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Infrastructure
Addressing New Zealand’s backlog of infrastructure needs will require an open mind about private and public funding, as well as active partnerships that can deliver at a rapid pace
As demand for new infrastructure continues unabated and New Zealand plays catch-up for decades of underinvestment, there is a call from the government to make offshore investment and private financing more attractive.
“Legislation is in place, as are funding and financing vehicles,” says Laura Harris, head of infrastructure, government and specialist finance at the BNZ. “Now they should be used to solve our infrastructure deficit.”
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The laws Harris is talking about are the Te Waihanga New Zealand Infrastructure Commission Act 2019, Infrastructure Funding and Financing Act 2020, Urban Development Act 2020, Kainga Ora Homes and Communities Act 2019 and Pae Ora Healthy Futures Act 2022.
While establishing them is a good step, Harris says the ability to “get on with it” with new financial and financial structures is among the many challenges and opportunities facing the infrastructure sector.
Harris is in a good place to find out. Formerly on the board of Infrastructure New Zealand, she led the origination, structuring, negotiation and execution of financing of project finance transactions including public-private partnerships (PPPs) and renewable electricity development.
Innovative financing and financing
The PPP model may need some changes, following a review by Te Waihanga, New Zealand’s Infrastructure Commission. But removing the private sector from the infrastructure financing picture risks slowing or even derailing essential infrastructure development work, Harris says.
Published in early 2021, a month before the wider debate of the Transmission Gully review, the Te Waihanga review found that the broad objectives of the country’s first eight PPPs have been largely achieved, although not without challenges. Te Waihanga supported the continuation of the PPP model, but with modifications.
Last year there was no PPP in the plan, and the Government’s policy meant that there would be no partnership in the construction of prisons, schools and roads. Te Waihanga warned: “The current gap between projects creates a risk that experience and expertise on both the Crown and private sector sides are not retained in the market.”
Harris says there are opportunities to reintroduce public-private partnerships and other innovative financing mechanisms to accommodate investments in water and social infrastructure projects.
“Much of the public debate about PPPs is about the time and cost issues that have arisen on some projects, however what is often not talked about is that numerous new schools have been delivered across NZ, on time and on budget, providing excellent facilities that allow academic staff to focus on academics rather than building maintenance. Also, New Zealand’s first public-private partnership, the Auckland South Corrections Facility in Wiri, has delivered the intended results of reducing reoffending and recidivism, providing lessons that the Department of Corrections can apply to the rest of its estates.
In layman’s terms, innovative funding tools include: value capture (related rezoning and land price increases around transport hubs), development contributions, user fees and tolls. Special purpose vehicles may apply the target rate. Innovative financing tools include PPPs, lease structures and special purpose vehicle financing for infrastructure delivery. Harris says that while these tools are often described as innovative for New Zealand, they have been used and proven effective in other markets.
Funding enables repayment of long-term financing tools that provide greater opportunities to partner with the private sector, she says, to accelerate infrastructure delivery and add another level of due diligence for the Government.
“Using private finance for these projects, you have other parties involved in looking at risk transfer and allocation as well as value for money.” Special purpose vehicles can be used to hedge that risk and allocate it to whoever is best able to manage it.
“The external funding of these projects also means there is a strong focus on the lifetime cost of the property. This helps decision makers determine where they want to make trade-offs.”
But right now, Harris says there are limited partnership opportunities presented in the government’s work plan, in stark contrast to Australia, for example, where there is significant – and visible – infrastructure building planned by state governments.
Te Waihanga has been collecting a number of planned works that have secure funding.
“The industry is looking for the next step, to refine that list, with even more security and funding,” Harris says. “It’s the evolution of the pipeline that’s needed.” The market is looking for stronger guarantees than those that currently exist in order for these investment opportunities to be realized.”
She warns that there is no time to wait, as the global race to repair and rebuild outdated infrastructure, as well as build new infrastructure, is very competitive. The private sector does not see this “need for speed” from the Government, although there is a successful model in healthcare.
“While there is still a lack of infrastructure for large hospitals, much health care is provided in private facilities in New Zealand that receive lease payments or subsidies from Health New Zealand to provide services. These payments allow private owners to manage their finances. So, in that sector, in particular, the Government does not care about the ownership of the land or the building itself, but only ensures that the services meet the required standards.”
Ivi attractive partners
Harris says he also sees more opportunities for iwi to partner with the Government, and the infrastructure is good for Maori, for whom kaitiakitanga or stewardship and a strong sense of intergenerational responsibility come naturally.
