07 September, 2023

How far New Zealand's land transport funding system has fallen. Part 3: What could fix it?

To establish how to fix the land transport funding system you first need to define the objectives of the system, and what outcomes are sought.  At present the system largely leaves this to the Minister of the day, but should funding for maintenance of the road network be politicised? It is in multiple jurisdictions, such as virtually all US states and the UK (and effectively now, NZ), and it is a disaster. Indeed look at other infrastructure sectors and what role do Ministers have in deciding where capital investments are made?

For airports and ports, this is left pretty much entirely up to the Boards of the respective airport and port companies to decide, representing their shareholders (which for airports are typically a mix of private and public owners, and for ports are almost entirely regional council owned).  In both cases as well, airport and port companies finance capital investment from borrowing, and recover the costs of that investment from usage fees of their customers (airlines, shipping companies, but also for airports, retail concessionaires, car park users and other users).  It wasn't always that way.  Ports used to be Harbour Boards which were elected. Major airports as authorities couldn't raise capital readily, hence why Wellington Airport had a reconfigured De Havilland aircraft factory as its major airport terminal from 1959 until 2000, as central government and Wellington City Council pointed to each other as being to blame for not funding a new terminal.

For other sectors, such as electricity, again generation, transmission, distribution and retail is all commercialised, with pricing a mix of market driven for competitive sectors (generation and retail) and regulatory oversight (for transmission and distribution) as natural monopoly sectors. Once more, it is expected that consumers will pay for capital investment which is paid for by debt.  Again, this has served consumers well, balancing out the risk of gold-plating capital investments with the risk of underinvestment in maintenance and renewals.

Water is quite different. With the exception of Watercare Services (and that is for fresh and wastewater not stormwater), the sector is characterised by a great deal of underinvestment in maintenance and renewals, because territorial authorities are responsible. While some water services are corporatised within the bounds of territorial authority ownership, they are limited in their capacity to borrow, and although they may price use, most do not.  With direct political control of investment, as has been the case for many decades, New Zealand is reaping an enormous backlog of renewals, and the effects are seen with raw sewage emerging on some streets or unsafe drinking water.  Leaving aside the merits or otherwise of the Three Waters proposals, behind them is abject failure of having political direction in capital investment and renewals in water, and ever moreso, a lack of link between how water is paid for (which more often than not is through rates, not user charges) and the use of revenue raised for this.  

So political direction over day-to-day, core spending on the road network is unlikely to deliver and sustain the levels of maintenance and renewals needed that should be utterly uncontroversial. In fact, the system should encourage optimising the amount of spending on maintenance and renewals over the long term, so funding is available for capital improvements.  This is exactly why the system was reformed in 1993, because as Finance Minister, Ruth Richardson's first budget in 1991 slashed funding to Transit New Zealand, as the land transport funding agency, which saw maintenance spending cut significantly (and capital spending cut almost to nothing).  The effect of this was to generate a maintenance deficit that took several years to reverse, so from 1993 Transit New Zealand was guaranteed 97% of the funding it received the previous year, to acknowledge that most spending was, at the time, maintenance (and there was no hypothecation of road user taxes at the time).

Beyond maintenance and renewals, the system should enable efficient investments in improvements to the network that represent clear benefits to those paying for them, which ought to reflect not just benefits monetised in travel time savings and reduced fatalities and serious injury accidents, but also user preferences overall.  For example, in the 1990s it was very clear that road users wanted more passing lanes on rural highways, because one of the biggest issues was having journey times frustrated by significantly slower vehicles (and the risks a few motorists would take to overtake where it was not safe, risking not only them, but innocent people travelling the opposite way). The system should reflect those preferences and should seek to lower the costs of using the network, costs seen in travel times, fuel used and most importantly, from accidents, which don't only hurt those directly involved, but affect the resilience of the network due to closures.

