Tag Archives | infrastructure

Matching infrastructure to population explosion a key Goff plank

Auckland mayor Phil Goff laid out his vision yesterday to build infrastructure at a rate that would match the region’s unprecedented population growth.

Some funding mechanisms are in place, and the council & Government have agreed bigger funding streams for some areas such as transport, but their budgets still show a $5.9 billion shortfall over the next decade.

The mayor said he would seek staff advice on options for broadening the council’s revenue base, which currently relies on rates to generate almost 50% of its funding. Other options include:

  1. the further development of special purpose vehicles funded by growth infrastructure targeted rates
  2. the application of the targeted rate on accommodation to the informal sector (eg, Airbnb)
  3. the sale of non-strategic assets, and
  4. likely proceeds from various road pricing options & practicality of implementation.

The mayor wrote his 8-page report to set the process going for the council’s 10-year budget (otherwise known as its long-term plan) for 2018-28.

The process now is for the council to run political workshops through September-November, finishing with a more concrete mayoral proposal which will go to more workshops in December, then out to public consultation in March and adoption of the plan on 27 June next year.

Mr Goff wrote in his release presenting the report:

“Our vision for Auckland is a world-class city where talent wants to live. It must be the city which can keep the best & brightest of our young people in New Zealand while competing globally with other cities around the world for skills, entrepreneurship & investment.

“My key focus is to build infrastructure at a rate that matches unprecedented population growth to maintain our quality of life and make it easier to do business in our city.

“Auckland grows by 45,000 people/year and is clearly a desirable place to live. This growth creates opportunities, but it also presents challenges in housing shortages & affordability, growing traffic congestion & pressure on our environment.

“The key to tackling these issues is our ability to lift investment in our infrastructure.

“Investment in public transport, including light rail, in active transport modes like cycling & walking, and optimising our road network is critical.

“That’s why, under our latest Auckland transport alignment project, we have set aside $27 billion for capital investment in the next decade. Currently, $5.9 billion of that is unfunded and has to be found.

“I welcome the Government’s commitment to meet the larger share of that, but Auckland will also need to contribute more.

“The 10-year budget needs to consider where we source our share of the funds.

“The interim transport levy is not user-related and does not raise sufficient funds. We can’t simply impose huge general rate increases to pay for infrastructure, so some form of road pricing will be essential.

“We need to build more houses more quickly. The mayoral housing taskforce makes recommendations which we need to move to implement.

“The unitary plan enables land development, but we need to invest in infrastructure to allow houses to be built. This will involve intensification of houses, as well as new developments under the future urban land supply strategy.

“Use of targeted rates as well as special purpose vehicles through Crown Infrastructure Partners will be essential. That also applies to protecting & enhancing our environment.

“Water quality is a top priority. We need to reduce wastewater overflowing into our streams & harbours. Building new water infrastructure will be our focus, including new wastewater interceptors & green infrastructure.

“While the council is looking for new sources of infrastructure funding, we must also get better value for the ratepayers’ dollar.

“It is time to realise the benefits of amalgamation to deliver further efficiencies & economies of scale made possible by the super-city.

“Findings from our group-wide section 17A value-for-money reviews will be critical, and I want the council to develop group-wide shared services.

“APEC [Auckland will host the Asia-Pacific Economic Co-operation forum leaders’ week from 8–14 November 2021] and the America’s Cup defence add impetus to our planning and provide the opportunity to create a lasting legacy for Aucklanders.

“We have the opportunity to make Auckland more prosperous, smart, innovative, inclusive & culturally rich, with a beautiful environment and choice & opportunity for all.

“With this as our vision and the investment we need in infrastructure, we will make Auckland a world-class city.”

Image above: Auckland mayor Phil Goff, on site shortly after his election as mayor last October.

Links:
Mayoral intent for the 10-year budget (long-term plan) 2018–28
10-year budget 2018-28 road map

Attribution: Mayoral release & plan document.

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Access matters most

On this website, access is the most important consideration. The real estate catchcry, “Location, location, location,” relies on your ability to get there.

In Auckland, a 30-minute car journey can take 90 minutes, but estimating timeframes is also hazardous at pretty much any time of day.

The Government resolutely opposed rail innovation until the super-city’s first mayor, Len Brown, won the support to proceed with the city rail link and forged ahead, notwithstanding the funding gap as the Government sat on the sidelines. Eventually, this year, the Government signed up.

Cars have quickly filled the extra lanes on a short patch of the Northern Motorway and will quickly fill the Waterview tunnel & North-western Motorway expansions.

As I wrote 6 years ago about travelling on the western, industrial side of the isthmus: “Occasionally I stray into Neilson St, Onehunga, and quickly realise it was a mistake. There’s no need to be quick about the realisation, of course, because it’s going to be a while before you can escape.”

Construction of the East-West Link, the State Highway 1-20 road route through that western area, is before a board of inquiry, Mill Rd between Papakura & the southern edge of Flat Bush at Redoubt Rd & into Murphys Rd is becoming a more significant arterial and is now the subject of upscale talk, but the arrival of still more congestion isn’t being beaten.

Now, it seems, the third track on rail’s main trunk line will be built, and perhaps the fourth track as well.

Labour’s new candidate for prime minister, Jacinda Ardern, upped the ante yesterday when she said Labour would build light rail between the city centre & airport within a decade, extending to West Auckland in the same timeframe and later to the North Shore.

She would introduce a regional fuel tax, infrastructure bonds & targeted rates.

