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Draft National Infrastructure Plan
5.1. Context: New Crown spending is limited by fiscal sustainability targets | Te Horopaki: E herea ana ngā whakapaunga hou a te Karauna e ngā whāinga toitū ā-moni tūmatanui
Central government agencies are responsible for almost half of all infrastructure investment. This includes a similar share of our existing infrastructure assets.[70] These agencies build and maintain many of the infrastructure assets needed to provide services to New Zealanders. Effective government processes for planning, delivering and managing infrastructure are therefore critically important.
Central government infrastructure is funded from revenue collected by the state. This includes taxes, user charges like fuel excise duty and road user charges, and other forms of revenue. Agencies can spend only when the Government allocates money to them. Taxes may be levied and public money spent only with the approval of the Government.[71]
Finance and funding are administered through the annual Budget together with other specific laws. For instance, the Land Transport Management Act 2003 can authorise taxes and spending.[72] The annual Budget includes a mix of ongoing and one-off funding allocations, or appropriations, that agencies can use to pay for capital investment in infrastructure (Box 13). The Government of the day can signal, and in some cases set, future spending intentions. However, it cannot commit future Parliaments to implement those spending plans.
New spending must fit within constraints agreed as part of the Government’s fiscal objectives. In annual Budget Policy Statements and Fiscal Strategy Reports, the Minister of Finance outlines how much new money will be available for new ongoing operating spending and one-off capital expenditures, and the Government’s intentions for spending over at least the next two years.[73] For instance, the 2025 Budget Fiscal Strategy Model forecasts $7.9 billion in cumulative operating allowances and $13.2 billion in cumulative new capital allowances in the 2026–2029 Budgets.[74] Because allowances are based on the Government’s fiscal sustainability targets they tend to be smaller when there is a need to reduce forecast operating deficits or pay down debt, and larger when there are forecast operating surpluses or debt is below or near target.
Box 13
How agencies get money to pay for investment
Most central government infrastructure providers are funded through appropriations in the annual Budget. Generally, changes to operating appropriations and new capital appropriations are informed by agencies’ funding requests, reflecting what they think is needed to provide services, but ultimately constrained by the Government’s decisions about how much to spend.
The main ways that agencies pay for infrastructure investment are:
- Capital appropriations: Agencies can be allocated new, one-off capital funding (‘capital expenditure appropriations’) to acquire new assets. When new infrastructure is required to meet demand or provide new services, this funding can be used to pay for the upfront development costs. This funding does not cover any ongoing costs to operate, maintain and renew those assets.
- Operating appropriations: Agencies can be given funds to provide specific services (‘output expense appropriations’) while letting the agencies choose the best way to provide them. Appropriations required to operate a new capital investment (for example, staffing costs) are often made at the same time as capital is appropriated. And when agencies are funded to acquire infrastructure like schools or hospitals through capital appropriation, funding to cover the ongoing costs of maintenance and renewal is provided through operating appropriation at the rate of asset depreciation. In principle, this means that agencies should be able to pay for routine maintenance and renewal and replacement of existing assets, including responding to changes in demand.
- Selling and purchasing assets: Agencies can sell existing assets and use the proceeds to purchase new ones. This is sometimes called ‘asset recycling’. For example, a school with a small and declining roll could be closed and sold to pay for new classrooms in a growing area. This also means that agencies should be able to change their assets to respond to changes in demand. However, agencies cannot increase their overall asset base through asset recycling.
NZTA is a notable exception from this approach. It manages the National Land Transport Fund (NLTF), which receives revenue from user charges like fuel excise duty and road tolling. The Land Transport Management Act 2003 appropriates funding collected through the NLTF to be used to build and maintain New Zealand’s land transport network. However, in recent years, significant Crown funding has been provided on top of NLTF revenue.
Central government oversees its own performance through the Investment Management System. As outlined in Section 4, this is a part of New Zealand’s Public Finance System that provides oversight of central government agencies’ investment and asset management activities. It does so by setting requirements for capital investment throughout the investment lifecycle, from problem identification to benefits realisation. When this works well, it enables central government to invest in the right things and deliver its investments efficiently.
Many core aspects of the Investment Management System perform well, but some need work. We reviewed New Zealand’s performance against the International Monetary Fund’s Public Investment Management Assessment framework, a best-practice framework for assessing public sector investment and asset management.[75] Central government can lift its capability to plan, fund, deliver, and manage infrastructure in three main areas. These relate to improving long-term investment planning, lifting the bar on project appraisal, selection and delivery, and budgeting for maintenance, renewals and resilience of existing infrastructure.
This section presents the Commission’s recommendations about steps that central government can take to improve its capability to plan, fund, deliver and manage infrastructure assets. This builds upon our previous advice in the Infrastructure Strategy, which included various recommendations aimed at improving central government infrastructure decision-making. Rather than repeating previous recommendations, we focus on identifying areas where additional recommendations are needed.