As long as the funding system is dependent on what are essentially taxes on distance travelled, fuel used and vehicle ownership (RUC, FED and MVR) to raise revenue, and with such charges set nationally, then it is understandable that there will be an appetite for Ministerial direction as to overall strategy.  However, if that is likely to result in undermining efficient spending on the network (much of the useful spending is on small to medium scale projects costing <$50 million), it is preferable that funding to expand or enhance the network beyond what users are prepared to pay, comes directly and transparently from general taxation funding.  This would be subsidising capital expansion of the network, but it is worth noting that almost all capital spending on Kiwirail is exactly of this nature. Kiwirail is basically unable to raise revenue from its customers to the extent needed to significantly upgrade most of its network. If Ministers wish to use general tax money to subsidise enhancing the rail network, then it is reasonable to expect them to do it to the road network, although there ought to be a high standard of transparency as to the net benefit of such spending, to ensure taxpayers are not having their money shredded on poor quality spending, which they may prefer spent on other sectors, or simply returned to them in tax cuts.

While there are likely to be many options to reform the system, there are some characteristics of a better system that ought to be elements of any reform. Reform should reflect where the revenue comes from, how funding is allocated and how infrastructure is managed, so my thoughts are categorised along those lines.


Perhaps the biggest limitation of the current system is it doesn't enable pricing to vary in ways that can manage congestion, encourage more efficient vehicle use of the network and equally as importantly, send signals about whether future spending should be directed, based on demand.  No country has implemented a nationwide road pricing scheme that does this (although Singapore's Electronic Road Pricing system operates an excellent congestion pricing scheme that effectively manages congestion on the routes it operates on).

While New Zealand's existing Road User Charge (RUC) system is much more sophisticated than most road charging systems around the world (including Australia, the UK and most US states), half the vehicle fleet will still be on Fuel Excise Duty (FED) for some time. While together they form a useful system for user pays in the National Land Transport Fund (NLTF), the funding system should evolve towards pricing, set not by politicians, but by road managers, with suitable regulatory oversight. A system that requires Cabinet decisions on pricing is completely incapable of being responsive to changes in behaviour, and local conditions. Most other pricing elements in transport are not subject to such centralised control, so a goal should be to move towards better pricing over the next decade or so.

In the short term this should mean enabling more tolling and congestion pricing for major cities and reform of RUC to better accommodate a significant growth in the number of light vehicles. This should be led by an agency dedicated to charging road users and spending their funds on their behalf, with an interest both in efficient revenue collection and sending appropriate price signals. Longer term the system should accommodate road manager setting prices directly, and offering a range of options to motorists as to how they want to pay for road use. This has to mean pricing varying by location, whether by region, road type or demand, and time of day. 

Related to this is the role of ratepayer funding of local roads, including cycleways and footpaths. The Shipley Government proposed replacing ratepayer funding with full funding from RUC and FED, so that motorised road users paid for all roads (although not footpaths). Another option would be to replace general rates funding with fees charged for connecting private property to local roads (whether garages, driveways or car parks) and footpaths, supplemented by revenue from parking or leasing out road space for other purposes (e.g. outdoor restaurant or properties bought for future road expansion).  In any case, the current system limits the scale and scope of local road improvements, and should be reviewed.

Track User Charges charged by Kiwirail for use of its infrastructure should not go to the National Land Transport Fund, only to be returned to Kiwirail. These should be subjected to appropriate regulatory oversight and transparency, if only to ensure Kiwirail doesn't discriminate against potential rail-based competitors, but there is no reason to blend rail and road user revenues.  If Government wants to subsidise rail, it should do so much more transparently and directly.  Kiwirail should set Track User Charges with regulatory oversight, and if it is not structurally separated between infrastructure and service provider, it should be subject to robust information disclosure requirements supervised by either the funding agency or the Commerce Commission (as is done for airports).

Finally, given current political commitments to several large road and public transport capital projects, Crown funding for projects that are not able to be supported or financed from the NLTF (after maintenance and spending on higher net benefit capital projects) should be entirely separate.  The funding system should prioritise maintenance, operations and the highest value capital projects first, which might include some politically identified projects anyway, but if not, then the funding system should clearly identify how much money has to come from general taxation to support politically determined projects.  There is alway the risk that such projects get cancelled after changes in Government policy, but this should not undermine maintenance or other capital spending supported by road user revenue.

