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“We haven’t got the money, so we’ve got to think”. That was Sir Ernest Rutherford infamously describing his team of pioneering scientists around the time they successfully split the atom molecule. When I think of our water sector, I wonder if this should be our mantra to address the water infrastructure investment crisis we face. But are we still a nation of thinkers courageous enough to try something different, or are we resting on our laurels and getting a bit soft? Despite not splitting the atom, we are certainly splitting hairs over where the necessary funds to pay for water infrastructure comes from. Ratepayer, taxpayer or water service customer funded, these are broadly the same group of people – so let’s just get on with it.

In the first of this two-part series, Water New Zealand Stormwater group committee member, and Senior Water Resources Consultant at Tonkin + Taylor Brad Tiller explores alternative funding sources that could be used to help bridge the water infrastructure funding gap. In part two market-based mechanisms and innovative impact finance and delivery models to improve infrastructure efficiency and community outcomes will be discussed based on success abroad.

Common sense does not seem to be very common these days.

This isn’t an opinion piece complaining about the water infrastructure crisis, or how we’ve got here, it’s about looking forward and tackling the big issue – where else could the money to solve it come from? In recent months, there has been strong industry rhetoric that we’re becoming a nation that is good at talking about issues, but not really solving them. I often wonder if New Zealand’s reputation for bold problem-solving, fueled by our isolation and innovative spirit has faded.

We certainly and proudly aim to lead the world in water management through indigenous values set out under the concept of Te Mana o te Wai; but I think we need to equally examine whether our financial innovation that actually enables this aim is relative to other forward-thinking nations. As an industry are we dynamic, innovative and courageous enough to address challenges such as increased storm severity and frequency; historic funding deficits and policy changes, while simultaneously increasing resilience against floods and mitigating further water quality degradation?

Common sense is using the money we do have, instead of borrowing more. We are a rich country with ample sovereign wealth, so why aren’t we drawing on those funding sources as opposed to burdening ourselves with more international debt? The water infrastructure investment crisis we now face is of a national scale, yet the burden  

History doesn’t repeat, but it often rhymes.

It is obvious to many that land development cannot continue to fund the investment required, as the majority of cost our councils face is addressing aged assets which have suffered from decades of underfunded renewal programmes and merely keeping up with current levels of service targets. We have developed complex procurement models for fairness, but they often hinder bold decision-making and the pace of delivery.

Our councils’ debt borrowing rules also stifle creativity, leading to no one making bold decisions anymore and over-analysis paralysis. In contrast, Australia’s infrastructure sector is more adept at innovative solutions and efficient infrastructure delivery models. Despite valuing democratic processes, sometimes decisive action is necessary.

It had good intentions, but the previous government’s Three Waters Reform will likely be remembered as a poorly marketed piece of legislation perceived by many practitioners (actually in the industry) as a missed opportunity set up to fail. In generalist terms, the perception was the reform would lead to a change of ownership and councils losing control, and increased regulation and a shift toward co-governance with iwi. The key message should have been around debt, but we don’t like to talk about it. Amongst the plethora of financial jargon, unless you were an economist, accountant, or lawyer it certainly was hard for the laymen to understand at times and subsequently, it was those laymen that voted it out.

Now a different shade of grey, the water entities – now council-controlled organisations (CCO’s) are required to choose partners based on their attributes, much like standing against a brick wall in the school yard at lunchtime, brutally waiting to be chosen for a sport team. Undoubtedly some Councils will be left behind, which in most cases are the ones that need the most help. So while the details and name of the water reform changes, I feel that events we’ve already experienced will continue to recycle.

If economies of scale are achieved, CCO’s can then apparently ‘self-source’ finance to increase the level of debt required to fund water infrastructure upgrades. But what does this mean? Where does this debt actually come from? Generally speaking, it means we borrow from overseas debt markets under the watchful eye of the Local Government Funding Agency, but like any loan, it is subject to interest rate fluctuations.

What’s more important, returns or resilience?

I don’t come from a finance background; however, I have learnt to embrace capitalism to better understand how investment decisions are made and to explore how when used sustainably, can enable better outcomes. Perhaps I’m just impatient or idealistic, but I often think our financial sector is too focused on investing for wealth generation and not investing in resilience against climate change and natural disasters. After all, these things we call ‘the economy’ or ‘financial markets’ are merely a subset of much larger uncontrollable forces at play in the natural world; for instance, financial assets like Auckland airport being exposed during heavy rainfall resulting in massive economic disruption.

