Hon Bill English

Minister of Finance

Speech to the New Zealand Council for Infrastructure Development

Embargoed until 9.15am

Wednesday August 11, 2010

Good morning and thank you. It is a pleasure to be here.

It's not a coincidence that for the second year in a row you are hearing from two Cabinet Ministers – my colleague Steven Joyce will join you tomorrow afternoon.

This reflects how important infrastructure is to the Government’s wider economic programme and New Zealand’s longer-term economic prospects. High calibre infrastructure matters because it supports productivity, faster economic growth and jobs.

And as our economy emerges from the deepest global recession since the 1930s, effective investment in infrastructure is supporting tens of thousands of jobs around New Zealand.

Just over half-way through our term, the Government's infrastructure programme is swinging into full gear and we are keen for continued engagement with providers like yourselves.

This investment represents a significant part of the combined $36.5 billion in Budget cash deficits we are forecasting over the next four years. The Government is running these significant deficits to invest in infrastructure, raise productivity and support the economy as it recovers from recession.

Today I want to share with you some of our thinking, the challenges we face and the progress we have made as we try to lift New Zealand's infrastructure performance.

Our economic challenges

But first, I'd like to outline some of the economic challenges we face.

Some commentators have suggested our economy was in good shape before the global recession hit in late 2008. That is incorrect: in fact, our average annual growth was less than 1 per cent a year in the three years leading up to the global financial crisis in late 2008 and we went into recession several months before just about every other developed economy.

Our track record going back several years shows sluggish and unbalanced growth driven by debt, consumption and government spending, rather than savings and exports.

The bottom line is that we need to rebalance our lop-sided economy and correct our fiscal imbalances.

That is the only way we can deliver the sustainable growth, jobs and the higher incomes Kiwis deserve.

There are two main indicators of our economic under performance.

Firstly, the tradeables sector – the internationally competitive part of our economy comprising exports and import competing industries – actually shrank in the five years from 2005 to 2010.

Even more alarmingly, there have been no net new jobs created in manufacturing and agriculture for the best part of a decade.

By contrast the non-tradeables sector – the spending side of the economy - has grown by 15 per cent since 2005.

The second indicator of New Zealand’s economic under performance is our net international investment position, which measures New Zealand’s total debt to the world, including households, business and the Government.

In 2000, our debt to the world was just over $100 billion. It’s now approaching $180 billion and, by 2014, it is forecast to be nearly $250 billion.

So we have a big task to turn this economy around and rebalance it towards savings and growth.

Early signs of progress

But I've been encouraged by some early signs of progress.

Firstly, after experiencing five quarters of recession, the economy is growing again. It expanded 1.9 per cent in the past year and growth of about 3 per cent a year is forecast for the next few years.

Secondly, the tradeables sector grew 3.4 per cent in the nine months to March, 2010, compared with just 1.2 per cent in the non-tradeables sector.

This is the largest positive gap between the two sectors over a nine-month period since December 2002.

Thirdly, New Zealanders are being more careful with their spending. Per capita private sector consumption increased by only 1 per cent in the past year, after consistently increasing by more than 4 per cent, year on year, between 2002 and 2007.

Reserve Bank figures show household debt is also easing for the first time in more than a decade.

So we are seeing signs of a fairly orderly, if quite slow, rebalancing of the economy.

Many businesses and individuals are now realising what we've been saying for some time – this recovery will be quite different from others in our recent past.

This recovery will be patchy at times - due to the uncertain global environment and the need for businesses and households to pay down large stocks of debt.

In this credit-constrained world, the recovery will need to come first from the earnings side of our economy such as exports.

All of this shows that tackling the economy's imbalances will not be a short-term task. It's not just a matter of shrugging off the global recession.

The challenges we face – as I've just outlined – started years earlier.

Turning that around will require a relentless long-term focus and commitment.

We are seeing this reflected in stable rather than growing results for domestic industries like housing and retail, and indicators such as business confidence and the sharemarket.

It’s clear that the recession bottomed in early 2009 and unemployment peaked late last year. Since then, we’ve also seen steady, if modest growth, in the number of hours worked.

Of course the Government is concerned about the loss of any job. That's why we are running large cash deficits over the next four years - taking a lot of the economic shock on the Crown’s balance sheet to protect households and businesses and to help keep Kiwis in jobs.