National’s finance minister, Steven Joyce, again ruled out a regional tax, which he’s previously argued is inefficient. So, too, is doing nothing while Auckland’s population grows by about 50,000/year, with 10-year projections from Statistics NZ of 29,000/year (medium) to 35,000/year (high).

A party in power for 9 years has no room for innovative policy without the audience asking why these policies weren’t already in place and, while both National & Labour issued transport policies yesterday, Miss Ardern had to have the front running.

We are set up, then, for a serious battle of wits over primary infrastructure & housing in Auckland – and the skilful politicians will at least appease the rest of the country, if not produce some sound economic offerings, so the election doesn’t just become about Auckland.

For the voter who thinks more about policy than party allegiance – and these voters, I think, are likely to decide who comes to govern – there are questions not just about policies but about strategies, and particularly funding methods.

Among those questions today:

  • Why has it taken so long to introduce new central government funding for extra housing infrastructure support?
  • Why has the Government steadfastly opposed new forms of tax, or a greater sharing of tax to support regional initiatives & infrastructure?
  • Why have key Auckland transport decisions been delayed so long in the face of record immigration?
  • Why is a board of inquiry examining one proposed section of transport infrastructure – the East-West Link – in isolation from other components such as the third & fourth sections of main trunk rail track and the future port location & consequent transport links?

Those are questions which are obviously aimed at the incumbent government. Other parties have released policies on some of these issues.

Labour has a policy to build, or finance the building of, an extra 10,000 houses/year and Miss Ardern talked yesterday of using a regional fuel tax.

The key transport – access – decisions need further input from all claimants for the government benches. The central issue is integrated decision-making, and the absence of such integration has long been a feature of central government (including bureaucrats) versus Auckland.

Attribution: Party speeches & release.

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NZ infrastructure body takes lessons from Scotland

Infrastructure NZ has brought back a long list of lessons from Scotland on streamlining processes and introducing a national spatial planning framework.

A delegation from the New Zealand organisation visited Scotland in March and issued its report last week.

Infrastructure NZ chief executive Stephen Selwood said: “New Zealand can make best use of the Government’s $32 billion infrastructure commitment over the next 4 years by streamlining plans & institutions, including specialist procurement, environment & water regulation agencies, and a top-down national spatial planning framework.

“Over the last 2 decades, the Scottish have completely transformed infrastructure planning, funding & delivery. They’ve established innovative & effective institutions at the national level which support & guide central & local government infrastructure delivery.

“The UK National Infrastructure Commission, Scottish Futures Trust, Scottish Environmental Protection Agency and Scottish Water are all bodies which could be employed here to rationalise & improve infrastructure planning, funding & delivery.

“Initiatives based on Scotland’s national planning framework & hub, City Deal, tax increment financing & growth accelerator programmes would each help align central & local decision-making and enhance collaboration with the private sector.

“The Scottish system is simpler, more transparent and reduces conflicts of interest across the public sector.

“The extensive infrastructure investment that New Zealand is planning over the coming years will need to be well managed if we are to tackle the growth challenge. The best elements of Scotland’s decision-making system are worth replicating.”

The key findings for New Zealand set out in the report are:

  • We could improve public understanding of infrastructure challenges and better support national investment by establishing an empowered national body charged with identifying infrastructure needs
  • Scotland’s plan-led approach gives greater certainty and better balances strategic priorities with local interests than New Zealand’s effects-based Resource Management Act system
  • We could save money and improve infrastructure performance by establishing an independent centre of expertise for project procurement, integration & public private partnerships.
  • A specialist central agency could work in partnership with local government to consolidate procurement and provide immediate & substantial benefits for water & tourism infrastructure
  • Public & environmental health could both be improved by consolidating wastewater & water supply delivery at a regional level
  • Auckland’s Watercare could be sold to fund Auckland growth with minimal impact on the cost of services and improved strategic capability
  • Dedicated independent regulators are more informed and take an outcomes-focused strategic view of the sector, which results in better services
  • Local government can be incentivised to align investment priorities with national outcomes by using the UK City Deal approach.

Link: Building national infrastructure capability: Lessons from Scotland

Attribution: Infrastructure NZ release.

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Joyce lifts infrastructure intentions and talks new operating mechanisms

New finance minister Steven Joyce (pictured early in his career as a sod-turner) looks to have increased the annual allocation to capital infrastructure spending from $900 million to $4 billion for the 2016-17 financial year, with the promise of upping the budget for the following 3 years by $4.3 billion.

Mr Joyce took over finance from Bill English in December, in the reshuffle following Mr English’s appointment as prime minister. The country goes to a general election on 23 September

Under the more conservative English programme, the allocation to capital infrastructure over the next 4 years was $900 million/year. Mr Joyce said yesterday the focus would be on the infrastructure that supports growth, and those annual allocations would rise to $2 million in the 2017-18 financial year and $2.5 billion in each of the following 2 years.

Both the Property Council & Infrastructure NZ focused on the $11 billion figure Mr Joyce waved in front of them, which included the $3.6 billion already budgeted.

Property Council chief executive Connal Townsend said a lot of the country’s infrastructure was at the end of its useful life and he expected asset replacement would feature prominently in the Budget: “Government’s announcement is a recognition that houses & commercial properties do not exist in isolation but need to be supported by infrastructure such as roads, schools & hospitals….

“Under-investment in infrastructure creates significant deadweight losses for the wider economy. Property Council is pleased that Government recognises this. Infrastructure spending must be seen for what it really is. It is an investment in our cities and a productive input into the wider production process, rather than a mere cost.”

