In 2004 there was a lot of talk about infrastructure. Among other things we had the government's infrastructure stocktake and the formation of an infrastructure lobby group.

Typically, infrastructure industries are taken to include roads, railways, electricity, water, gas, telecommunications, ports and airports. The definition of infrastructure favoured by the government, however, seems to be ‘everything that the state takes responsibility for'. Listing infrastructure spending recently, finance minister Michael Cullen included prisons, defence force equipment, replacement of hospitals, building new schools, recapitalising a national airline, installing new electricity generating capacity, upgrading the electricity transmission grid, road building and even “saving rail.”

Defence and prisons are genuine ‘public good' activities for which the state must be responsible (although there is no reason why the private sector can't manage prisons under contract). By contrast, many infrastructure industries, like ports and airports, can be run as normal businesses.

In May 2004 the Ministry of Economic Development released a nationwide infrastructure stocktake prepared by PricewaterhouseCoopers. The main areas of concern were security of electricity supply, investment in electricity transmission, road congestion, water allocation problems, and water quality problems. These sectors – electricity, roading and water – have one obvious thing in common: they are all government-dominated. Notably absent from the problem list are the five infrastructure industries dominated by the private sector: telecommunications, gas, railways, airports and ports.

Contrast the situation today with that in the early 1980s. The major problem areas then included telecommunications, ports and railways, all of which were publicly owned. In 1987 there were 15,000 people waiting on average 6 weeks or more to have a phone connected. Our ports and railways were a disgrace. Governments of the time undertook an extensive programme of deregulation, corporatisation and privatisation and the problems of capacity shortages and poor performance have, by and large, gone away.

Few, if any, people complain about under-capacity in telecommunications today. In ports, the only problem is that the job has not been completed: local government ownership has impeded industry rationalisation. The largely privately owned airports like Auckland and Wellington international airports have been stellar performers for shareholders and travellers alike. Likewise, the gas industry is largely privately owned and performing well, although the government seems bent on fixing a problem that doesn't exist.

Rail has been controversial again in recent years. However, for all its faults, Tranz Rail (now Toll) has done a better job than when the business was under government control. The company has at least achieved a better, if inadequate, return on capital. Deregulation of road and rail transport has delivered huge benefits to users and to New Zealand's international competitiveness.

Much has been said and written about public-private partnerships (PPPs). PPPs have been adopted in over 140 countries, New Zealand amongst them. They can be very successful. Contracting out, for example, has been a consistent success story for local government in New Zealand, with cost savings of 10 to 30 percent commonly cited. Experience from the United Kingdom shows how to structure PPPs and where they work best. A critical issue is whether the provider's performance can be adequately defined and measured. Where it can be – as, for example, in the case of prisons – private providers can offer considerable advantages by bringing lower costs and/or more innovative services. However, PPPs can also become dodgy and corrupt where proper processes are not followed or where performance cannot be adequately measured.

Outright privatisation is often a better policy. Why go for a convoluted second-best solution when full privatisation is feasible and known to deliver the goods? Isn't it better that governments focus on what they can do best – setting the rules, ensuring the provision of public goods, and providing a welfare safety net – and allow the private sector to focus on running commercial businesses?

Auckland's congestion problem is a national disgrace. As far back as 1993 the Business Roundtable released a major study on options for roading reform in New Zealand. The solutions advocated were not radical or complex. They are simple and are now well tried around the world. Firstly, build more road capacity where it is economically justified; secondly, face users with the true costs of services by introducing economically efficient pricing; and thirdly, put the management and operation of roads on a similar basis to other utilities like telecommunications, and extricate it from political control.

Other countries are getting on with privatisation. New Zealand is going in the opposite direction, with over $5 billion of assets renationalised in the last few years. We are the only country in the OECD with a blanket ban on privatising SOEs. This is despite the overwhelming evidence that the private sector is better, on average and over time, at running commercial businesses than the public sector.

In relation to infrastructure, the OECD has recommended the New Zealand government drops its ideological opposition to further privatisation, focuses on reform of roading management rather than on rail or public transport, and addresses the problems of (government-induced) uncertainty, creeping regulation and the impact of the RMA. Most of the changes required to promote better infrastructure can be summarised simply: more private enterprise and less government.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz