Archive for the ‘Infrastructure’ Category
Rod Oram Sunday Star Times piece on rail’s revival overlooks one big issue.
Significant parts of the rail network – for example the Napier to Gisborne line – are million dollar millstones and should have been shut down years ago.
KiwiRail has given the affected regions two years to come up with viable clients so these lines can stay open.
Declaration of interest here – I’m a supporter of the Napier-Gisborne rail trail.
Lines like the Napier-Gisborne one are big culprits in the underinvestment in rail over the years, sucking up good money to be invested after bad. At last count, one train a week travels on this line, returning to Gisborne pretty much empty.
Like many of the marginal lines it is incredibly expensive to maintain thanks to its tough typography (which BTW is why it’d make a great rail trail).
Getting it up to speed, if KiwiRail wants to keep it open, will also require huge investment, inevitably continuing the drain on the good parts of the business.
BigCake has quietened down a bit over the nationalisation of rail, because the new owners have done what the private sector couldn’t or wouldn’t do – invest.
But there’s still the fundamental issue that parts of the rail network are commercial duds and, if not closed, will continue to weaken the rail network as a whole.
Government ownership is just going to make it that much harder to do anything about this.
[Further declaration of interest - I worked for Tranz Rail from 1999 to 2001]
An old myth is that the Chinese word for crisis is a combination of the characters danger and opportunity.
It’s a great idea, but it’s a “curious specimen of alleged oriental wisdom“.
However, it does give you a clue about how to handle crises.
In today’s NZ Herald, columnist Brian Gaynor sees opportunity in the Christchurch earthquake.
He says although the quake has had a devastating impact on local residents “it will divert resources into an area of the economy that is much more likely to take us out of the recent recession.
“The economic argument, which is becoming increasingly popular in the United States, goes a bit like this.
“The consumer, who accounts for around 70 per cent of economic growth, is shopped-out because of too much debt and the depressed state of the housing market. In other words economic recovery is not going to be consumer-led, there have to be other economic drivers.
“Construction and infrastructure-led recoveries are obvious alternatives to a consumer-led recovery.”
BigCake has posted before on why our spending power has taken a hit. It’s not just that we’re now more sensible with money and debt, but we’ve run out of ways to ensure we can continue to buy what we want rather than what we need.
These mechanisms are:
• Two-income families
• Working longer
• Debt.
The Global Financial Crisis killed the last one.
And now to the danger bit in a crisis.
Gaynor says influential US business people, looking for ways to fill the economic hole left by newly thrifty consumers, want US federal and state governments to sell infrastructure assets and use the proceeds to build new infrastructure projects or repay debt .
“A similar approach needs to be looked at in New Zealand because the debt-loaded consumer is in no position to drive the economy out of recession through increased spending.
“An obvious alternative is for the Crown to sell minority shareholdings in its commercial companies and use these proceeds to invest in the country’s rundown infrastructure assets.
“The new Auckland Super City could do the same by selling a stake in Ports of Auckland and a number of other assets and use the proceeds to invest in badly needed infrastructure assets, particularly roads and public transport.
“Unfortunately, the domestic political environment is not sympathetic to that approach so it looks as if we have to rely on a natural disaster to create a construction/infrastructure led recovery.”
There’s a growing heap of stuff that needs to be sold.
Gaynor says “it is patently clear that we are not going to have a consumption-led recovery …
“…the preferred option is to have a government policy-led construction/infrastructure boost instead of just waiting for the next natural disaster.”
BigCake would add this boost should be funded by asset sales as Gaynor suggests, not debt (of which we have already got more than enough).
It looks as though the quality of NZ’s infrastructure has gone seriously downhill over the last six or seven years, probably for much longer, but there’s an indication the trend is being halted.
My last post set out my theory explaining why we’ve ended up with second-world infrastructure. Basically our health and education expectations gobbled up the budgets.
It gets a bit tricky making infrastructure comparisons over the years because I’ve been forced to use secondary sources. The Global Competitiveness reports use two measures of infrastructure: one, just plain infrastructure under the heading of ‘basic requirements’ and the other ‘overall quality of infrastructure’.