Infrastructure NZ chief executive Stephen Selwood said: “This is a massive increase and the largest capital investment commitment by any government since the 1970s. But it must be said that New Zealand’s growth challenge is the highest it has ever been, and meeting population demands requires the services for a city larger than Nelson to be added every year.

“Added to the growth challenge is New Zealand’s historic under-investment in infrastructure. The reality is that it would not be difficult to spend $11 billion in 2017 alone.”

Mr Joyce said: “We are growing faster than we have for a long time and adding more jobs all over the country. That’s a great thing but, to keep growing, it’s important we keep investing in the infrastructure that enables that growth.”

“We are investing hugely in new schools, hospitals, housing, roads & railways. This investment will extend that run-rate significantly, and include new investment in the justice & defence sectors as well.”

Mr Joyce said the budgeted new capital investment would be added to the investment made through baselines & the National Land Transport Fund, so the total budgeted for infrastructure over the next 4 years would be about $23 billion.

He said the Government wanted to extend that further, with greater use of public-private partnerships and joint ventures between central & local government & private investors.

“As a country we are now growing a bit like South-east Queensland or Sydney, when in the past we were used to growing in fits & starts. That’s great because we used to send our kids to South-east Queensland & Sydney to work, and now they come back here. We just need to invest in the infrastructure required to maintain that growth. Budget 2017 will show we are committed to doing just that.”

Mr Joyce will give details of the initial increase in the May Budget.

Attribution: Ministerial release.

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Council agrees to reprioritise land supply schedule

Auckland Council’s planning committee skipped the most pressing part of its business yesterday – decisions on refreshing the overarching Auckland Plan – but did spend time on its future urban land supply strategy.

Committee chair Chris Darby said the Auckland Plan refresh and how the council would consult on it had been deferred until Tuesday 28 March because more preparation was needed.

But the committee discussed in detail the future land supply strategy and agreed to a number of changes to sequencing.

Staff recommended advancing work on some areas and deferring it elsewhere because of infrastructure constraints. The estimate to install bulk infrastructure over the next 30 years is $19.7 billion.

Areas to be brought forward: Warkworth North, Wainui East, Silverdale (business), Red Hills, Puhinui (business), Wesley (Paerata), Opaheke Drury, Drury South.

Areas to be pushed back: Kumeu-Huapai-Riverhead, Whenuapai stage 2, Drury West stage 2, Puhinui (business), Red Hills North, Warkworth North-east & Takanini.

Public consultation on the Auckland Plan is scheduled for the period 29 March-18 April.

East-West link

The planning committee also identified a number of concerns about the East-West link project intended to run through Onehunga.

The Government identified the project as a road of national significance and referred it to a board of inquiry. The NZ Transport Agency’s applications were publicly notified on 22 February and submissions close on 22 March.

  • This is an overly short version of events at yesterday’s committee meeting – being in 2 places at once doesn’t always work. I’ll come back with more detail on the land issues and the East-West link.

Link: 
Committee agenda

Attribution: Council release, agenda.

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Leading banker takes Australian politicians to task on governance, finance, infrastructure, urban prospects

Australian politicians’ ears must have been burning when bank chief Ken Henry addressed the country’s Committee for Economic Development in Canberra on Thursday, because he wasted no words in portraying the destruction – instead of construction – of a sound future they continued to guarantee.

The Unconventional economist on MacroBusiness, Leith van Onselen, wrote: “Dr Henry pulled no punches in admonishing the Government’s negligence in managing Australia’s mass immigration programme.”

Mr van Onselen also raised questions arising from Australian Productivity Commission reports, including An ageing Australia: Preparing for the future.

But migration & age were just 2 of the questions raised by Dr Henry, who chairs the National Australia Bank. He talked about the notion that endless growth was a practical proposition for Sydney & Melbourne, how every proposal for major infrastructure was drowned in political wrangling and – in the sector he knows best – how every tax reform proposal of the last decade had failed.

Below are some excerpts from his speech:

Business at odds with community

“According to our research, Australian businesses see our strong rate of population growth as a positive. …. In the broader community, there is considerably less support for a larger population. People are concerned about the impact of a growing population on traffic congestion, urban amenity, environmental sustainability & housing affordability. And they worry about our ability to sustain Australian norms of social & economic inclusion. These concerns are understandable.

“Australia’s business leaders have to accept responsibility for ensuring that strong population growth, and the investment opportunities that go with it, lift economic & social opportunity for all, without damaging the quality of the environment we pass to future generations. That means that we have to take an interest in traffic congestion, housing affordability, urban amenity & environmental amenity, including climate change mitigation & adaptation….

“If we want better access to skilled domestic workers, then we are going to have to offer those workers the prospect of better lives. If we want modern & efficient infrastructure, then we are going to have to take an interest in the design of our cities; we are going to have to take an interest in regional development; and we are going to have to take an interest in the planning of new urban centres.

“If we want less red tape & less regulation, then we are going to have to demonstrate that regulation is not necessary….

“Meanwhile, our politicians have dug themselves into deep trenches from which they fire insults designed merely to cause political embarrassment. Populism supplies the munitions. And the whole spectacle is broadcast live via multimedia, 24/7. The country that Australians want cannot even be imagined from these trenches….

“Almost every major infrastructure project announced in every Australian jurisdiction in the past 10 years has been the subject of political wrangling. In the most recent federal election campaign, no project anywhere in the nation – not one – had the shared support of the Coalition, Labor & the Greens.