Our infrastructure programme plays a key part in supporting New Zealanders in work and I'll talk more about that later.

Catching Australian incomes by 2025

In the last few weeks, the Government's goal to catch Australia by 2025 has attracted some comment. That debate has been characterised by an almost total lack of context and I'd like to take a moment to bring it back to reality.

As I've said, in the three years to 2008 New Zealand's economic growth was unbalanced and sluggish. In early 2008, New Zealand went into a recession that Australia simply didn’t have.

This meant Australia's economy grew by about 11.5 per cent in the four years to March, 2010, while our economy grew just 2 per cent.

So the Government inherited a situation that makes the challenging target of catching Australia even more difficult. Let me stress that the Government remains committed to this goal – but it is a 2025 target, not a 2011 or 2014 target.

Over the past 30 years, there have been many two year periods where New Zealand performed better than Australia as things like dairy and other commodity prices fluctuated. But the overall trend was adverse.

On the commodity front, Australia clearly has the edge at the moment.

Put in simple terms, Australia's mineral industry makes up nearly 70 per cent of that country's exports, while dairy makes up about 20 per cent of our exports.

Furthermore Australian commodity prices roughly doubled in the five years to July, 2010, while New Zealand's commodity prices increased by only half that rate.

As a result, Australia's minerals boom means it is likely to perform better than New Zealand in the near term, but it is the long-term trend we are determined to turn around.

The only way we can permanently lift New Zealand’s economic growth is through considered and consistent reform and change, year after year.

Budget 2010 took several steps in that direction – including across the board personal tax cuts from 1 October, which will help narrow the gap in after-tax incomes compared with Australia.

More broadly, the Government has identified six drivers of economic growth, which I talked about at this symposium last year. In the past 18 months, we have been extremely busy rolling out policies within this plan, and you will see more announcements in the coming months.

We’ve already made good progress, including:

Strengthening our tax system – you will have all seen the major changes we made in the Budget.

At a time when many other countries are being forced to consider income tax increases, we have delivered across-the-board personal tax cuts that will leave the average household about $25 a week better off, even after the GST increase to 15 per cent. The average wage earner will be about $15 a week better off.

From the 2011/12 income year, our company tax rate will fall to 28 per cent – lower than Australia and ensuring that we remain competitive. It also helps provide businesses with the right incentives to invest and export.

Better, smarter public services – this has involved getting forecasts of never-ending Budget deficits and ever-increasing government debt under control.

We’ve reviewed the performance of major departments and agencies; we’ve capped the bureaucracy and moved nearly $4 billion of spending into frontline public services such as health, education and law and order.

And we’re reviewing longstanding issues such as welfare dependency and pressures on social housing through the Welfare Working Group and the Housing Shareholders Advisory Group, which you will have seen in the media over recent days.

Lifting education and skills – we’ve introduced national standards in literacy and numeracy; we’re investing a record $12 billion in education services; we’re introducing the Youth Guarantee and trades in schools; and we’re focusing tertiary education on achievement by improving the quality and relevance of qualifications.

Better business innovation and an ambitious trade agenda – we recognise the benefits to growth and jobs this area makes.

Last year, we announced the $140 million a year Primary Growth Partnership with the private sector; and in Budget 2010 we confirmed a $321 million investment over four years in new science, research and technology initiatives.

And our ongoing drive for free trade agreements will deliver more benefits for New Zealand businesses – we’ve signed agreements with Malaysia, Hong Kong and ASEAN, and we’re in talks with India, the Gulf States, Trans-Pacific Partnership countries, Korea and Russia.

Cutting red tape and regulation – just last month, we outlined a package of employment law reforms to give businesses the confidence to invest and take on new staff.

We’ve simplified the Resource Management Act to reduce costs and promote growth, and further RMA reforms are underway in areas such as water, infrastructure and urban design.

And we’ve progressed aquaculture reforms and building regulations.

And last, but not least, we’re investing significantly in productive

infrastructure.

Before the 2008 election, we promised to unclog the economy’s arteries and address how New Zealand provides its infrastructure.

We promised to increase funding, reform regulation and get the best from our limited resources by being smarter in planning, financing and executing our infrastructure projects.

