By Bruce White
Bruce White Consulting
The New Zealand economy commenced contracting early this year, and all the indications are that the recession is still closer to its beginning than its end.
This recession stems from households having become excessively indebted. Because households are less able than firms to lay off staff, sell assets, or call in the receiver, the adjustment is likely to be protracted. A quick bounce back is not in prospect. Rather, it will be more of a steady grind, as debt is paid down, in the face of falling house prices and less job security. And the recession is global; we are facing strong global headwinds.
To be sure, the usual adjustment mechanisms are kicking in. The Reserve Bank has lowered interest rates, and further reductions can be expected; and the exchange has fallen sharply. But these adjustments may not provide much of a near-term boost. Lower interest rates do not help borrowers who cannot obtain credit at any price, as some will now be finding. And the lower exchange rate, whilst raising the incomes of exporters – at least those whose order books are holding up – also increases the costs facing the rest of the economy.
This outlook has brought to the fore questions about how the government should respond. One thing on which there seems to be broad agreement is that infrastructure investment could have a role, both in softening the recession in the near-term, and in underpinning growth over the longer-run. Both National and Labour campaigned on such a platform.
Executing such a strategy may be easier said than done. For one thing, even though the recession can be expected to be lengthy, the lead times for infrastructure development tend even to be longer. Gearing up in time for additional construction activity to be underway within a year or so will be a challenge, and carries risks. One risk is that a bulge in construction activity will come through just as the economy is getting into its next upswing, and will end up accentuating the next boom rather than softening the current downswing.
Another risk is that haste will result in proceeding with projects that do not stack up. New Zealand has gone down that track before. The “Think Big” projects in the 1980s were motivated by a view that the economy could be given a leg-up by moving quickly to utilise abundant energy at a time of global energy shortage. In that case, haste in entering into investment commitments resulted in badly skewed allocations of project risk – which ended up costing the taxpayer, and the New Zealand economy, dearly.
Using infrastructure developments as a counter-cyclical policy response will demand better capability this time to get the planning and regulatory ‘ducks in a row’. The incoming government has foreshadowed improvements in this area. It remains to be seen whether they can be progressed sufficiently quickly to deliver results within the span of the current recession.
Funding will also be an issue. We are not only in recession, but also are in the midst of a credit crisis. Public-private partnerships will be more difficult to put together, at least for a while. Some of the investment banks that previously have brokered these partnerships currently are scarcely in a position to do so, and market appetite for leveraged infrastructure investments has dried up.
Of course, government borrowing remains a funding option. The fiscal surpluses of the past decade enabled government debt to be paid down to a low level, so there is now some head room for additional borrowing. But that headroom will be limited. We now have a decade of projected fiscal deficits ahead of us, which will need to be funded by borrowing, as will future contributions to the New Zealand Superannuation Fund. And this is all ahead of the looming debt burden that will come with population aging.
One possibility foreshadowed by the incoming government is to fund some infrastructure from, rather than in addition to, the superannuation fund (John Key, Building for a Brighter Future, October 27, 2008). In the face of constraints on government borrowing, there is some logic in such an approach. It is not obvious that it makes sense for the government to borrow to fund, via the superannuation fund, continued accumulation of foreign equities if, at the same time, high-return local infrastructure developments are unable to access credit markets.
But such a shift in the investment structure of the superannuation fund would expose it to risks, particularly if accompanied with directives that resulted, however indirectly, in an erosion of investment discipline. Strong governance structures for the fund will need to be preserved if superannuation for the ‘baby boomer’ generation is not to be undermined by requirements to invest in gold-plated infrastructure for ‘generation Y’. But then, subjecting infrastructure developments to rigorous investment discipline may be just what is required to ensure that the developments that do proceed are the right ones – ones that have a reasonable chance of generating the economic returns required over the longer run.
In summary, the current credit-crisis-induced recession presents opportunities as well as challenges for the infrastructure sector. There is potential for infrastructure spending to soften the downturn, but also a risk that weaknesses and delays in the decision-making will result in projects that are poorly conceived and that turn out to be unhelpfully timed. Capturing the potential the benefits, and avoiding the pitfalls, will require first-class processes – if you like, first class policy infrastructure – for making and executing the transport and communications investments that are envisaged.
Contractor Vol.32 No.11 December 2008 - January 2009
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