“Every government proposal of the last 10 years to reform the tax system has failed.

“And the long-term fiscal, economic growth & environmental challenges identified in 4 intergenerational reports over the past 15 years?  The opportunities identified in the White paper on Australia in the Asian century? Simply ignored.

“The reform narrative of an earlier period has been buried by the language of fear & anger. It doesn’t seek to explain; rather, it seeks to confuse & frighten.

“Meanwhile, the platform burns.”

Growing Sydney & Melbourne

Dr Henry also spoke about the Australian budget & tax system, a strongly growing but aging population, climate change & energy security, and making the most of the Asian century.

“How will we fund the biggest infrastructure build in our history? And what about infrastructure planning?” he asked, before questioning the sense in adding 7 million people to the populations of Sydney & Melbourne:

“On the basis of official projections of Australia’s population growth, our governments could be calling tenders for the design of a brand new city for 2 million people every 5 years; or a brand new city the size of Sydney or Melbourne every decade; or a brand new city the size of Newcastle or Canberra every year. Every year.

“But that’s not what they are doing. Instead, they have decided that another 3 million people will be tacked onto Sydney and another 4 million onto Melbourne over the next 40 years.

“Already, both cities stand out in global assessments of housing affordability & traffic congestion.

“And even if we do manage to stuff an additional 7 million people into those cities, what are we going to do with the other 9 million who will be added to the Australian population in that same period of time? Have you ever heard a political leader addressing that question? Do you think anybody has a clue?

“At the very least, we are going to have to find radical new approaches for infrastructure planning, funding & construction. And that includes energy infrastructure, critical to our economic performance and our quality of life.

“The biggest challenge confronting the energy sector is that climate change policy in Australia is a shambles. At least 14 years ago, our political leaders were told that there was an urgent need to address the crisis in business confidence, in the energy & energy-intensive manufacturing sectors, due to the absence of credible long-term policies to address carbon abatement. It is quite extraordinary, but nevertheless true, that things are very much worse today.”

  • Dr Henry was Secretary of Australia’s Treasury Department from 2001-11, and was appointed a director of the National Australia Bank in November 2011 and chair in December 2015. From June 2011-November 2012, he was special advisor to the prime minister with responsibility for leading the development of the white paper on Australia in the Asian century. He’s a former member of the board of the Reserve Bank of Australia, the Board of Taxation, the Council of Financial Regulators, the Council of Infrastructure Australia and chaired both the Howard government’s tax taskforce in 1997-98 and the Rudd government’s review of the tax system in 2008-09, and he’s governor of the organisation he was addressing above, CEDA.

Links:
23 February 2017: NAB chair Ken Henry’s full speech at CEDA
Unconventional economist on MacroBusiness, 24 February 2017: Australia can’t build its way out of population ponzi
Unconventional economist, 24 February 2017: Bigger cities are engines for inequality
Australian Productivity Commission, November 2013: An ageing Australia: Preparing for the future
Committee for Economic Development of Australia

Attribution: NAB, CEDA, MacroBusiness.

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Propbd economic update Sun20Nov16 – Trump the upheavalist, the Onion view, beyond the rentier, Fed encourages Asian deficits

Trump the upheavalist
Onion highlighted US infrastructure decline in 2014
Beyond the rentier economy
Fed governor encourages switch to deficits for Asian economies

Trump the upheavalist

The Trump impact is everywhere, before he takes office as US president, with only a few of his executive named. Slowly, US mainstream media are realising they, and those they represent after nominating themselves as partisan commentators, won’t influence the direction of government, or the economy, or a multitude of other factors in daily life.

In Quartz, I read an interview today with a social scientist espousing the rise of urban radicals as an antidote to a rampant President Trump. He saw numerous ways around authoritarian decrees, but ignored the most important factor: He who holds the purse strings dictates.

Mr Trump might not be in charge of cities or states, but those who are will reach surprising degrees of flexibility as they lose out on federal funding because of their stands against change on perhaps completely unrelated issues.

Link:
Quartz, 15 November 2016: “Cities will be a powerful antidote to Donald Trump”: Social scientist Benjamin Barber on the emergence of a new urban radicalism

Onion highlighted US infrastructure decline in 2014

The Onion ran a semi-satirical article 2½ years ago highlighting the decline of the US economy and of its infrastructure. Semi-satirical, because the announcement of president-elect Donald Trump to pour $US100 billion/year into infrastructure over 10 years illustrates how real the predicament is.

The Onion story’s intro: “Putting the nation on alert against what it has described as a ‘highly credible terrorist threat,’ the FBI announced today that it has uncovered a plot by members of al-Qaeda to sit back and enjoy themselves while the United States collapses of its own accord.”

Link:
The Onion, 15 April 2014: FBI uncovers Al-Qaeda plot to just sit back and enjoy collapse of United States

Beyond the rentier economy

Neither of those pieces above directly affects us in New Zealand. But one matter which is international, but led from the US, has had decades-long direct effects here, and the way Donald Trump goes about the business of presidency may ring many changes to this factor: the rentier economy.

Mr Trump, in business, is very much a member of the rentier society, but he also opposes the hold of Wall St & closely related officialdom, while also wanting to lift productive businesses in former manufacturing centres that have declined.

As in so many of his pronouncements, his aims conflict with each other, and those that hit his hip pocket are likely to be discarded first. But Mr Trump will ring in changes, in the same way that John Banks did when he became Auckland mayor in 2001.

