Draft National Infrastructure Plan

5.4. Budget for maintenance, renewals, and resilience | He mahere pūtea mō te tautiaki, ngā whakahoutanga me te manawaroatanga

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5.4.1. Context

Nothing is more certain than maintenance and renewals. Some of our most important and essential assets are already around us. Keeping them going is among the most important tasks before us. This requires funding. Without it, access to services will be lost or levels of service will decline.

Protecting infrastructure against risks is also an asset management challenge. Asset owners need to respond to natural hazards that can damage infrastructure, as well as other risks, like cybersecurity threats. Although large, costly events may be relatively infrequent, the costs of responding to them or proactively building in resilience are part of the long-term cost to provide infrastructure assets. When a disaster happens, renewals that might otherwise have been required years or decades later will need to be brought forward.

The cost of responding to natural hazards will rise as we build more infrastructure and as climate change increases extreme weather events. In some cases, we will find that the approach we took in the past will not continue to work in the future. We will need to adapt.

The more infrastructure we have, the more it costs to maintain, renew, and protect. The Investment Management System sets expectations for how these costs are identified and funded. However, further work is needed to ensure that agencies can adequately maintain, renew and manage risks to current and future infrastructure assets.

5.4.2. Strategic directions

Central government agencies better understand their assets

The first rule of asset management is to understand your assets. Central government infrastructure providers should maintain asset registers with information on the identify, condition and risk exposure of their service-critical assets. They should use this information to understand how the condition of their infrastructure changes over time. And they should prepare appropriate asset management plans for their assets.

Agencies are required to manage their assets to ensure they deliver intended levels of service. Since 2010, this requirement has been set in a Cabinet Office Circular on investment management and monitored by the Treasury. Recent amendments to the Cabinet Office Circular also require agencies to maintain asset registers and asset management plans and to consider whether assets are resilient to significant risks.

These basic requirements need to be supplemented with more detailed guidance on asset management requirements and performance indicators. This is important for monitoring performance. The Commission, as system leader for asset management and investment planning is establishing a work programme to define these requirements.

Compliance with asset management requirements improves

All agencies should comply with main asset management requirements. This is important for understanding maintenance, renewal, and resilience needs, as well as credible long-term investment planning and funding decisions (Box 16).

Asset management maturity needs to improve in many areas of public infrastructure. New Zealand ranks fourth to last in the OECD for asset management governance for infrastructure.^[86] Within New Zealand, asset management maturity varies between sectors, and tends to be lowest for central government social infrastructure providers like health and justice.^[87] Contributing factors include inadequate information on assets, a lack of transparency and accountability, and underperformance by system leaders and regulators.

Most capital-intensive agencies report non-compliance with basic requirements. In June 2024, six out of eight capital-intensive agencies self-reported that they do not currently have asset registers that meet these requirements (Figure 31). Five said they do not have asset management plans that inform strategic, tactical, and operational choices. Because agencies’ self-reported compliance has not been independently assured or reviewed, actual performance may well be weaker. Several agencies noted that compliance varied significantly between different types of assets they owned, suggesting that while headline numbers might suggest compliance, certain asset classes within a portfolio may not.

Most capital-intensive agencies are not compliant with asset management expectations

In theory, agencies have sufficient funding to maintain and renew infrastructure to deliver public services. Ongoing output expense appropriations should be sufficient to pay most of the ongoing costs to provide needed assets, including maintenance, renewal and risk management, but excluding costs to meet rising standards. The Cabinet Office Circular on investment management sets an expectation that agencies use depreciation expenses, which should be funded through ongoing appropriations, to ensure that the levels and methods of service enabled by the agency’s assets reflect its strategic intentions.^[88]

Transparent reporting of maintenance and renewal spending can ensure that required funds are available. Because agencies’ overall expenditure is subject to top-down fiscal constraints, there is no guarantee that funding that is notionally available will be spent on maintaining assets. As a result, reporting on spending is needed to know whether maintenance and renewal are adequately funded and whether depreciation funding is being spent as intended. Central government already sets disclosure requirements for local government and commercial entities regulated by the Commerce Commission.

Evidence shows that renewals are under-funded in both central and local government. For instance, from 2012 to 2022, renewal spending on state highways was equal to around 36% of reported depreciation (Figure 32), although operating spending for pavement maintenance would push up this ratio.^[89] The Treasury’s data suggests that central government agencies responsible for the justice sector and natural resources are also under-renewing their assets.^[90]

Most agencies do not report on their maintenance and renewal spending.^[91] We could not find comparable, publicly available data for most types of central government infrastructure, like schools, hospitals, courts, prisons, and the Defence estate. This makes it difficult to have confidence that central government infrastructure is being managed appropriately.

Other asset indicators are also needed to understand whether assets are in good condition. In addition to financial metrics, agencies should transparently report on measures like asset criticality, asset condition, achieved levels of service and risk ratings. The Commission is exploring required indicators as part of its ongoing work on asset management guidance and indicators.

What is the condition of our central government infrastructure?

Agencies better understand risk and invest in cost-effective resilience

Infrastructure needs to become more resilient because risks are intensifying. In addition to routine maintenance and renewal needs, infrastructure providers need to be prepared for additional costs to respond to natural hazard events and other risks that can damage infrastructure. Costs from extreme weather events and flooding will increase due to climate change. These costs are manageable if we plan ahead. But, if we do not, they will inevitably be disruptive. New Zealand was hit by two major earthquakes and two major weather events between 2011 and 2023, leading to costs of over $10 billion to rebuild infrastructure and requiring significant adjustments to infrastructure budgets to pay for the costs.

Good asset management and transparent reporting are critical for risk management. Agencies must understand their assets, including where they are, who they are serving, what condition they are in and what risks they are exposed to. Equally, risk management is an important part of good asset management planning, meaning that asset management reporting should include information on the risks facing infrastructure and how they are being managed.

We can manage risks cost effectively if we identify, quantify and price them in advance (Box 17). This also helps to minimise the wider costs on society due to lengthy disruptions in services. For infrastructure providers that insure their assets (including some forms of self-insurance), rising premiums sharpen the focus on whether to maintain, strengthen or retreat. When the rising cost of insurance cuts into other priorities, real costs emerge from the decision to build roads in highly exposed locations, rebuild school buildings in the line of storm surges, or place new hospitals on flood prone land.

Risks facing central and local government infrastructure are not fully addressed. Budget reporting highlights the future cost of responding to natural hazard events as an unquantified fiscal risk.^[94] According to the Office of the Auditor-General’s most recent review, less than half of public assets were insured against damages as of 2013.^[95] Insurance cover is likely to have declined since then. When central government infrastructure is not insured, additional Crown funding will be needed to pay for the cost of the damage. The Crown is also expected to pay for 60% of the cost of repairing local government infrastructure damaged in an event.^[96]

Costs and risks need to be recognised and reported so we can avoid paying more after the fact. For instance, the Office of the Auditor-General reports that a reason why land transport assets have such low rates of insurance is due to expectations of one-off Government funding for loss or damage.^[97]

5.4.3. Recommendations

Changes are needed to improve accountability for maintaining, renewing, and managing risks to central government infrastructure. We make two main recommendations to improve policy and practices in this area. These recommendations are intended to ensure that important information on asset management, including how risks are being managed, is transparently reported, and that adequate independent review is undertaken of asset management planning and implementation.

These recommendations bolster our advice on long-term asset management and investment planning. For long-term planning to be credible, we need to ensure it meets appropriate quality standards and that we can monitor outcomes for asset condition and performance. This is important for ensuring that decision-makers and the public can have confidence in how public assets are managed.