Related to pricing of road users, is pricing of public transport users.  There should be a clear basis for the proportions of cost recovery expected from public transport users through fares, the proportion to be supported by road users (because public transport can benefit road users in specific circumstances), the proportion to be supported by local ratepayers (recognising that property owners may benefit from public transport services) and any funding from general taxpayers (for social based policies, like concessionary fares). Road users should pay for road user benefits. Passengers should pay for private benefits, and anything else should be transparently paying for either social policy (targeted subsidies) or advancing urban form and property development (rates).


Long term the funding system should mean road managers charging customers directly and maintaining and developing road networks by being responsive to the needs of users. This also includes maintaining and developing alternatives to roads, in the form of efficient public transport, cycling and walking infrastructure and freight alternatives such as rail and sea freight, with the emphasis being on efficiency.  Maintaining and developing such projects should be based on a robust appraisal of the likelihood to attract traffic from the roads, reducing congestion and other externalities. 

This means applying principles of economic efficiency to reducing travel times, improving trip reliability, improving access and reducing negative externalities (particularly reducing fatal and serious injury accidents, but also reducing environmental impacts). By applying economic efficiency it means that revenue from road users is directed first to activities that mean the network is efficiently maintained, and improvements have net benefits to users and society as a whole. Until road pricing enables road managers to be funded directly from customers, the funding system should buy road services on behalf of motorists based on proposals from road managers. 

To enable this, the funder should be separate from road managers, so that the funder can manage the NLTF prudently and audit the performance of road managers in managing maintenance. This should also include funding, as appropriate, large scale renewals and long-term performance-based maintenance contracts if they minimise life-cycle costs and optimise performance for road users (minimising potholes and maintenance requirements).  This should be outside any political direction or interference. Similarly, the system should allocate remaining NLTF funds on the basis of economic appraisal that values what road users value, being travel time savings, reducing fatal and serious crashes, improved trip reliability and lower vehicle operating costs.  This should be driven by road managers seeking to enhance their networks for their customers.  Output classes defined by the funding agency for road maintenance and capital improvements, and then funding of alternatives to roads for public transport, cycling, walking and other modes if they generate net savings for those paying into the NLTF.

A long standing flaw in the current funding system is the insufficient use of debt financing to spread the cost of capital projects across their depreciated life. While PAYGO is a suitable tool for funding maintenance and operating subsidies, finance should be the tool for most capital investment. To enable this either the funding agency should be empowered to borrow against future road user revenue, or road managers should be structured to enable them to do so (which would require the funder to guarantee a flow of revenue to the road manager). For Crown funded projects, this will mean the Crown providing the cashflow for such projects.

The end result should be that (leaving aside how the local share, if any, of local projects is funded) road managers, and public transport authorities are funded from the NLTF for activities that deliver the greatest benefits to road users.  For activities beyond the capacity of the NLTF to fund, the Crown can step in to inject funding for specific categories of projects, which would not push aside the priorities of the system more generally. The Minister could not defer or cancel road or public transport projects or maintenance to redirect funds to a pet capital project, but could only seek funding for a pet project from the standard budgetary process. That keeps funding transparently separate from the core land transport funding system. It means that network maintenance cannot be neglected, nor can long-planned for, high-value capital projects be deferred out of political whim (though they may be deferred due to cost-escalation or if changing demands reduce the net benefit of such a project). 

If National or Labour are elected and want to build project A or B, and these are not already provided for in the NLTF, the choices would be to either check with the funder as to whether increases in existing motoring taxes would make such a project fundable (along with many others), or to simply grant general taxpayer funding for such an activity (taking advice from the funder and the relevant infrastructure manager as to its impacts on other projects). Of course a similar option is available to local authorities who want to fund projects outside the NLTF altogether, with ratepayers' funds.

In short, it partially returns the system back to where it was pre-2008, but with clarity and transiency between what is Crown funded and what is not.  Ministers may choose to fund more, but they could do cancel projects that the road manager wants, that is assessed as being efficient and a good use of NLTF funds by the funding agency. 