“We won, you lost,” was Mr Banks’s riposte when he appointed Citizens & Ratepayers councillors to head all committees, sparking a walkout by Labour & City Vision councillors, who’d found themselves in a minority.

Mr Banks’s stance is worth repeating on a couple of other aspects of council business 15 years ago, because Mr Trump has adopted a similar line. Mr Banks in 2001: “It’s not business as usual, it’s not an extension of the old government, this is a new government. The people of Auckland don’t want to continue down the street to nowhere.”

Cllr Glenda Fryer (City Vision) had acknowledged the CitRats had won 9 seats, “but that shouldn’t mean winner take all.” Wrong, said Mr Banks: “I support the fact that the winner will take all, and the winner will be the people of this city & this country. The reality of life is about votes in a democracy. The votes have been cast and the game has changed.”

Mr Banks took a lead on roading infrastructure, championing the eastern corridor motorway between the eastern suburbs & the cbd and criticising the pre-election decision of his opponents to approve the Britomart railway station. His motorway support helped him get ousted 3 years later.

Distinguishing between value & rent

The Evonomics website ran a long article today – repeating one that originally appeared in a US academic journal in September, by economics professors Dirk Bezemer (Groningen in the Netherlands) & Michael Hudson (Missouri & Peking) – which goes to the heart of arguments on how to fund growth or change: the basis of economic growth (productivity); how finance, and particularly collecting rent from assets, slid into being considered at the economic heart and how it should be distinguished; how the “great moderation” was anything of the sort; and the role of the debt-leveraged rise in asset prices.

They wrote: “Economic growth does require credit to the real sector, to be sure. But most credit today is extended against collateral, and hence is based on the ownership of assets…. Our aim is to revive the distinction between value & rent, which is all but lost in contemporary analysis. Only then can we understand how the bubble economy’s pseudo-prosperity was fuelled by credit flows — debt pyramiding — to inflate asset markets in the process of transferring ownership rights to whomever was willing to take on the largest debt.”

Unfortunately, this article dwells on what’s gone, leaving just a list of questions at the end on how the next stage might unfold. Those questions are the most important part of the article, but are only about what might be needed in the immediate future. The good thing about them is that they should lead to further inquiry focused on how to set a new course without causing total upheaval.

The Trump focus, at least for the moment, has a heavy focus on upheaval, and he will have the votes to follow the courses he wants to take. The next task for enlightened economists is to look at the ‘how’ of change.

Links:
Evonomics, 20 November 2016: Finance is not the economy
Journal of Economic Issues, September 2016: Finance is not the economy: reviving the conceptual distinction

Fed governor encourages switch to deficits for Asian economies

US Fed governor Jerome Powell.

US Fed governor Jerome Powell.

US Federal Reserve governor Jerome “Jay” Powell told a research conference at the Federal Reserve Bank of San Francisco’s Centre for Pacific Basin Studies on Friday it would be “advantageous” for Asian nations to shift towards external deficits seeing that financing costs were so low.

That’s despite an antipathy towards deficits among leading Asian economies, the likely gradual rise in the Fed’s funds rate as it tries to boost inflation, and the more likely escalation of rates in the US & probably internationally if Donald Trump goes ahead quickly with a number of his policies, including ramping up infrastructure spending.

In a speech entitled The global trade slowdown and its implications for emerging Asia, Mr Powell said: “Encouraging domestic demand and allowing for downward adjustment of these surpluses in emerging Asia, with more balances turning into deficits, would provide a much-needed injection of demand into the global economy and also support economic growth in the region by providing another source of growth in place of the lessened impetus from external demand.

“A shift toward external deficits in Asia would be advantageous, considering the low level of external financing costs at present. Many observers are raising the possibility of a ‘new normal’ for the global economy, in which moderate global demand, low productivity growth and slow trade may persist for some time, keeping interest rates in the advanced economies ‘low for long.’

“To be sure, bond yields have moved up recently, but they remain quite low by historical standards. Accordingly, the cost of external finance to Asian economies has fallen, which should support strong private capital flows to emerging markets. Normally, we would worry about volatility of these flows and how they might exacerbate risks of financial instability, particularly as US monetary policy normalises. But we should also bear in mind that many emerging market economies, particularly in Asia, have improved their macro-economic fundamentals over the past 2 decades; that they have built an adequate war chest of reserves, with no pending need to further reserve accumulation for precautionary purposes; and that their currencies are much more flexible, which acts as an adjustment mechanism to shocks and also lessens the possibility of fluctuations in reserves due to currency intervention. These factors have made the emerging Asian economies much less vulnerable.

“Given all this, dare we imagine a world in which private capital inflows to emerging market economies could prove self-sustaining, are not offset by reverse flows of official capital and would finance long-term profitable investment that would help support growth in these economies while also supporting global growth?

“In essence, these capital inflows would finance the shift from export-led growth to domestic-led growth required by the slowdown in global trade. And, with little or no official outflows, emerging market economies would have total capital net inflows as well, consistent with running current account deficits instead of current account surpluses. As pointed out recently by former Fed chair Ben Bernanke, the availability of profitable capital investments in one part of the world can help defeat secular stagnation in another part.”

Mr Powell was appointed to the US Federal Reserve board in 2012 and reappointed in 2014 for a term scheduled to run until January 2028, a few days before his 75th birthday. He was a New York lawyer & investment banker, a partner for 8 years at global alternative asset manager the Carlyle Group, and became an assistant secretary & undersecretary of the Treasury under President George HW Bush, with responsibility for policy on financial institutions & the treasury debt market.