This year Ngati Toa Rangatira achieved the Waitangi Agreement which included the purchase of 40 schools across Porirua and Wellington and leasing them to the government on a renewable energy basis.
“At the end of that lease, Ngati Toa were able to raise the funding so they can now pay off the purchase over the lease period and benefit from the cash flow from the property for generations and reinvest in their community.” It is a good example of government and private sector cooperation in funding and financing.”
BNZ was involved in the project and Harris sees a significant role for Māori in addressing underinvestment in New Zealand’s infrastructure through partnerships.
“They have access to capital and are a natural partner. There are some great examples where ivi already has strong infrastructure ownership and development capabilities, especially geothermal power generation. The new procurement guidelines also focus on social outcomes, requiring greater consideration of ivi in terms of community engagement and job creation.
“For global investors looking to invest in New Zealand property, it makes sense to partner with ivi because they understand the local community, stakeholders and all the sensitive land issues.” Ivi partnership enables success.”
Growing investments in renewable energy sources
There are increasing opportunities to invest in renewable electricity projects, says Harris. A recent report by consulting firm BCG predicts it will take eight years and $42 billion to decarbonise New Zealand’s electricity sector, including roughly $16 billion in new funding.
Report co-author Richard Hobbs says investment dollars and projects are already on track to reach 91 percent renewable electricity by 2025, but in the second half of the decade it will be necessary to redouble our efforts to reach 98 percent renewable electricity and 4, 8 gigawatts of new renewable energy by 2030. For all that, Harris says, the industry is optimistic.
“100 percent renewable electricity is an ambition, but renewable electricity has problems with continuity of supply, due to interruptions in production from solar and wind farms. So we also need storage solutions.
“Those in the industry are asking ‘why stop at 100 percent?’ why don’t we have a target for New Zealand that is much higher than that and don’t actually consider renewable electricity as something we could export, whether it’s in the form of green hydrogen or ammonia. And if it is also used here to create new processes – say to power data centers or in manufacturing – maybe we could change our productivity in a big way?” says Harris.
The BNZ has an overall sustainable funding target of $10 billion by 2025 and Harris believes funding for renewable electricity development will be a big part of that.
Among other clients, it works with Hiringa Energi, a green hydrogen provider that develops hydrogen production based on the production of new renewable electricity, together with the construction and operation of hydrogen filling stations. At the beginning of November, the High Court rejected the appeal against the consent given for the Kapuni Green Hydrogen project of the Hiringa Energi company, thus paving the way for the start of construction. Its refueling network is expected to be operational in the North Island during 2023.
But Harris believes New Zealand’s greatest untapped potential lies in grid solar, onshore wind and even more, offshore wind.
“There is a lot of activity in the market at the moment with developers looking at these three areas.” The largest online solar farm we currently have is 2.1 megawatts, while developers are now considering 400-500 megawatt farms. So there is considerable scope available. It’s the same with the wind.”
Shortly after Hiringa approval was granted, a consortium of BlueFloat Energi, Energi Estate and Elemental Group announced the development of a 65-turbine offshore wind farm in South Taranaki, the first of four offshore wind projects in Taranaki, Waikato and Southland. .
Like others, Harris says New Zealand needs to take a systemic approach to infrastructure development as it seeks to decarbonise. She uses the example of natural gas.
“Our reduced reliance on natural gas presents challenges as it has ensured security of energy supply.” New Zealand has had to burn more imported coal from Indonesia this year due to low hydro lake levels and gas shortages due to reduced investment in the sector. Therefore, we cannot consider gas independently. We need to look at the bigger story across the entire economy during the transition.
“As we need electricity storage that is not yet developed or available in New Zealand, gas will continue to play a role in our energy security and equity, to ensure energy is affordable.”
Harris says that kind of thinking—considering broader outcomes and collaboration—is needed for effective infrastructure development. “Good infrastructure enables greater prosperity and productivity, and the private sector is willing and able to partner with government to deliver this at the pace we need and future generations deserve.”
BNZ is a partner of Newsroom.
This article is for informational purposes only. It is not financial or other professional advice. For assistance, please contact the BNZ or your professional adviser.
No party, including the BNZ, shall be liable for any direct or indirect loss or damage arising from the content of this article. Any opinions expressed in this article are not necessarily shared by the BNZ or anyone else. References to third party websites are provided for your convenience only. BNZ accepts no responsibility for the availability or content of such websites.
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