Can new public infrastructure pay for itself?

Our new research 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.

We are hosting a webinar on 4 April at 11am to take a closer look at our findings in this research. There will be an opportunity to ask questions. Register through the link below.