Sometimes it’s not clear which of the two the secondary sources are referring to.
Anyway, I have two sources (Treasury and MED) for the fact that back in 2004-05, we came in 22nd in world in ‘overall quality of infrastructure’.
In the latest 2010-11 report, we rank 48th.
Treasury gave a breakdown on the 2004-05 measures:
• Ports – 13th in the world (22nd in 2010-11)
• Aviation – 13th (17)
• Telecoms infrastructure – 16th (26)
• Electricity supply – 30th (53)
• Rail infrastructure – 31st (37).
So, yeah an ugly performance.
But a note of caution here. The above numbers are derived from the World Economic Forum’s Executive Opinion Survey. There were 43 NZ respondents to the survey in 2010-11.
The respondents were asked to assess general infrastructure (e.g. transport, telephones, and energy) with 1 = extremely underdeveloped; 7 = extensive and efficient by international standards.
So I’d pick the ‘overall quality of infrastructure’ measure can be a bit subjective and prone to being influenced by what is going on at the time of the interview.
And looking at the (more objective?) ‘basic requirements’ measure for infrastructure over the last three years we get:
• 2008-09 – 42nd in world
• 2009-10 – 35th
• 2010-11 – 37th
So perhaps some progress.
For sure, building and maintaining infrastructure in NZ is harder/more expensive than say the flat, geographically compact and well-populated The Netherlands.
And some of these ratings are not a million miles away from the level of our overall wealth – 28th in the competitiveness report.
But we’re going nowhere without improving them.
Something BigCake has long wondered about is why our infrastructure is so shitty compared with other modern economies.
The obvious answer is that we haven’t invested in it, but why’s that?
In most other areas that underpin economic growth we, most of the time, at least do okay.
My theory (just formulated this morning – apologies if someone else has bet me to it) is that investment in infrastructure over the last couple of decades has been cut back (or at least not matched what was needed) so we can continue to enjoy first world standards in health and education.
A price for this has been our slide into second-world standard road, rail and telecommunications. And reduced economic growth which would help to bridge the gap between what we want and what we can afford.
Given our relatively poor economic growth compared to the countries we like to think ourselves the equal of, something had to take a hit. So maybe fair enough for infrastructure.
But it’s helped mask the truth that NZ has been living beyond its means.
As the Ministerial Review Group on health said about our health spend: “We like to consume health services like other OECD countries, but we are less able to afford to.
“The difficulty is that our per capita income is much weaker than [our] per capita health spend.”
According to the BigCake theory, our infrastructure has paid the price this mismatch between what we can afford in health and what we expect. Same for education.
But with infrastructure these particular chickens have come home to roost.
Global Competitiveness Index rankings highlight the disparities resulting from these investment (or underinvestment) policies.
In the latest index we come in 23rd (down from 20th last year) out of 139 countries in overall competitiveness with infrastructure being the standout brake on our overall economic performance.
We do well in things like:
• Institutions (such as banks etc) – 3rd in world
• Health and primary education – 5th
• Market efficiency – 7th
• Higher education and training – 13th
But in quality of overall infrastructure we come 48th thanks to:
• Electricity supply – 56th best/worst in the world
• Mobile phone subscriptions – 48th
• Roads – 45th
• Rail – 45th
Kiwi businesses rate ‘inadequate supply of infrastructure’ as the single biggest problem they face.
There are other shockers as well, but often these are in things we don’t have much control over:
• Local supplier quantity – 77th
• Domestic market size – 59th
But some we do:
• National savings rate – 90th (the worst indicator of all)
• State of cluster development – 56th
• Company spending on R&D – 38th
BigCake used to think there was a missed opportunity during the privatisations of the late 1980s and 90s to create Kiwi “mom and pop” shareholding bases in companies like the Bank of New Zealand, Telecom and New Zealand Rail instead of selling to the Yanks and Aussies.
Now he’s not so sure. Current events in Australia where Telstra, with its 1.4 million “mom and pop” investors, is butting heads with the Government over the price of the national broadband network make him even more uncomfortable.