Link:
Fed governor Jerome Powell speech, 18 November 2016: The global trade slowdown and its implications for emerging Asia

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Goff talks up growth along with cutting congestion and revising funding

As Statistics NZ published its latest migration figures last Friday – a net inflow just 46 short of 70,000, and a net 32,700 into Auckland – new mayor Phil Goff was talking up growth while proposing faster measures to cut congestion, and telling the Government it needs to shift at least some of the financial burden from ratepayer to taxpayer.

The Government has been running a programme to encourage regional economic growth, but not in the concerted way needed to reduce imbalances. And it has done none of the exercise needed to restructure the funding of infrastructure.

The Auckland transport alignment project, between the Government & Auckland Council, is a very tentative step towards part of this necessary revision. But it’s predicated on Auckland continuing to grow apace, it’s a tally of tasks & setting of a priority order.

Transport alignment, and what it’s not about

It’s not about examining Auckland’s apparent needs from a wider perspective – looking at housing not just as a centre-outward programme but as part of the creation of communities & new economic centres, looking at local business as an integral feature of growth instead of being a chance occurrence, looking at access as an efficient way to move between economic centres and between those centres & homes.

Carpeting an overpriced landscape with homes is not the answer to a problem but an escalation of the problem. Growth for its own sake has rightly been characterised as a Ponzi scheme.

Silverdale, in the north of the region, is an example of how improvements to local government can send progress astray. Under the old Rodney District Council, which needed more sources of rates, some of the land now being gobbled up by an expanding Millwater housing subdivision was intended for a business innovation park. A tertiary education relationship would have followed, naturally.

The jobs in Silverdale & Millwater are in shops. The strength of the greater perspective has been defeated.

“Growth is good”

New Auckland mayor Phil Goff.

New Auckland mayor Phil Goff.

Mr Goff told the Council for Infrastructure Development (renamed yesterday, now Infrastructure NZ) about his travails on the campaign trail of guessing when he might turn up, because of congestion.

But his central themes were that “Auckland is a great city – that’s why so many people want to live here”, “New Zealand needs a city of international scale”, and “New Zealand needs a major city which can retain the best & brightest of its own new generation and can attract talent from abroad”.

“Growth is good,” he told his infrastructure-oriented audience. Where have you heard a similar phrase, the first word changed?

Mr Goff has 3 central answers. First, the economic imperative founded on growth & skill; second, overcoming the housing price spiral and providing the infrastructure to support it; third, changing funding structures. They all need a lot more work.

“Auckland has to be a centre of learning & innovation,” he said. “It is our best prospect for building a diversified & high technology economy. To attract & retain the talent we need, the city has to provide high paid jobs in high value-add enterprises and also needs to be a good place to live.”

He said local & central government had to work together to address the infrastructure deficit underlying housing unaffordability & traffic congestion: “For housing, there are some issues of demand management which are largely within the scope of central government which could take some of the pressure off. Longer term, it is about increasing supply.

“Around 60% of housing costs are the land, and increasing the supply & better utilisation of land is vital. The new unitary plan, when it is fully implemented, is a big step towards tackling the problem of land supply and therefore cost.”

At that point Mr Goff raised the catch-cry: “We need to go up & out.”

“Up & out” inherently a conflict

Sounds great, but it’s inherently a conflict where pricing is integral. Old Auckland City wanted intensification because it had nowhere to expand, while the rest of the region’s old territorial councils wanted expansion in their areas to improve their economies by boosting their populations.

Without those old boundaries, the reasons for those numbers games change. Suburban intensification can be justified where there is amenity and where work is available at a range of skill levels, so concentration in centres well away from the cbd will then work. Carpeting the landscape without adequate activity centres – jobs, education, sports facilities, entertainment, not just shops – means the dominance of the car will continue.

Mr Goff said reviewing Auckland’s consenting process would be a priority. From the council’s perspective, “we need to have a resource consenting system that is fast, efficient & responsive to the needs of our city while maintaining the integrity of the process”.

Infrastructure funding

But, he said, the bigger problem was the cost of providing infrastructure so land zoned for housing can be developed: “I am pleased that central government recognises the cost of providing infrastructure cannot be funded from the narrow revenue base of rates. Nor can infrastructure needs be funded in local government as they are in central government by simply borrowing & increasing debt.

“Auckland is constrained in its infrastructure investment by the need to maintain prudent levels of debt, in particular in its debt to revenue ratio. Currently, the maximum ratio set by Standards & Poor’s is 270% and Auckland’s current ratio is approaching 250%. Our debt currently stands at $8 billion and will grow by another $2 billion over the next 3 years, and this is within the prudential limit by our credit rating agencies.

“With the need to meet half the cost of the city rail link – some $1.5-1.7 billion over the next few years – Auckland’s ability to take on new debt is constrained.

“Breaking the debt:revenue ratio would put at risk our AA credit rating and potentially add millions to the council’s interest costs. Treasury & central government agencies understand the scale of Auckland’s infrastructure needs, which come from unprecedented growth and the revenue constraints on the city to meet that growth.

“We can look overseas for better models, such as in Sydney, where infrastructure needs are met not just by local government but in large part by the state government, which has broader sources of revenue.