Finally, Kiwirail should be taken out of the NLTF land transport funding system, as an infrastructure provider. Although there should be transparency and oversight of Track User Charges, there is no clear public policy reason why Kiwirail should be paying Track User Charges into the NLTF and then receive funding back from it. Where Kiwirail should be, is where road manager ought to be in the medium to longer term. It sets charges for users of its infrastructure, with regulatory oversight, and receives revenue from them to maintain and develop its network.  If Ministers want to fund greater levels of capital investment, or to subsidise maintenance, it should come directly from general taxation, and be an explicit subsidy. It may be preferable to simply subsidise services and include the full cost of infrastructure maintenance and upgrades through such subsidies, so Kiwirail could not submit proposals for capital projects without assessing the expected revenue from customers to pay off debt accrued for such projects.  The NLTF funder could have a role as economic regulator of Kiwirail, or such a function could go to the Commerce Commission.

What about funding of public transport, cycling and walking infrastructure?  This could be split into three sources (on top of fare revenue):

  • NLTF funding for projects and activities that deliver net benefits to motorised road users, shared with local authorities according to the proportion of such benefits attributable to road users;
  • Separate Crown funding for projects that deliver net benefits to the community at large (such as encouraging housing development, or the health benefits of active modes), which may be shared with local authorities depending on the type of project and objective;
  • Local authority funding for projects to be funded from ratepayer and other local authority resources for purely local purposes.

Implied in these suggestions is some significant structural reform of the sector. Waka Kotahi/NZTA's existing functions may be divided between two or more entities. Certainly State Highway management should be separated, into a corporate structure as seen in England and Austria.  The funding and regulatory activities may be split or retained in a single entity.

Road (and rail) infrastructure managers should be statutorily required to maintain, plan and develop their networks to be user responsive, economically efficient and to reduce negative externalities within the bounds of the first two principles. They should be encouraged to be innovative in maintenance, design, contracting and operations, and to use technology to improve productivity, efficiency and safety.  For local road managers especially, the system should encourage consolidation of road managers, to achieve not just economies of scale, but a critical mass of capacity, capability and experience in management and contracting.  There should be fewer road managers, but they should be more efficient and dynamic, and the funding system should either incentivise or require establishment of structures that reflect this.  Local government could be encouraged to develop proposals to consolidate road management across regions, to deliver efficiency savings in maintenance and better standards of performance, and enable entities with capacity to borrow against future revenues.  If local government cannot come up with appropriate options within a couple of years, central government should develop them for it.  

As for public transport authorities (mostly regional councils plus Auckland Transport), a major focus should be on planning and contracting the delivery of services to customers. Consideration might be given as to whether regional councils are the right entities to plan and contract for public transport, when many of the less metropolitan ones are primarily water-catchment and rural environmental management agencies.  There needs to be more accountability for performance, more responsiveness to users and better capabilities in contracting, and where relevant, asset management. For example, shouldn't Greater Wellington Regional Council be developing the land over suburban railway stations? If not, should the assets be transferred back to Kiwirail to do this, or to a separate infrastructure management entity? 

Other options?

The old Transfund, Transit model had some major limitations. In particular, it couldn't debt finance major capital projects, it did not incentivise better pricing, and was constrained in its capacity to fund larger projects, but it did ensure greater scrutiny on spending and was less amenable to political redirection of funding away from maintenance.

The Better Transport Better Roads proposal from the late 1990s would have transformed the road sector, by corporatising road management and enabled road companies to contract out of nationally collected motoring taxes. However, it did had significant pushback from local government, and did not have a sufficient strategic vision for how public transport would fit into a future before road pricing was widely introduced.  It was clear that public transport in Auckland and Wellington needed significant capex and it did not sufficiently enable it.  However, it would be entirely possible to reform road funding and management, and maintain public transport funding as part of a separate system.

What isn't a good option is to retain the status quo. Whatever the next government does, it shouldn't simply amend the GPS, it should rather develop a revenue, funding and management structure for roads, and for public transport, that is economically sustainable, and delivers better outcomes for users.  The only economic infrastructure that appears to be worse managed is the water sector, largely because it has for so long been left to local government to do largely what it wanted, with accountability solely vested in local politicians.  

