Funding and Financial Arrangements
132. PwC noted that "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."
Current and Recent Investment
133. Recently the Government has provided significant financial support for infrastructure investment through:
- Project PROBE (tens of millions of dollars);
- Whirinaki reserve electricity generation plant ($150 million);
- Sanitary Works Subsidy scheme ($15 million per year over 10 years);
- Auckland transport package ($1.6 billion).
134. Commercial providers are also investing heavily in infrastructure:
- Telecom has signalled that it intends to move to a Next Generation Network, which will involve investment of upwards of $1 billion over 10 years;
- Woosh's wireless broadband investment.
135. However, substantial investment is still required in a number of sectors:
- Transpower has estimated that total grid investment requirements over the next 10 years are around $1.5 billion;
- Investment in electricity generation is required to cover ongoing growth in demand (this becomes even more acute following Meridian's decision not to proceed with Project Aqua);
- The Crown has agreed to spend up to $200 million on capital works for the rail network (in the process of being returned to Crown ownership) but this may not be sufficient to address deferred maintenance issues, let alone new investment;
- Investment of between $100 - $300 million from drinking water suppliers is required. In addition, the Crown will be asked to contribute a proportion of this on a similar basis to the Sanitary Works Subsidy Scheme.
136. The companies concerned meet the majority of infrastructure funding requirements. The PwC report did not identify that access to capital is a wide-ranging constraint on infrastructure investment.19 Infrastructure funding and ownership arrangements have evolved on a sector-specific basis. Case by case decisions are taken by the Government when necessary to address particular needs, e.g. reserve generation levy, Auckland transport funding package, forestry roads for regional development, and the Sanitary Works Subsidy Scheme.
137. The Government's capital investment decisions are taken within the Budget process. This allows integrated decision making across capital spending proposals and to strike an appropriate balance between capital and operating spending. The capital Budget process now includes SOE capital injections.
138. Some local authorities are experiencing infrastructure funding pressures. In general, the funding for improved infrastructure must come either from increased revenue (generally rates increases) or reductions in local government service(s).20,21
Infrastructure Bonds
139. Treasury is currently developing options, with the Department of Labour, for the issue of infrastructure bonds. Infrastructure bonds could be issued to the public (commercial or retail) or migrant investors' capital could be held as an infrastructure bond. The proceeds from the bonds could then be on-lent to finance infrastructure investment. For example, the Government could issue infrastructure bonds and on-lend proceeds to Transit to fund construction of a toll road.
140. Work on infrastructure bonds is currently at an early stage and observations about risks and opportunities are tentative. Infrastructure bonds enable a closer linkage between raising the finance and the application of the funds. However, public infrastructure bonds may be more expensive to raise than government debt. The extent of the additional cost will depend on the exact nature of the bonds. Migrant infrastructure bonds may be cheaper than conventional bonds, but this cost advantage would be obtained from requiring migrants to invest, rather than the bond itself.
141. It is recommended that Cabinet invite the Minister of Finance to report to Infrastructure Ministers on the issues with infrastructure bonds and with options for the introduction of infrastructure bonds, by 30 November 2004.
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