“I welcomed the Government’s announcement of its Infrastructure Fund a couple of months ago. It was an acknowledgement that high growth areas need additional assistance. However, that $1 billion spread over 5 growth areas won’t accelerate housing construction in Auckland to the levels needed to meet housing demand. I also acknowledge that the onus is on Auckland Council to demonstrate to the Government that we have our house in order for extra capital to be made available.”

Failure to solve funding hugely expensive

None of that spiel on infrastructure needs & funding matches what the “out” part of “up & out” will do to infrastructure demand. Auckland needs closer attention given to a mix of public & private infrastructure provision, and particularly to how it’s managed. Management needs to be non-partisan and, while the public sector theoretically has no favourites, it can be extremely partisan & jaundiced.

Funding by the taxpayer is no different from funding by the ratepayer: same pants, different pocket. Upfront funding by the developer adds hugely to cost, as does the uncertainty of how long getting consent will take. Plenty in the public sector continue to regard “the developer” as a greedy parasite, ignoring the cost of uncertainty and the value of that gift of upfront funding.

Those costs feed into land prices and into all inputs of housing. And they feed into the costs of business, and especially into transport.

Mr Goff said congestion was costing Auckland an estimated $1.5-2 billion/year in productivity losses: “Technology such as Uber car sharing & driverless vehicles will help, but we shouldn’t sit back and expect that to be the only solution when our population will grow by another million. Motorway investment can help, but no great city has built its way out of congestion with roads. Cycleways to allow kids to get safely to school could take up to 10% of traffic off the roads during rush hour. Increasing our public transport, heavy & light rail and busways is critical to relieving pressure on our roads, as it is in almost all international cities.

New transport priorities

“The developments we need here are, in many cases, not even within the next 10-year plan, 2018-28. As mayor, I will prioritise the development & signing off of a business case for rapid light rail in the isthmus to bring it into the long-term plan.

“Auckland must also plan for rail from the city centre to the airport, given we have 3.5 million tourists/year, growing to 5 million, and the airport region and cbd are our fastest-growing areas of employment.”

Mr Goff said funding was critical to bringing transport developments forward, but there was a national funding imbalance: “Many Auckland roads, which carry much heavier vehicle loads than roads elsewhere that are classified as roads of national significance, get half the funding of other regions. The city rail link, likewise, gets only 50% funding with the rationale not obvious for this.”

He said Auckland needed a regional petrol tax now and congestion charging later.

It might be unreasonably selective to focus on one speech out of hundreds made over an election campaign and into the start of a mayoralty, but this is when the speeches actually count, and this is when the detail needs to be provided.

Attribution: Goff speech, Statistics NZ.

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Capital intentions plan up $15 billion in year

Finance Minister Bill English released the Government’s 10-year capital intentions plan on Friday – a pipeline of $100.9 billion of infrastructure projects over the next decade.

The Government launched the plan in 2014 and has updated it twice. It includes intentions of both central & local government and, to a lesser extent, the private sector.

Of the 3823 projects in the 2016-25 pipeline, 219 belong to central government and are valued at $40.5 billion, 3559 belong to local government and are valued at $51.1 billion, and 45 projects belong to the private sector at a value of $9.2 billion.

This year’s plan gives a greater year-by-year breakdown of actuals & intentions. Mr English said it showed the total actual & estimated spend out to 2025 had increased by nearly $15 billion since last year.

“Ensuring that the right frameworks are in place to support sound infrastructure investment decisions that meet the needs of a changing New Zealand is an important focus for this government. “Central & local government are increasingly working together to improve infrastructure investment & the management of existing infrastructure necessary to underpin economic growth,” he said.

The Government’s National Infrastructure Unit said the full evidence base comprised:

  • an overview document, including methodology & key sector messages
  • sector-specific narratives, including an assessment of the current state of infrastructure and potential future pressures on it
  • an analysis of potential future demand pressures on infrastructure, based on sector-specific scenario & trend information
  • a resilience assessment, and
  • a 10-year capital intentions plan.

Link:
Capital intentions plan

Attribution: Ministerial release, plan website.

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Infrastructure frailty puts US financial woes in perspective

Economist & financial commentator John Mauldin put a lot of US financial woes in perspective this week in his column, Thoughts from the frontline, where he highlighted the frailty of the country’s infrastructure and the likelihood that funding will prevent it being maintained or upgraded adequately.

Those infrastructure woes pitch the US into a role of coming from behind. One issue has been recognised but not resolved: funding of its road network has not kept up, the rising proportion of pensioners leaves fewer motorists to pay for it, and improved vehicles reduce the fuel use that taxes are levied on.

Other issues are arising, much the same as in New Zealand, except that more complicated governance structures make resolution harder. After 70 years of suburban development, water supply & waste removal are 2 areas of concern.

From afar, we see a streamlined country that knows how to run its affairs (apart from the temporary question of finding a president). What Mr Mauldin sees – backed up by a report from the independent analysts at the Congressional Budget Office in a report in August on the national budget & economic outlook for the next 10 years – are the likelihood of early recession and rising deficits which won’t go anywhere near covering infrastructure requirements.

Mr Mauldin summarised what is a quite long opinion piece, and I’ve reduced the summary further:

  1. The next president is likely to face a recession early in their term; current monetary & fiscal policy will ensure it’s fairly serious, and the recovery even slower than last time
  2. The fiscal deficit will swell to at least $US1.3 trillion and likely more. That will leave little room for fiscal spending & stimulus, and certainly not much for the usual infrastructure spending that is called for
  3. The state of US infrastructure is appalling. It needs at least $US3.6 trillion worth of repairs, and that does not even include what we need to do to prepare us for the 21st century. We have dug ourselves a very deep hole of massive failures on infrastructure upkeep, and we are continuing to dig
  4. His solution on where to find the money
  5. Necessary tax & regulatory reforms, and then he notes: “If we do none of the above but stumble along doing what we have been doing, the investment environment is going to be exceedingly stressful; and pension funds & insurance companies are going to have massive difficulties staying in business, not to mention meeting the needs of tens of millions of retirees”.

