/origins of traded physical goods that use airfreight and tourist destinations/origins? Again, flight patterns may have changed in recent years because of re-routing through regional hubs, but this need not result in any particular overseas location being less accessible.
• Even if changes in air service capacities are creating a constraint, what can policy do to alleviate this?

These questions could be explored empirically, although given data limitations and the arguments above this may not be an informative exercise. Air freight may be becoming more costly because of changing market conditions, including troubled airlines withdrawing from less profitable routes and services, and general cost increases such as heightened security measures. Exporters whose product value is insufficient to cover these cost increases are economically marginal and will either cease or need to find ways of improving their margins to cover the extra costs.

The same arguments apply to shipping capacity, which does not appear scarce world-wide. Constraints are most likely to occur in the harbour facilities (including the depth of harbour approaches to cope with increasing size of international vessels) rather than the availability of vessels. Upgrading port facilities may take advantage of the cost effectiveness of larger vessels, but whether it is worthwhile upgrading to accommodate these vessels is a decision for port authorities to take, considering both the commercial consequences and environmental restraints.