The time for tinkering is over.  New Zealand has had 15 years of highly politically driven land transport funding, and the results have been mixed, and the end state today is a system that is less efficient, less dynamic and financially overstretched.  It's time to take its core (the NLTF) out of the hands of political horse trading, let politicians choose to add funding from general taxes if they so wish, transparently and accountably, and let the system be built primarily by what users pay and want, and only topped up by what politicians get a mandate to add.

Perhaps a National/ACT Government would see a few more major state highways built, or a Labour/Greens Government a few more railways and some light rail, but in neither case should it be at the expense of road maintenance and a long-term programme of efficient capital improvements to the road network, based on road managers developing comprehensive corridor strategies.  

30 August, 2023

How far New Zealand's land transport funding system has fallen. Part 2: What's wrong?

Nobody can really claim that there is any such thing as a perfect land transport funding system in existence, although elements of systems in different jurisdictions can be seen as better than others. As New Zealand reformed its system in the late 1980s through 1990s a lot of limitations of the previous system were addressed. Before those reforms road maintenance was funded more haphazardly, Governments would pick projects in part based on the electoral advantages seen (at one time the Chairman of the National Roads Board, who was the Minister, made sure his electorate got the projects it wanted), projects were advanced based on the capacity of the Ministry of Works to build, and without a hypothecated roads fund, funding competed with hospitals, schools and other activities.  Some of these are disadvantages seen in other jurisdictions. Australia's federal Government has long funded projects based on Cabinet's assessment of the political advantage of some projects over others. In the United States despite hypothecated roads funds, politicians regularly pick high value, high profile projects to be funded over road maintenance, and the results are seen in many states (although some states are rather good at prioritising maintenance). 

For a while New Zealand looked like it had overcome these two big disadvantages. It had a system that did not struggle to pay for road maintenance, that would fund capital spending after maintenance, based almost entirely on appraising the net economic benefits of proposed works, and although it would be unable to fund all proposals for capital spending, it did mean that high value projects were advanced. While Ministers would send unofficial signals about preferences through board members, this would not be able to get low value projects advanced over high value ones, but rather tinker on the edges. If there were two high value projects at the threshold of funding, then maybe one got preferred over the other, but at a BCR of 5:1, it hardly mattered overall (other than the system ought to have had capacity to fund both with that rate of return).

The genesis of the changes was what was called the "Next Steps" review of the land transport sector at the tail end of the Clark Government.  When the Bill was introduced by Associate Transport Minister Harry Duynhoven he said that merging Transit New Zealand with Land Transport New Zealand would "integrate decision making and improve accountability", quite how was not clear.  Land Transport New Zealand and Transit New Zealand were merged, in part because it was thought there would be efficiencies through "reduced bureaucracy", although a review of the annual reports in 2008 for Transit New Zealand and Land Transport New Zealand for personnel costs, and then 2010 for the NZTA, showed around a 25% increase.

The 2008 personnel budget for the two separate agencies combined was just short of $80m but in 2010 the merged NZTA had personnel costs of just over $100m. While some officials in Treasury superficially thought a single larger bureaucracy is more efficient than several smaller ones, what is forgotten is that the separate of funder and provider generated incentives for better efficiency than combining the roles.

The funding system was previously managed by Land Transport New Zealand (previously Transfund), which would prudently manage the NLTF and although it would accept some direction of priorities, it would warn that it could not fund projects for which there was insufficient revenue from the NLTF, or additional Crown funding, and it would not expand the scope of the NLTP in ways that would generate such a large deficit over subsequent years.  In short, it wanted to be able to spend as much as possible on high value projects, and it also scrutinised administrative budgets for Transit New Zealand (and local authorities for their road and public transport management functions). Transit New Zealand was also aware of this, and knew that it would be held accountable if its proposal for funding was seen to be excessive. Although the merger was intended to include safeguards to ensure accountability, the incentives simply were different.

However, the merger in itself whilst poor public policy was only part of the issue. The creation of the Government Policy Statement (GPS) process to direct funding is where the biggest inefficiencies arise.

The press release on the Next Steps review talked about the state sector being more collaborative and cohesive and delivering value for money, but was unclear how having the Minister dictate what money should be spent on, and how much would be spent on each output class would ensure value for money.  Indeed, it appears to have been obfuscated largely because the reforms were really designed to subvert a system that worked to limit direction of funding to inefficient capital spending. 