First-class infrastructure is an important enabler of higher productivity and economic growth.

The costs of inadequate infrastructure are not too hard to find. Bottlenecks have become apparent and are now being addressed in roads, electricity transmission and telecommunications. We believe these bottlenecks have held our economy back.

In principle, infrastructure is no different from any other type of investment.

It is about investing to provide users with excellent services and the country with worthwhile returns.

The challenge is to ensure the right level of investment is made in the right places by organisations with the knowledge and incentives to invest.

New Zealand needs infrastructure that is properly selected, designed, built and maintained using modern, whole-of-life approaches.

Progress to date

The Government’s approach to infrastructure so far is three-pronged.

Firstly, we've increased investment and pushed ahead in areas where the need for investment was obvious. We've started the task of reforming regulation to remove the barriers to getting projects off the ground and we've taken steps to improve the quality of the Government's infrastructure investment.

The first part of our plan is well underway.

We've prioritised the construction of Roads of National Significance and we are spending $11 billion over 10 years on State Highways. Total spending on roading and other Land Transport priorities is now about $2.8 billion a year.

Soon you'll see the rollout of fibre to the home as part of our $1.5 billion ultra-fast broadband plan. We have now received refined bids from a large number of regional and national bidders and we expect that new fibre will be in the ground before the end of the year.

There has been a substantial rise in spending on the National Grid – investment of about $4 billion is planned in the next five years to give businesses and consumers confidence they will have a secure electricity supply.

And we are investing in Rail – committing in principle to a $750 million contribution over the next three years to Kiwi Rail’s turnaround plan.

We have also outlined Budget capital spending of $7.5 billion over five years. Much of this will be used to build and upgrade schools, housing, hospitals and telecommunications.

This is a significant step up in investment and with the commercial property market experiencing a lull, Government projects are supporting the infrastructure sector on this side of the Tasman.

For example, in the three months to May this year, Government projects made up about 55 per cent of non-residential building consents.

In terms of major projects – jobs worth more than $5 million – Pacifecon estimates 80 per cent of them are Government generated.

So the Government's investment is having the added benefit of supporting thousands of jobs.

Reforming regulation

The second leg of our infrastructure programme is reforming regulation to remove barriers preventing vital projects from being built.

Just last week, Parliament passed four bills that will remove unnecessary barriers to infrastructure development and improve the consistency of regulations. In particular, they will greatly improve arrangements for managing access to road and rail corridors by utility companies.

The Government was concerned that the rules until now had been inconsistent across utilities, creating inefficiencies, uncertainty and disputes.

This is in addition to other reviews I have already mentioned, including the Building Act and phase two of the RMA reforms.

Taken together, these changes will contribute to a smoother pathway for infrastructure development in New Zealand.

Improving the quality of our infrastructure investment

The third leg of our infrastructure programme is improving the quality of the Government's procurement and management of assets.

We've set up the National Infrastructure Unit within the Treasury. This is the centre of Government expertise, covering areas such as major project evaluation, infrastructure-related regulatory issues and contracting with outside finance.

Almost all mature infrastructure markets we have looked at have a similar body. Many of you would have had some engagement with the unit over the past year.

One of the unit’s roles was to produce the first National Infrastructure Plan, which was essentially a stock take of current demands and planned investment to provide a degree of certainty to the business community.

The plan has provided a useful list of existing planning and projects in the pipeline and a clear sense of where the sector is heading. Private sector participants like yourselves have long been calling for such a document.

However it was very much a first effort and next year we will release the second plan. It will include a closer look at how central and local government can work better together and where the planning gaps might be looking out 10-20 years.

The National Infrastructure Unit is backed by an advisory board of private sector experts, who are assisting us with the plan as well as general policy.

Engaging with the private sector

The Government wants to see as much private sector expertise and discipline used as possible. We welcome engagement.

That's because we believe there are big gains to be made by exposing the public sector to private sector skills and techniques – particularly in the area of risk management and better assessment of whole-of-life costs.

This is part of the rationale behind our recent steps towards New Zealand's first public-private partnerships.

We have announced our intention to build a PPP prison at Wiri in south Auckland, subject to consents and a successful tender process.

We have also announced our intention to proceed with a PPP for new school property and developed our ultra-fast broadband initiative with a commercial structure that partners public and private investment.