In the case of water infrastructure, it certainly doesn’t seem that our financial innovation to deliver required upgrades is scaled to the increasing energy of our climate. With the IPCC recently indicating that each degree of warming will lead to approximately 7% more water vapor, resulting in heavier rain bursts, the next 20 years are critical to safeguard our communities amidst uncertainty. Financial institutions such as insurance companies are increasingly becoming exposed to instability of weather events, yet local councils are unfairly lumped with funding the clean-up from flood events with rate payers’ money.

Contrary to popular belief, our infrastructure investment, as a proportion of GDP, is similar to other average high-income countries (about 4.5%). The difference however, according to the 2021 New Zealand Infrastructure Commission / Te Waihanga report (1), is our ‘efficiency’. We seem to get less value from our infrastructure spending than most other developed countries. Overall, the economic return for every dollar spent for us lies in the bottom 10% of high-income countries (illustrated by the graph below). Given our investment levels are in line with other developed countries, this suggests that we might have an efficiency gap, rather than an investment gap. So, what can we do about it?

We need to separate project selection with re-election.

The 2021 Te Waihanga report goes onto say “spending more money does not necessarily lead to useful, high-quality infrastructure if project selection processes do not prioritise value for money, or if delivery agencies have poor incentives to control delivery costs.” Value for money is often disregarded in public infrastructure investment decision-making in favor of vanity projects to benefit existing or attract new voters in key electorates. Countries that experience election to election swings in infrastructure investment are likely to be less efficient, as stop-start investment patterns make it difficult to build capability and capacity to deliver efficiently (2). Sound familiar?

(1) New Zealand Infrastructure Commission. (2021). Investment gap or efficiency gap? Benchmarking New Zealand’s investment in infrastructure. Wellington: New Zealand Infrastructure Commission / Te Waihanga

(2) International Monetary Fund, 2015. Making public investment more efficient: IMF Staff Report. Washington, DC: International Monetary Fund.

The graph above compares the efficiency of infrastructure investment in high-income countries (Source: Te Waihanga analysis).

Let’s move the ambulance.

While funded locally, flood protection schemes as an example don’t just protect local assets. The total estimated national annual benefit of current flood protection schemes highlighted in a report by Tonkin + Taylor in 2018, is a phenomenal $11b each year. This includes protection of crown assets owned by central government such as roads, railways and telecommunications. The consequences of not providing preventative capital to fund critical flood protection works across New Zealand just isn’t an option. It seems a missed opportunity that public and private insurers aren’t investing into natural hazard mitigation projects to avoid one-off after the fact recovery payouts.

The Accident Compensation Corporation (ACC) is our compulsory accident insurer with $47 billion funds under management as of June 2023 (3). In 2021 ACC lent $90 million (4) to a huge private irrigation scheme in Canterbury which during the 2022-2023 season supplied 173 million cubic metres of water – almost twice the capacity of Auckland’s water storage dams – to just 380 (5)properties. Unbeknown to many, ACC has also set up a $100 million “climate change impact fund’’ which to date has invested into a solar farm developer, and a company that extracts protein from crops like lucerne and oats, offering farmers a commercially viable means of reducing their carbon footprint.

As a crown entity I would argue that these types of investment aren’t equitable or essential especially when compared to the health, safety and well-being outcomes that could be achieved for hundreds of thousands of at-risk Kiwis living in flood plains and/or drinking unsafe water if the money was allocated differently. A few hundred million dollars could provide effective injury prevention that would benefit ACC such as stormwater maintenance and urban stream swim educational programmes, helping to fund the removal of forestry slash in flood prone areas, or funding water treatment plants to prevent sickness. Isn’t the tangible, and immediate health, safety and well-being for humans more important than solar panels and carbon farming?

Can KiwiSaver be our savior?

As we recover from the financial hangover caused by the pandemic, it is abundantly clear that the countries who bounced back best were financially independent and more self-sufficient to withstand adversity. New Zealand’s has several private KiwiSaver schemes with billions of dollars available to invest in water infrastructure, but there is no mechanism for struggling local councils to access it. Collectively, our national KiwiSaver fund pushed through $100 billion (6) at the end of 2023, but at times I think this vast pool of wealth is underutilised to build a modern and resilient New Zealand.