So rather than using Crown funding to fund specific lower value projects (which is of course what happened eventually), the NLTF was used to direct funds from higher to lower value activities. 

Instead of having statutorily defined objectives (which were previously to fund a safe and efficient road system), objectives could pivot according to Ministerial preferences.  Since 2008, there have been four distinct versions of this.  Output classes would not be defined by an assessment of how best to prioritise spending of maintenance over capital, and the classes of capital spending based on assessment of proposals from the state highway manager and local government, but based on Ministerial priorities. Finally, a system designed to not fund specific projects, is now able to specify projects that should be given consideration when funding.  

With the GPS changing regularly the effects of this on the efficiency of the system are fairly obvious.

The effects of these changes are palpable and directly responsible for years of deferred maintenance as funds were redirected from maintenance to capital under the previous Government, and more recently generating higher cost inflation as large projects were cancelled and then re-started, but with Crown funding.

Essentially by the late 2010s the scale of political ambition was such that the NLTF could not accommodate funding road maintenance, road capital spending (even on a reduced scale) and large scale public transport infrastructure spending, so the response was to allocate funds from general taxation (Crown funding). 

Indeed it is the scale of Crown funding that is demonstrating how broken the system has become, there is now more Crown funding each year in the NLTP than there was total NLTP funding in 2018. 

The Cabinet Paper for the latest draft Government Policy Statement (PDF) (GPS) indicates that there is now a deficit in the National Land Transport Fund (NLTF) of $5.3b in the next three years for what is called "essential expenditure", being road maintenance, maintaining public transport subsidies and commitments for new works already underway and servicing debt.  The reasons for this are a mix of factors that are largely outside the control of the current government:

  • Costs of deferred maintenance that occurred under the previous National Government (a problem which occurred after 1991 when budgets for maintenance were cut severely as part of the "Mother of All Budgets" of Finance Minister Ruth Richardson that year, which was the reason why subsequent years of land transport funding guaranteed 97% of the previous year's revenue to avoid further deferred maintenance);
  • Increased interest on debt for PPPs and Crown debt projects (which ought simply to have been factored into forecasts);
  • Significant inflation in road construction and maintenance (stated to be 45% over an 18 month period, covering labour and materials);
  • Increased weather-related maintenance (including storm damage);
  • Downwards revenue projections due to decline economic growth;
and those that are entirely within its control:

  • No increase in RUC and FED since September 2020 (despite inflation);
  • Increase in the scope of activities to be funded by the NLTF (specifically adding rail and coastal shipping);
  • Greater demand for more spending (and a political willingness to respond to that demand);
  • Increased political "ambition" to fund resilience, safety and public transport projects;
  • A "bow-wave" of approved but delayed projects due to the pandemic.

So the system itself now enables the Minister to defer essential spending on maintenance, to increase demands for spending, including approval for projects for which there is insufficient revenue to fund it, and of course for Cabinet to not approve additional revenue from the motoring taxes that fund most of the National Land Transport Programme (NLTP)

The latest draft GPS notes no fewer than 21 different activities to receive direct Crown funding, including activities that are part of a much wider programme of work (such as the NZUP) and those that are highly specific such as Auckland Light Rail specific planning.  It comes to over $4b in the 2025 year alone. All in all between 22-27% of funding in the NLTP for the first two years of the GPS comes from general taxation.  While it may make sense for NZTA to manage the allocation of those funds, it blurs its overall funding role, which is primarily to allocate funds from the NLTF to maximise value for money against the Government's objectives, but now is also to deliver specific activities for which there is Crown funding.  