John Key and Bill English have suggested something along “mom and pop” lines for any eventual sales of Kiwibank and other state businesses.
But BigCake is highly dubious that this is the way to go, even if it has a lot of appeal on the basis of greater Kiwi ownership of NZ businesses is no bad thing.
The problem is the potential for the “mom and pops” to cause trouble down the line. What may be good for the company may not be good for the country and vice versa and politics and business get mixed up.
Mostly sales of state assets to “mom and pops” are offered as a sop to privatisation opponents (ie political reasons) rather than any sound business one.
Anyway Telecom, with only 22% Kiwi shareholding and with a large percentage indirectly held through funds, has managed to scare the sh!it of the last two Governments over moves (based on the overall good of the nation) that’d hurt its bottomline.
Imagine how hard it’d be to move against Telecom if the company’s shareholding register had been stacked with “mom and pops” who, incidentally, are also on the NZ voting register.
Off the top of my head similar issues could arise in transport policies regarding KiwiRail and climate change-related ones to do with power companies.
Across the Tasman, Telstra is negotiating with the Australian Government over the value of Telstra assets needed for the planned new A$43 billion national broadband network.
Telstra says it won’t do any deal that is not in the best interests of its shareholders (many who ummm also happen to be voters).
BigCake still has vivid memories of the evening he was hauled into the boss’s office over some advice he gave his employer – which had a monopoly or at least was in one with monopolistic characteristics – about raising prices.
The boss spat the dummy because I’d suggested that, recognising the company’s sensitive position in the market, management should not only consider purely commercial arguments for upping prices, but also factor in how it might be received by Government.
I wasn’t saying prices shouldn’t be raised, but no one seemed to be considering the big picture. Basically there’s a cost in p!ssing off the Government.
This cost may have been enough to decide to leave the price rise for another day.
Anyway, after being put in my place, I was told to not to venture into such matters again.
My employer of course got away with the price rise and the boss probably thought I was d!ckhead.
Wonder if Vodafone got similar big picture advice?
The latest Idealog magazine has a great interview with Sam Morgan.
Here are some snippets:
Idealog: Do you think Kiwis have the confidence to invest elsewhere [other than in property], in New Zealand businesses or even in the stock market?
Morgan: “Fundamentally, no.
“…the allocation of capital into property is excessive and needs to be controlled.
“I think central government has a role in protecting people from their own stupid selves.”
But as he says a lot of people have been scared off shares because of things like the 1987 sharemarket crash.
• BigCake: This is a big problem because we need more investment in our companies, and not just through the sharemarket, but also in Venture Capital, Angels and Private Equity. He wonders how much Kiwis were driven into property investment because businesses were seen as too risky. The sharemarket crash crippled investor confidence and this was compounded by some subsequent listed company behaviour and failures and more recently finance companies falling over. The New Zealand sharemarket is now a shadow of its former self.
Idealog: Your thoughts on tax reform [BigCake paraphrasing the question here]?
Morgan: ”The amount of tax people pay in different areas is not fair. The people that pay the most tax are working people.
“I was lucky enough to sell my company [TradeMe for $750 million all up] in a country with no capital gains tax on the sale of my company.
“[Now] I basically pay no tax. And that’s not right, but what am I supposed to do?”
Idealog: Have you been following the feed lot [industrial farming] argument down in the Mackenzie Country?
Morgan: “New Zealand is widely recognised as having a pastoral system, not a lot feed system. Muddying that message by having lot-fed cows is not good for our brand with dairy exports being a third of our net exports, or whatever it is.”
• BigCake is very wary of telling farmers how to farm, but he’ll do it (again) anyway. You need to get real! Your future is in high value, not high volume. South American countries and others will kill you in the volume game. Leverage the clean and green advantage and don’t put that advantage at risk by dirty dairying. And that includes in China.
Idealog: The New Zealand internet is getting better, but we will have data caps.
Morgan: “We need to solve the international bandwidth problem. We need a cable which is not based on price maximisation. I’m almost inclined to do it myself.