Same issues apply to Auckland

Some of that warning could equally be applied to Auckland, which is still spending less on infrastructure upgrades than it should, although the advent of the super-city has streamlined the ability to make that provision.

Auckland is also going down a new route of escalating suburban housing development, led by a government that wasn’t awake soon enough to the bottlenecks being created by insufficient land supply around the region. Those bottlenecks occurred as the regional council was responsible for monitoring land use and contested urban conversions while having no power to implement alternatives – such as the present move to intensification.

Changing land use was primarily in the hands of territorial councils until the super-city took over in 2010, and those councils had very different – and competing – intentions. As residential development is promoted ahead of all other uses, some of those pre-merger intentions should be kept in place, such as providing more local jobs and encouraging business clusters outside the centre.

At the moment, the helter-skelter rush to lay out new suburbs requires infrastructure to be in place, at greater cost/residence than more intensive development, and with long-term maintenance costs that are likely to be much higher.

Just as Auckland Council has worked out the costs & requirements of a steady growth in infrastructure, it is being pressured to meet hasty new demands based on an old model that the US is demonstrating has high risks when demography & funding systems militate against the “forever onward” approach.

US economy “running at stall speed”

Back to the US, where Mr Mauldin argues that the economy “is running at stall speed, and any shock that comes from outside the US – from Europe or Japan or China – or from an actual honest-to-God initiation of interest rate hikes by the Fed, which would force a repricing of bonds & equities, could set off a recession that would become self-reinforcing”.

One of those potential external disrupters is Deutsche Bank – in trouble, at the heart of the international financial system, not to be bailed out according to German president Angela Merkel, requiring a rescue according to Mr Mauldin.

“Pay attention to Deutsche Bank,” he wrote. “The bank is deeply connected with the entire global banking market, and just as Lehman Brothers triggered a rolling wave of panic, Deutsche Bank has a similar potential. Even though Merkel swears she is not going to bail out Deutsche Bank, she will have no choice. They will probably have to wipe out shareholders and maybe even some subordinated debt, but they cannot let the bank itself go under, because it is at the centre of a massive financial spiderweb. Which means that the German central bank will have to be at the centre of the rescue, and it gets its capital from the ECB (European Central Bank). Watch how quickly Italy, Spain & the rest of Europe demand that the ECB bail out their banks, too. So the last thing Germany will want to do is bail out Deutsche Bank.”

Projections are for escalating debt, no answers

The Congressional Budget Office, in its report on the state of US public finances, said: “The deficit under current law is projected to be larger this year, but smaller over the 2017–26 period, than the office projected in March. Since January, the office has reduced its projections of gdp growth & interest rates over the coming decade.”

It stated the obvious, that growing deficits projected through the next 10 years would drive up public debt, and it’s projecting the federal deficit will reach 4.6% of gdp by 2026, pushed upward by the continued growth in spending on social security, Medicare & net interest. It said these costs would outstrip growth in revenues, resulting in larger deficits & increasing debt.

In the Congressional Budget Office’s projections, federal outlays rise by $US2.4 trillion/year (or about 60% percent) from 2016-26: “Relative to the size of the economy, outlays remain near 21% of gdp for the next few years – higher than their average of 20.2% over the past 50 years. Later in the coming decade, the growth in outlays would exceed growth in the economy and, by 2026, outlays would rise to 23.1% of gdp. That increase reflects significant growth in mandatory spending & interest payments, offset somewhat by a decline, in relation to the size of the economy, in discretionary spending.”

The office said that, if current laws generally remained unchanged, revenues would gradually rise – by $US1.7 trillion, or about 50%, from 2016-26 – increasing from 17.8% of gdp in 2016 to 18.5% by 2026. They’ve averaged 17.4% of gdp over the last 50 years.

“As deficits accumulate in the office’s baseline, debt held by the public rises from 77% of gdp ($US14 trillion) at the end of 2016 to 86% of gdp ($US23 trillion) by 2026. At that level, debt held by the public, measured as a percentage of gdp, would be more than twice the average over the past 5 decades.”

In sum

In short, the rising infrastructure debt is not matched by an ability to pay, and the US Government is not producing ways to resolve what will become a critical failure at the heart of the international financial system.

Its effects will be widespread, right down to the number of wars the US can fight. A symptom at the moment is the level of interest rates, seen mostly from the perspective of a financial system struggling to get traction. The finance world has been promoting ever-lower interest rates, which support higher asset prices.

There is another side to this, not mentioned by Mr Mauldin or in the Congressional Budget Office report, and that’s the preference of governments to get interest rates down – and exchange rates rebalanced in their favour – when their repayments are high.

New Zealand’s Reserve Bank has been bleating that our exchange rate is too high, but it’s not going to beat the requirements of more powerful nations on that score.

Links:
John Mauldin, Thoughts from the frontline, 2 October 2016: Start moving some dirt
Congressional Budget Office
Congressional Budget Office, 23 August 2016: An update to the budget & economic outlook: 2016-26

Attribution: John Mauldin, Congressional Budget Office.

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