There are now more objectives in the draft GPS than before:

  • Maintaining and operating the system (which should be without question, it is indicative that it has to be mentioned to be a priority)
  • Increasing resilience (there used to be specified emergency works funding to partly address this, but resilience ought to be part of prudent asset management in any case)
  • Reducing emissions (noting that unless the number of emissions units available under the Emissions Trading Scheme are also reduced, it can't actually reduce emissions as they become available for purchase for another activity)
  • Safety (now defined as making the system substantially safer for all, rather than the previous "zero deaths and serious injuries" objective, which was a copy of similarly fanciful ideas from some European countries)
  • Sustainable urban and regional development (which is code for funding alternatives to driving); and
  • Integrated freight system (described as "well-designed and operated" transport corridors, although it unclear what any of this means in practice).
Somehow, NZTA is meant to fund to meet all of these objectives, which previously would largely have been delivered through the old system of prioritising road maintenance and public transport subsidies, then funding efficient capital spending (which would include safety, resilience and projects that reduce externalities and travel times).

However, the Minister has also expanded the list of output classes. The land transport funding system used to fund maintenance of state highways and local roads, public transport services, capital improvements and renewals of state highways and local roads and public transport infrastructure. Walking and cycling improvements appeared around 20 years ago, but in more recent years coastal shipping, rail (which means rail infrastructure not public transport) and now inter-regional public transport (which means rail, as there is nearly zero chance of inter-regional bus, ferry or air services being funded).  

Reforms only three years ago now mean that Kiwirail pays Track User Charges into the NLTF, set at a rate well below the marginal cost of maintaining the rail network. Then NZTA funds Kiwirail to maintain and upgrade its track infrastructure, in part funded from the NLTF (not separating out revenue from Track User Charges from revenue from motorists) and in part from the Crown.  This accounting exercise seems to deliver little public policy purpose. It does not create a "level playing field" because Track User Charges are not set on the same basis as Road User Charges, but it also does not incentivise Kiwirail to provide access to its network on easier terms, because the funding it gets from the NLTP is not directly dependent on Track User Charge revenue.

Of course the Minister has also specified the upper and lower bounds of spending by output class, which itself adds to the inefficiency of spending. Some of those ranges are enormous. In 2026/27 funding for rail could be anywhere between $180m and $620m, but coastal shipping has only a range of $5m. Public transport infrastructure could be $520m or $1.01b.  While all of this allows some funding to vary across output classes, it is likely to be more efficient to give an indicative number and leave it to NZTA to decide how best to spend available funds against the objectives.

There are other objectives though.  Following on from the Roads of National Significance of the previous National Government, is the new Strategic Investment Programme, which is a wishlist of projects which NZTA should give "particular consideration" of their "strategic importance" in NLTP development.  The Minister having already decided that these projects will contribute to the Government's strategic objectives.

In short, it is a wishlist of politically defined projects to be advanced regardless of their actual relative net benefits.

So New Zealand now has a funding system characterised by:
  • A crisis in funding of road maintenance
  • Regularly changing objectives according to political whim
  • An ever growing and changing list of output classes according to political whim (with funding moved between them every few years, in part to reflect changing political optics)
  • Funding levels by output classes to meet the political ambitions of having such output classes in the first place (see "inter-regional public transport" which literally means two trains (Hamilton-Auckland and Palmerston North-Wellington)
  • A wishlist of projects of mixed value which are basically expected to be funded.
It also continues with key flaws identified in the 1990s. These include:
  • Most capital funded from cashflow (although a proportion is now debt funded);
  • Poor capacity to fund large capital works (unless funded directly from general taxation or borrowing on a case by case basis);
  • Little incentive to achieve economies of scale in road maintenance and operations through consolidation of the over 60 road controlling authorities;
  • Next to no pricing signals on road use (largely confined to the structure of Road User Charges encouraging use of heavy vehicles with additional axles) and little prospect of better price signals in the next three years;
  • Little scope for the inputs of users and their preferences to be taken into account in funding decisions;
  • Local government road improvements heavily constrained by the need for significant ratepayer funding (but not for walking and cycling improvements which can receive up to 90% financial support which conversely risks development of proposals with little local authority accountability for performance);
  • Limited scope for innovation in delivery and operations.
If the Government changes after the general election, expect a completely different GPS. Presumably it might look more like the ones produced under the Key Government, which prioritised productivity and economic growth, and would further restructure output classes and funding levels, and a different set of priority projects.  However the system will remain unstable, in that much funding will come from the Crown.  There will remain poor incentives for efficiencies at NZTA and local government levels, and limited scrutiny of the net benefits of strategic projects.  Furthermore, another six or nine years later, it could all be altered again (if not in three years) as Ministers and Governments change, and the political winds shift towards new priorities (and funding swiftly cut from old ones).

