Attachment 4: Infrastructure Policy Framework: Identifying Appropriate Government Intervention
1. The following policy framework is intended to help answer the questions: Are infrastructure policy settings "right" within each infrastructure sector? Are governance arrangements appropriate for each infrastructure sector?
2. The policy framework in the table comes from a variety of sources, including the following:
- NZIER report
- Maarama report
- Various "diagnostic papers" prepared by the IWG.
3. The framework is built around a series of "tests" designed to ascertain if there are market failures or other characteristics associated with the infrastructure sector under observation that might require government intervention to alleviate / address. Hence there is the "test" question, followed by a description of potential causes of market failure or issues that might arise, and identification of some of the appropriate "policy tools" to address this failure.
4. To apply a test to an infrastructure sector, one would ask, for example, "are there public goods and/or market dominance concerns?" The initial response is to describe the nature of the goods (rival, non-rival, etc) and market characteristics and the existing policy settings. This is followed by a judgement as to whether the current policy settings are adequate to address the public good or market characteristics or if a better means of handling this particular "failure" is available. As noted above, the framework offers some guidance on possible policy tools and/or settings for addressing particular issues.
5. The policy framework takes into account the ten principles of the Sustainable Development Programme of Action, and is designed to assist in achieving the infrastructure policy objective: "to enhance infrastructure's net contribution to economic growth and societal well-being over time, while reducing the incidence and severity of service failures and adverse effects on the environment."
6. The framework provides information on identifying appropriate government intervention in the generic sense. A second, but non-trivial question is assigning the roles between local and central government. This requires the consideration of two factors: (1) the principle of subsidiarity: wherein a collective policy response is devolved to the lowest level of collective authority capable of dealing with it, and (2) the area of geographical impact (e.g. local air pollution issues are generally best dealt with by local government, while greenhouse gas emissions may need to be addressed at the national level).
7. The policy framework does not explicitly consider:
- Funding issues, as these are a separate concern that needs to be addressed once it has been determined that there should be a central or local government intervention and is influenced by the nature of the intervention itself.
- Ownership issues, such as private vs. public ownership and central vs. local government ownership.
- Emergency management issues where the government has a legitimate role in establishing overarching arrangements to ensure that communities are protected against natural disasters and acts of terrorism. Rather, this policy framework is providing guidance for sector-specific infrastructure policy decisions.
Test: Is There Sufficient Infrastructure Sector Monitoring / Information for Government to Know If and When to Intervene in a Timely Fashion?
This is a fundamental test in the framework, and could be said to provide the basis for assessing all of the remaining tests.
Decision-makers should have access to high quality information that allows them to make informed decisions. Hence, it may be necessary to provide sufficient information to:
- Establish drivers of demand for infrastructure services, monitor trends in these drivers and form expectations about future movements ("futures analysis")
- Identify possible "bottlenecks" or pressure points
- Ensure the security and reliability of infrastructure capital stock to meet current and anticipated demand - including resource supply, capacity, condition, uptake of infrastructure alternatives and efficiency
- Monitor the appropriateness of provision of goods currently deemed as "public" in face of changing conditions, especially technological change
- Ascertain that infrastructure is making a positive contribution to (and minimising adverse impacts on) sustainable development
- Monitor the performance of Government policy and public agencies, e.g. to assess whether policy intervention might achieve improvement
- Establish the community's redundancy requirements (e.g. dry-period security of supply).
This requires the provision of a range of quantitative and qualitative information.
Test: Are There Public Goods and/or Market Dominance Concerns?
Potential Causes of Market Failure
- Public good (non-rival, non-excludable)
- Market dominance: natural monopoly (high sunk costs, economies of scale).
Policy Tools to Mitigate Failure
- Policies to establish competitive markets where possible (including definition of property rights and regulation to promote fair competition)
- Public: planning, policy making, finance, ownership
- Private sector finance and ownership under public regulation
- Contestable service operation, e.g. bidding to operate with government monitoring of performance
- Regulation to allow other services fair access to use of the facility
- Price regulation.
Test: Are Externalities Present That Require "Internalisation"?
Potential Causes of Market Failure
- Externalities can be created in the production of an infrastructure service (e.g. air pollution from coal generation) or in its consumption (e.g. congestion arising from use of roads)
- May be local, national or global.
