Research by the New Zealand Infrastructure Commission explores whether new public infrastructure investment can generate revenue to pay back the cost of the investment.

"The social and economic benefits of public infrastructure - our hospitals, schools, roads, water networks and more - are clear. But while all infrastructure needs to be paid for, it’s not always clear how it’s paid for," Peter Nunns, General Manager - Strategy, says.

How we pay for new infrastructure

"One way to pay for more infrastructure investment is by raising user charges or tax rates. But that can be difficult. A recent public opinion survey from Ipsos shows that while most New Zealanders think we should do more to meet our infrastructure needs, few of us are willing to pay higher charges or taxes to fund more investment.

"Another option is to invest in public infrastructure that pays for itself by bringing in new revenue. Projects that lead to large increases in infrastructure usage or large increases in economic activity generate more revenue from existing user charges, local government rates, or taxes.

"Our new research, Paying it back: An examination of the fiscal returns of public infrastructure investment, takes a closer look at when, where, and how this is possible.

When does new infrastructure pay for itself

"Projects that can be delivered cost-effectively and that benefit many people are more likely to pay for themselves out of new revenue. Prioritising value for money can help boost our ability to invest in more infrastructure.

"However, the bar is very high for public infrastructure projects to fully pay for themselves. Governments only collect a small share of new economic activity or user benefits through taxes, rates, or user charges. As a result, we estimate that transport projects must generate social and economic benefits that are five to nine times higher than the cost of the project to generate enough new tax revenue to pay for themselves," Nunns says.

"Our research suggests that the payback from public infrastructure investment tends to be higher when infrastructure networks are added to bit by bit as demand grows. In contrast, the costs of a ‘big bang’ approach usually outstrip the returns and must be covered from other tax or rates revenues. This could then take money that could be used for other priorities like hospitals and schools.

A closer look at local councils

"In one case study, we looked at seven large or growing urban councils over a 25-year period. We estimated how much they spent on infrastructure to accommodate population growth - from construction to ongoing maintenance," Nunns says.

"Some of these councils generate enough new revenue from this infrastructure - through development contributions and added rates revenues on new buildings - to fully recoup the cost. Others spent more on growth infrastructure than they earned in new revenue. We found that councils that grew their networks in line with population growth were much more likely to come out financially ahead after 25 years.

"Not all projects have to pay their way. The point of public infrastructure is to improve community wellbeing, not simply generate revenue. But as the challenges of an ageing population and slowing productivity growth place pressure on our budgets, we’ll need to pay more attention to the fiscal sustainability of new infrastructure investment," Nunns says.

Background information

• The report Paying it back: An examination of the fiscal returns of public infrastructure investment includes three case studies to explore how and when infrastructure can generate sufficient revenue to cover its costs.
• Based on the case studies, the report highlights four key lessons for how to maximise revenues from new investments: project quality matters (projects that are cost-effective to build and which serve more users or beneficiaries are more likely to generate positive fiscal returns); the bar is high for projects to fully pay for themselves; incremental investment tends to have higher returns; and attaching revenue streams to new projects can help.
• One case study looks at a 25-year period from 2007 to 2031 for seven local councils (Auckland (2012 to 2031), Hamilton, Tauranga, Wellington, Christchurch, Queenstown-Lakes, and Dunedin).
• Another case study looks at four major transport projects, both road and rail, where published business cases provided sufficient information to calculate fiscal returns to the Crown: Ōtaki to north of Levin (O2NL) motorway (a 24-kilometre, four-lane motorway and shared use path); Pūhoi to Warkworth motorway (an 18.5-kilometre, four lane motorway, the first section of the Ara Tūhono, Pūhoi to Wellsford Road of National Significance); Warkworth to Wellsford motorway (the second proposed leg of the Ara Tūhono, Pūhoi to Wellsford Road of National Significance); and City Rail Link (CRL) (a mostly tunnelled 3.5-kilometre rail link connecting the Britomart Transport Centre to the North Auckland Line).
• The final case study examines how a hypothetical tool, like a value capture levy to collect revenue from increasing property values might affect the returns from major transport projects. The study tests different scenarios around project cost, characteristics, and population density in the area that the project is serving.

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