“It’s maybe $600 million and I think you can make that happen.”
• BigCake thinks this answer is a laugh given this week’s Pacific Cable announcement in which Morgan, along with Stephen Tindall and Rod Drury announced they’re looking at a $900 million investment in a new internet fibre cable linking New Zealand Australia and the US.
He must of known of this when he spoke to Idealog. The cost grew by a third in the interim.
In today’s Dominion Post (Strategies and plans aplenty but are there any new ideas?), political writer Colin James talks about the need for investment in “soft infrastructure” – I think he means people.
He says “soft infrastructure might contribute more to faster economic growth than six-lane highways to carry more of the same and water to grow more of the same”.
James believes the Key Government understands that getting things like tax and government spending right is not enough.
And “neither actually is investment in physical infrastructure,” he says.
The Government’s infrastructure plan includes school buildings, “but teachers don’t teach buildings and children don’t learn buildings.
“Teachers teach and children learn knowledge, skills and how to think.
“The real school infrastructure is what is inside the heads of the future workforce: how smart it is, how smartly it works and how it can make life better and richer.”
As James points out, a problem with this ‘infrastructure’ is that it is mobile and has a habit of heading off to Australia.
Though the troubles at Telecom’s XT network and at Kiwi Rail’s Wellington suburban passenger services have struck from two different directions (the former contemporary bungling, the latter historical) they highlight the poor state of New Zealand’s infrastructure.
When our businesses try to compete with the world, clogged motorways, power failures, slow broadband, busted trains and non-functioning phone services put us a huge disadvantage. Not overlooking the personal hassles involved.
They provide some great humour though – see XT network for sale on TradeMe.
For sure other countries have similar problems, but in New Zealand they’re mostly a lot worse (unless we’re talking about real third world countries or Sydney’s motorways).
In the World Economic Forum’s Global Competitiveness Report 2009-10 we rank 35th in the world for infrastructure compared with 20th for overall competitiveness and 5th for our economic institutions which Brash and Co bang on about as the cause of our economic woes.
In infrastructure we were sandwiched between Estonia (34th) and Saudi Arabia (36th).
Our port and air infrastructure are the best performers (22nd and 17th in the world respectively) and electricity and roads the worst (53rd and 43rd).
After years of underinvestment in infrastructure the current Government has made it one of its priority areas, spending $10.7 billion over 10 years on new roads and $1.5 billion on ultrafast broadband.
KiwiRail and the Greater Wellington Regional Council are spending $550 million to improve Wellington’s passenger rail services. Auckland’s getting $1.6 billion.
How much it’ll cost Telecom to fix the XT Network failures is not clear, but it has so far shelled out $15 million to unhappy punters and has warned financial markets to expect lower earnings for the year to the end of June.
There’s also an extra (I think) $7.5 billion to be spent over five years on a government infrastructure investment programme targeting roads and telecommunications, and apparently in the same programme, non-infrastructure stuff like schools, housing and hospitals.
Infrastructure definition: The basic physical systems of a country’s or community’s population, including roads, utilities, water, sewage, etc. These systems are considered essential for enabling productivity in the economy. [Courtesy http://www.investorwords.com/2464/infrastructure.html]
Anyway all good, but to give you an idea of what we are up against, Australia’s spending A$43 billion on its broadband network, on which work started earlier this month.
Our lot are not expected to get underway till the second half of this year when commercial agreements with the Government’s partners (one of which is prospectively Telecom, hah!) are finalised.
So that’s Australia out of the 2025 race starter’s block on broadband while we’re still deciding which midgets (dollar wise) are going to run.
But that okay because there are more reports on the way:
- There’s the National Infrastructure Plan (due “early 2010”) setting out a “high-level view of the state of New Zealand’s infrastructure and include a stock-take of existing infrastructure and anticipated future requirements”. and
- Mid-year there’s the release of economic and public policy research group Motu”s four-year, $1.6 million research project into net benefits provided by New Zealand’s infrastructure.
Feel better now?
Rod Oram Sunday Star Times piece on rail’s revival overlooks one big issue.