Policy Tools to Mitigate Failure
- Regulation (e.g. zoning, technical standards)
- Fiscal instruments (e.g. taxes, fees, subsidies)
- Promoting behavioural / attitudinal change (e.g. through education, information provision, voluntary agreements, QBL reporting).
Test: Are Societal Objectives (Quality of Life, Including Access and Equity) Being Achieved?
Potential Causes of Market Failure
- Merit goods
- Social redistribution.
Policy Tools to Mitigate Failure
- Regulation (e.g. universal service requirements)
- Investment planning (e.g. of regional spread)
- Public financing of non-commercial services deemed socially important
- Empowering all New Zealanders to participate in decisions affecting them
- Ensuring all New Zealanders have access to key services.
Test: Are the Institutional Arrangements Structured to Avoid Information or Co-Ordination Failures and Permit the Uptake of New Technology?
Key issue: Are the institutions able to promote smooth adjustment to new technology, supply shocks, demand changes, etc.?
Potential Causes of Market Failure
- Information failure within and across sectors: valuable information which is not procured because of potential free-riding (usually fragmented market present)
- Co-ordination failure within and across sectors: e.g. may occur in networks when there is no clear set of operating rules, or no single operator in a position to enforce those rules, possibly exacerbating congestion and bottlenecks across the network
- Uptake of technological change.
Policy Tools to Mitigate Failure
- Co-ordinate provision of information - may be publicly funded or through levy / tax
- Regulate for provision of information
- Regulation of investment or operating standards to improve co-ordination in service provision
- Monitor the emergence of new technologies for their contribution to infrastructure provision
- Maintain flexibility in policy to allow uptake - changing policy if required to maintain ability to adopt "innovative" solutions such as use of smaller scale alternatives and alternative supply sources.
Test: Is Risk Being Handled Appropriately?
Demand Risk
Issue
Revenue / financial return is less than expected.
How Can Risk Be Mitigated?
- Borne by facility operator where a private good (telecommunications, ports, airports)
- Where common pool or public goods are involved, may be appropriate for government to share risk
- Demand and construction cost guarantees have weak justification in terms of risk sharing. A developer or operator usually has more control over construction costs than government, and government is only one of many influences over future demand, and not necessarily the dominant one
- Guarantees for infrastructure investment may create long term potential liability (open financial transactions are generally more transparent and easier to target).
Political and Regulatory Risk
Issue
Future government actions subsequently undermine return from facility.
How Can Risk Be Mitigated?
- Under control of government.
Quasi-Commercial Risk
Issue
State-owned supplier or purchaser may default on contract with investor under political influence.
How Can Risk Be Mitigated?
- Government guaranteed returns
- Environmental risk
- Social and cultural risks: where social and cultural outcomes are less than expected.
Environmental Risk
Issue
Environmental pollution (externalities) as a result of infrastructure construction or service provision.
How Can Risk Be Mitigated?
- Borne by provider - performance bonds and liability rules.
Social and Cultural Risks
Issue
Social and cultural outcomes are less than expected.
How Can Risk Be Mitigated?
- Impacts are borne by communities affected, thus "communities of interest" are most suitable to manage.
Test: Are There Sufficient Systems in Place to Pre-Empt Regulatory Failure?
Types of Failure
- Information asymmetries
- Imposition of excessive costs on providers and users
- Regulatory uncertainty and undue reduction of expected rates of return
- Creating allocative and dynamic inefficiency by distorting price signals, e.g. when intervening to promote equity for target populations
- Use of inappropriate financing/funding mechanisms, e.g. those that "crowd out" more efficient investment by the private sector.
How Can Risk Be Mitigated?
- Government needs to be aware of potential regulatory failures when making the decision to intervene and in selecting instruments
- Performance of Government policy and public agencies and assess likelihood of new policy intervention achieving improvement.
Test: Are Trade-Offs and Complementarities Being Explicitly Considered?
Issues
- Fiscal and environmental constraints imply the need to prioritise investment decisions
- Short run vs. long run impacts (what appears as a trade-off in the short term may be a complementarity in the long term).
How Can Risk Be Mitigated?
- Government requires sufficient information to make effective trade-offs and decisions
- Infrastructure policies which advance more than one dimension of sustainability, for example both economic and social outcomes (e.g. policies supporting more "liveable" cities), are of special interest.
Attempts should be made to decouple economic growth from pressures on the environment.
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