Initial investigations show these projects will provide savings for taxpayers, as well as providing a range of other benefits.

The Government's basic position is clear: We're open to any innovative ideas – from both the public and private sectors – that can maximise economic efficiency, get better value for money for taxpayers and help the economy grow faster.

The Government will enter into PPPs only if they work and deliver value for taxpayers. In Australia where about 50 PPP projects worth about $30 billion have been completed since 2000, PPPs still only comprise about 20 per cent of projects.

And we must acknowledge our own specific circumstances.

New Zealand is smaller and this means there will be more small and medium-sized projects and there is unlikely to be the same constant pipeline of PPP projects there is in Australia.

These projects are likely to be both more varied and of a more one-off nature than the Australian market.

However, that will mean good entry-level PPP opportunities for smaller or emerging firms, allowing them to move up the value chain and extend into Australia.

There is further work to be done to develop this market in New Zealand, but to date I have been impressed by the level of interest from the market.

New measures to drive improvement

As I've said many times, this Government is determined to improve the management of its assets – both the existing stock and the way decisions are made about future investment.

Today I want to announce some new measures designed to improve public sector performance in these areas.

Given that we are borrowing – and investing - significant sums of money on behalf of taxpayers, we will be running a tough ruler over our investments. Local government will need to do the same on behalf of their ratepayers – and they will need to be realistic about how much they are paying and where they can invest.

At present the New Zealand Government holds about $220 billion of assets – about half of them physical assets like roads, schools and prisons. This investment base is set to grow by about $30 billion over the next four years.

This means the Crown is by far the largest asset owner in the country.

Every one of those assets was built up using PAYE taxes from hard working New Zealanders, so we have a huge responsibility to manage it well.

However, Government performance in this area has been poor.

Before we came into Government, there was very little knowledge in the public service and little work being done about where this value resided, which assets were rising in value, which were dropping and why.

Crucially, there was almost no work being done on how to raise the bar on how we manage the Government's assets – despite the huge sums of money involved. We have set about to rectify this.

At a time when our finances are constrained, even small improvements in this area could yield substantial gains to reinvest in vital public services and assets like schools, housing and hospitals.

So while our opponents are obsessed with the subject of asset sales, we're getting on with the unglamorous, but far more important task of improving the public sector's management of the Government's large asset base.

We want to make sure we are allocating future capital funding where it can best raise productivity and lift New Zealand's economic performance.

Taking the lead from the first National Infrastructure Plan, which provides the strategic basis for our five-year $7.5 billion infrastructure investment in assets like schools, hospitals, broadband and prisons, the Government is now undertaking a wider stock-take of its entire balance sheet.

Government investment statement to be published

It is our intention to release a Government Investment Statement – signalled in the Budget - which will clearly set out the Crown's assets and liabilities, identify any emerging issues and state how the Government plans to manage its large and growing investment in taxpayers' assets.

We intend to release the first Investment Statement before the end of the year. This will bring this important aspect of the Government's financial management into line with other regular fiscal reporting.

We believe this level of transparent information – in a regular publication - will allow the public to demand a much greater level of accountability from the Government and lead to significantly better decision-making across the public sector.

I am also pleased to announce today that Cabinet has recently agreed to a package of other measures aimed at enhancing public sector decision making in regard to infrastructure.

From today all Crown agencies proposing new infrastructure with a wholeof- life cost over $25 million will need to consider and evaluate alternative procurement options, including a PPP.

PPPs will be appropriate only for some projects, but we believe putting this to the test will increase price competition and ensure taxpayers get the best possible value for money.

We are also giving chief executives greater discretion to commit to projects with a whole-of-life cost of less than $15 million, but there will be a tighter focus on getting results.

Agencies will have to take a more consistent approach to developing their business case, with a focus on clearly displaying the economic and financial rationale for any investment.

In addition, they will be required to explicitly report back to Cabinet on the results of major investments so the Government can ensure it is getting the expected benefits.

We are confident this combination of measures will help lift infrastructure investment and asset management practices across the public sector.

Conclusion

In summary, these are exciting times. We have the opportunity to get the best from our limited resources by being smarter. The challenge is to get to the forefront of world practice.

That is a goal worth pursuing and one we are committed to.

Thank you.

ENDS

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