Ask anyone in the water sector and they will proudly know that most of our energy production is from Hydro (57%). Despite it being a softer consenting environment mid-century, we have greatly benefited from those decisions, but we ran up large external deficits to make it happen. Now a rich country, why don’t we widen the pool of available capital that already exists in our own country instead of acquiring more foreign credit and interest rate hikes? Direct investment into water infrastructure for Kiwis, by Kiwis.

Other counties with enormous sovereign wealth like Norway and Singapore have used it to transform their nations by channeling it into economy-boosting infrastructure projects like public transport and modern utilities. KiwiSaver fund managers however channel the majority of our savings into bank deposits, government bonds, and shares of global companies listed on overseas share markets. Based on the promising forecasted growth illustrated in the graph below, surely there is capital available to help pay for urgently required water infrastructure?



(5) From CPW website


Forecasted value of KiwiSaver funds under management from financial year 2012 to 2023 (Source: NZ Funds 7 )

NZ Super Fund to the rescue?

The New Zealand Superannuation Fund (NZ Super Fund) is a state-owned sovereign wealth fund set up to partially pre-fund the future cost of superannuation. Now valued at $65 billion (8), it invests the government’s money to grow it over the long term to make future superannuation costs more affordable. Could this be the champion to convince the Government to allow public capital to finance water infrastructure in return for stable, guaranteed, inflation-adjusted returns?

NZ Super Fund’s participation could even depoliticise public private alliances to deliver water infrastructure paid for by revenue bonds, long-term leases to the government, or targeted rates. Why? Because it belongs to everybody. An example are revenue (or utility) bonds; debt backed by revenues from a project, rather than by ratepayers more generally. An example would be a Council issuing a bond to the private sector to build a new wastewater plant, with the investors being paid back by the customers that benefit from that network.

If you want to future proof an economy, it starts at the ground level – it starts with infrastructure. Sure, investing in capital markets (the trade of stocks, bonds, currencies, and other financial assets) plays a vital role in supporting the growth and productivity of New Zealand, but are we too focused on investing into other countries and not our own?  The graph below shows the actual portfolio composition of investments made by the NZ Super Fund, with only 1% invested into New Zealand infrastructure. Whilst infrastructure is commonly seen as essential, the NZ Super Fund 2023 annual report describes infrastructure as “an asset class that provides good opportunities to improve the sustainability profile of our portfolio.” Sustainability profile? Surely our sovereign wealth fund sees infrastructure as being more than just an opportunity to “green” their portfolio by investing in cleaner energy projects?



We need a paradigm shift.

Despite our country having more money than Sir Ernest Rutherford could ever fathom, we still have to think about how we get the most out of it. As examples, there is collectively right now $200 billion across NZ Super Fund, KiwiSaver and ACC. In 10 years, there is forecasted to be $400 billion in KiwiSaver funds alone. I’m not saying that we drain these funds to pay for water infrastructure, I’m merely proposing that even a small percentage coupled with central government spending could be invested to achieve an immediate step change in water infrastructure delivery over the next 30 years. Afterall, these sovereign funds amassed phenomenal wealth over the past 30 years, which ironically was when returns on infrastructure spending decreased in proportion to population growth… Despite this, our National Government Debt has officially reached $165 billion[ (1)in Dec 2023, and it is expected to increase by another $10-15 billion to fund further tax cuts.

Latest estimates indicate our water sector requires between $125 – $185 billion over the next 30 years. A modest 2.5% investment spread across these funds could equate to $5 billion per year – ample to meet the official estimates required. Despite it being quite boring, given the socio-economic benefits that critical infrastructure such as water provides, I’m sure our national productivity and standard of living for all Kiwis will increase. It surely would also alleviate the pressure on local government given their constrained current financing tools and allow them to still deliver other vital services.

The time for reporting and talking has passed. The time for our sector to look at things differently, a long-term, bipartisan, co-investment approach to address the water infrastructure investment crisis we face is right now. If you want to learn more on this topic be sure to attend the ‘enabling investment’ panel at the Stormwater conference on Thursday 16th May in Wellington where we bring together finance and water experts to develop this topic.

(1) New Zealand National Government Debt 2006 – 2023 | QUARTERLY | USD MN | CEIC DATA