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From the Exosphere

Infrastructure Investment and Inclusive Growth

With Patrick McVeigh

This article was first published in the Mahi Tahi Journal by Economic Development New Zealand on 13 May 2019.

Infrastructure investment is a topic that is currently front and centre in the mind of New Zealand’s economic development community. The creation of the New Zealand Infrastructure Commission as the recently announced Construction Accord highlight’s the critical role that infrastructure has to play in improving the nation’s long-term economic performance and social wellbeing.

In addition, as regions across New Zealand continue to explore opportunities associated with the Government’s Provincial Growth Fund, it is apparent that in many parts of the country there will be new investment that offers the potential to bolster economic growth and unlock new jobs. If the benefits of this investment are fully captured, this investment can deliver more inclusive growth that benefits all communities.

The need for more investment in infrastructure is an issue for all countries — globally the infrastructure gap is growing. Image: Unsplash

Infrastructure takes many forms, including transport, technology and telecommunications, housing and accommodation, commercial and industrial land, energy and utilities, education and health. Together, these key assets are enablers of all economies. Without them, sustainable long-term growth is a challenge.

Infrastructure is also critical to enabling trade and building resilient towns and cities. The infrastructure sector is an important employer, providing jobs and supporting deep supply chains that create further opportunities for large and small businesses alike.

Infrastructure investment clearly has an important role to play in facilitating inclusive growth, however, inclusive growth outcomes cannot be taken for granted and economic development practitioners have a critical role to play in fostering the conditions that will support these outcomes.

A global issue

The need for more investment in infrastructure is an issue for all counties — globally the infrastructure gap is growing. In 2016 the McKinsey Global Institute (MGI) estimated that there was a need for an average investment of $3.3 trillion a year through to 2030 to support economic growth projections, and that there was an annual shortfall of some $350 billion (McKinsey Global Institute, Bridging Global Infrastructure Gaps, June 2016). In America, it has been suggested that traffic congestion alone accounts for a loss of $120 billion a year and that addressing the overall infrastructure deficit would require an investment of almost $2 trillion over 10 years (ASCE, Infrastructure Report Card, 2017).

The need for investment is clear, as are the potential benefits that could be realised. The MGI report for example estimated that “every dollar of infrastructure investment can raise GDP by 20 cents in the long run by boosting productivity”. We also know that infrastructure investment creates new jobs, both directly and indirectly, and spurs further economic growth at the national and local level.

Despite this, we continue to under-invest in the very thing that will make our economy more competitive and resilient. Across New Zealand the infrastructure deficit is recognised as a brake on economic growth and a dampener on productivity improvement. The costs of insufficient or inefficient infrastructure are driving up transportation and housing costs, reducing quality of life, driving up wages, and generally increasing the cost of doing business. Look at just one dimension, congestion, in one city, Auckland — in 2017 it was estimated that congestion was costing the city up to $1.3 billion in lost GDP each year (NZIER, Benefits from Auckland Road Decongestion, July 2017).

Grasping the current opportunity

Despite the challenge of under-investment there are some signs of progress. The coalition Government has committed to investing an estimated $129 billion in capital projects between 2019 and 2029. For a country of only 5 million people this is a significant amount. The establishment of an independent Infrastructure Commission is a welcome addition and also through NZTE there is active promotion of regional and sector opportunities to overseas investors. On their own, however, these initiatives will not be enough.

Globally, there is also an increasing need to look at alternative forms of infrastructure provision, and at business models that could be deployed to enable and accelerate the development of critical infrastructure to support inclusive and sustainable growth. Across the world, governments have variously implemented different models that seek to spread the cost and accelerate the delivery of infrastructure projects. There are opportunities to learn from these experiences, sharing what works and being conscious of the challenges and risks.

In particular, there is a need for a considered conversation about how central and local Government can partner effectively with the private sector. Much has also been said about the fact that global capital is actively seeking investment opportunities and that global growth, and particularly ongoing urbanisation, is creating new investment opportunities in urban infrastructure, real estate, consumer goods and services, and agriculture supply chains (PGIM, The Wealth of Cities, The Investment Implications of Urban Expansion).

Without infrastructure, sustainable long-term growth is a challenge. Image: Unsplash

We are also in danger of ignoring lessons from overseas and considering how they might support inclusive and sustainable economic growth at both a national and local level. The City Deal model, which has often been discussed but never adopted in New Zealand, has coupled increased investment in infrastructure with measurable commitments to job growth and productivity improvements. The model has been widely used in the UK and has become an increasing feature of the Australian infrastructure scene, with seven city deals already in in place and a further two under development.

Unlocking mobile capital

Given the acknowledged infrastructure deficit, it is also clear that there is also a need to ongoing private sector investment in our cities and regions. However, to unlock mobile capital there is a need to consider the investor perspective and what makes any location attractive to them. There is evidence that investors see these four factors as most important (Centre for Cities, What investors want: a guide for cities, July 2017):

  • A strong and growing economy, with a skilled labour force and a track record of growth and resilience
  • A well-functioning transport system, with excellent connections and plans to improve and maintain investment
  • Leadership that is pro-growth and pro-investment, with credibility and a good reputation with industry
  • Local partners and organisations who are focused on delivery, with the right skills and experience and with supportive planning systems that are open to growth.

These are critical issues that deserve more attention when we are considering how to address the global infrastructure deficit. However, in unlocking private capital, governments also need to strike a balance between attracting private capital on the one hand, and on their other their wider wellbeing objectives, recognising that one of the key outcomes from new infrastructure should be more sustainable, resilient and inclusive economies.

Meaningful employment outcomes and business opportunities

If we are interested in inclusive growth outcomes, addressing the infrastructure deficit also needs to include the creation of more meaningful employment outcomes, as well as market and supply chain opportunities for local and small businesses.

Across New Zealand, as we embrace the current commitment to investment in infrastructure and addressing the structural and regulatory challenges across the construction sector, we must also remain focused on leveraging this investment to create long term, sustainable and inclusive growth. In planning for infrastructure and in ensuring that the benefits accrue to all communities, we need to take active steps to train workers for future jobs, to open up procurement, and to better connect with those communities that have not necessarily benefited from previous economic growth. This needs to be a shared challenge for the public and private sectors, for communities and for New Zealand’s economic development community.

About the author

Patrick McVeigh has more than 25 years’ experience working across the public and private sectors in strategy development, policy formulation, research and evaluation, scenario planning and visioning. He has delivered a broad range of projects in a variety of subject areas and locations, bringing high-level political understanding and finesse. Patrick is a hands-on practitioner who focuses on the client’s needs.

Patrick’s strong consultancy background is based on eight years’ experience in public policy and economic development roles in London, where he worked with clients in local, regional and central government.

Patrick has a BSc in Town Planning Studies, a Post Graduate Diploma in City and Regional Planning (Distinction), and a Post Graduate Diploma in Social Science Research Methods — all from Cardiff University.

Patrick McVeigh

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From the Exosphere is a platform for sharing thoughts from the team at MartinJenkins. The exosphere is the last layer of atmosphere before space, offering an unrivalled view of our blue planet and where we might go next.

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