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Now is the time to start investing in NZ's infrastructure


27/09/2019

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For central and local governments there's now an opportunity to think very big for all infrastructure. Low-interest rates and the KiwiSaver savings pool means we can now afford to repair and replace much of our core infrastructure. In my 30 years of investing I've never seen such an opportunity. Demand, supply and price are in a rare and very close alignment.

The demand for major infrastructure is clear, with many projects nationally and locally needing serious funding. Many are focused on the boring but necessary basics of life eg. stormwater, sewage, freshwater and power supply. 

Others are more glamorous and vote winners like roads, rail, bridges and housing. And some are polarising, most obviously transport with the perennial road vs rail debate.

Whatever the priorities, the ability to fund what we need and want is now compelling. Why?

Government debt is low. There is no more denying that central Government debt is well under control. Grant Robertson's expansion in maximum net debt to GDP from 20 per cent to 25 per-cent of GDP by 2021-22 allows for billions more in spending, and would still leave the Government's books the envy of most western countries.

Borrowing is very cheap. Post-2008, most economists and commentators (including me) thought the printing of money by western governments might unleash a wave of inflation, with too much money chasing too few goods.

What many (myself included) underestimated was the massively deflationary power of technology. 

This has allowed central banks to act faster to get interest rates down to historically low levels to try and stimulate growth. Now that interest rates are at or below GDP, borrowing to invest becomes compelling. Economic theory says that fiscal restraint when interest rates are this low simply isn't a rational way to manage any balance sheet, let alone a whole economy.

But there is little locally to invest in. The sad reality is that 43 per cent of KiwiSaver was invested in New Zealand five years ago. It's now 37 per cent and going lower. Why? There's simply not enough to invest in. The market alone is unlikely to create sufficiently large, long term investments. Government must be involved in a major way. We all need a grander plan. 

Fortunately, KiwiSaver is changing everything. It's now almost a $60 billion pile of savings and should be $200 billion by 2030. On top of the billions managed by NZ Super, Iwi and ACC, it's looking like Kiwis will have over $400 billion for investment by 2030. The number is staggering, but perhaps even more important is the nature of the money. It's very long term focused, it's growing predictably and it's 100% ours. 

We no longer have to worry about foreigners funding our infrastructure. Local investors, including KiwiSaver fund manager, can do it. Surely KiwiSaver providers and Iwi investing in their hood is what everyone wants.

The politics work. I doubt if any politician, local or national, would dislike the idea of KiwiSaver funds and local investors funding new infrastructure. Indeed, the Government risks being asleep at the wheel while more and more of our savings are invested offshore. And the debate on Government spending has changed, with spending too little is likely to be worse for their chances of getting re-elected than spending too much.

The case for investing heavily in infrastructure, using local money, is now compelling. But there are some significant roadblocks the Government has to remove. By themselves, the financial markets cannot identify the projects and manage them through the politics, consents and logistics of getting roads, rail, bridges, sewers and stormwater drains built. Governments need to get the projects shovel ready and, in most cases, manage the build. The prime minister's business advisory council were wise to recommend creating a new cadre of civil servants that specialise in large infrastructure project management.

Government and industry need to sit down and prioritise what needs to be done and, as much as possible, simplify the process of investing. NZ has a poor record of public-private partnerships. Most have been too bespoke and outsourced the risk to the financial markets, who have wanted higher short term returns as compensation. And in allowing foreign investors in, the politics has always been complex.

It doesn't have to be that way any more. With capacity building and long-term planning to get local money into local projects, we can fund most of our required infrastructure ourselves. It's never been this way before, because we've never had such large pools of local money saved by ordinary Kiwis. It’s a simple and wonderful fact that we now do. And to see what good that can do, just look at Australia. It's been recession free for 26 years, a significant reason being the investment of superannuation funds into local infrastructure.

But there is a warning for the Government here too. If they don't come to the table in a meaningful way, most of our savings will fund toll roads and stormwater drains overseas, while we drink poorer quality water and sit in even worse traffic jams at home.

Perhaps the most contentious debates will be over transport spending priorities for a country that sorely needs it. Inevitably the result will be a mixture of rail, roads and other sustainable modes of transport like bicycle and walking lanes. It needs to be a mix, as no one mode of transport will satisfy the long term needs of capacity and sustainability.

As a not-for-profit KiwiSaver investor with a 30-50 year view, we are very interested in the mix of projects, as they are natural investments for us. They’re long-term, large size and likely to generate revenues and users that will support the investment. In most cases, this will be alongside any necessary subsidies or underwrites from central and local governments, as public transport systems very rarely pay their own way. Even rail systems with huge user numbers eg. subways in the worlds most populated cities, inevitably make their profits from the property development above the stations, rather than via ticket prices. The same is often the case for toll roads.

Simplicity is a noisy wannabe investor in this regard, and have been visiting local and central governments, asking them to sit down with KiwiSaver managers and come up with a long term infrastructure investment plan. The Government’s Infrastructure Commission is a positive move in this direction, and we may well look back on it as a very significant tipping point. And on individual projects we’ve been supportive of opportunities that we could invest in, like the light rail to Auckland airport and shovel ready roading improvements. 

From an investor perspective, some projects may well be socially desirable but have traditionally been harder to justify from a pure economic return perspective. Heavy passenger rail is an example of this. We have a poor history in NZ of making it work, although the investment merits of rail freight can be compelling, and it works in other countries with larger cities, higher population density and well established and maintained rail infrastructure. The big unknown here is how carbon pricing policies will impact the economics of rail, particularly where it’s electrified.

One thing is clear, the majority of R&D globally in transport is focussed on maximising the efficiency of existing transport networks. Tesla, Uber, Amazon and Google are investing billions in the expectation of driverless and electrified cars and buses, and it’s a reasonably safe assumption that there will be considerable improvements in the efficiency of transport there. 

Whatever technology wins, the government must work with investors and industry to create the projects that allow all of us to invest in our communities. In this sense, the formation of the Infrastructure Commission might be one of the most significant opportunities of a generation. We can seize the future, or spend our savings funding someone else's overseas. Now is the hour to think very big for New Zealand, and pay for it ourselves.

 

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