It is a system that treats motorists as simply revenue sources, not as customers who might expect a basic level of service for what they pay for. It treats the suppliers of roads (NZTA and local government) as essentially bureaucracies that provide what they think road users should receive, and the link between what motorists pay and what they get has become increasingly blurred as the NLTF revenue is outstripped by demand. Is user pays no longer seen as important in road funding? It certainly appears to have been significantly eroded for rail funding.

The funding system does not incentivise efficiencies in maintenance or construction, let along usage of the network, and rather treats road user's taxes as a fund to be used according to political whim, and to be topped up by general taxes as it all gets too hard. Ironically, road spending has not been so heavily subsidised by general tax revenue for decades, given the Government's goals of reducing road transport. 

New Zealand has had three main land transport funding models in the past thirty years:
  • Integrated state highway manager and land transport funder, with a National Land Transport Programme guaranteed at 97% of the previous year's funding, with the rest approved by the Minister each year
  • Independent funding agency, with fully hypothecated fund determining total funding availability and no direct political input into funding decisions
  • Integrated state highway manager and land transport funder and regulatory authority, with three year funding cycles defined by Ministerial objectives, output classes and strategic priorities, with Crown funding topping up a wide range of programmes.
However what should be done by whatever government is elected in October?  How can the land transport funding system be made more sustainable, be made more responsive to the needs and wants of users, and incentivise value for money, as well as enabling high quality capital spending to proceed?  How can long term ambitions for the development of land transport networks be met, without skewing capital spending away from high value projects in the short term?

How far New Zealand's land transport funding system has fallen. Part 1: Where has it come from?  

How far New Zealand's land transport funding system has fallen. Part 3: What could fix it?

21 August, 2023

How far New Zealand's land transport funding system has fallen. Part 1: Where has it come from?

(prefix: This is my first post on non-road pricing issues, it will be part of an occasional series of pieces on more general transport policy, the key challenge is not making these posts too long!)

The latest draft Government Policy Statement (pdf) from the (New Zealand) Labour Government on land transport funding highlights for me how far the system has fallen from what it once was, and how reforms which were originally designed to accelerate development of large, complex projects have resulted in what was a system once deemed “international best practice” by the World Bank, is now no longer fit for purpose. 

Land transport funding policy seems to have entered what may be best described as a “culture war”, yet it was not meant to be this way when first the Lange/Palmer/Moore Labour Government and then the Bolger/Shipley Governments took NZ’s land transport funding framework on a journey of extensive reform.  One side wants to use taxes generated from road use to primarily pay for maintaining and improving roads and the other wants to use it primarily to maintain roads and improve other modes. There is a lot more noise around reallocating road space from all motorised road users to a subset or to active modes, and in reducing speed limits to pursue a goal of zero deaths.  However, the reforms of the 80s and 90s were designed to achieve the best value for money in spending on roads and public transport, and ultimately to ensure that road users paid for what they used and enable better pricing of road use.  Those reforms were not completed and in 2023 NZ faces a legacy of a land transport funding system that is creaking due to several backward steps and a failure to confront major limitations that were recognised in the 1990s.

In this series of posts, I’ll write about where NZ came from, what the problems are of today and what could be done to fix it.  First, where did we come from?

Political command and control of land transport

For decades funding of roads, public transport and railways were disjointed, as NZ had a highly regulated system managing the supply of freight and passenger transport, and the supply of the infrastructure that it used.  Until the early 1980s there was highly prescriptive regulation that:

Prohibited much freight from being hauled by any mode other than rail beyond a set distance from a rail freight depot. There were a growing list of exemptions from this!;

Prohibited establishment of scheduled bus or coach services unless a regulator deemed that there would be adequate demand, and it would not undermine pre-existing rail, bus or coach services;

Prohibited issuance of licences for hauling freight by road unless adequate demand could be demonstrated, and it would not have an adverse effect on the rest of the industry;

Controlled supply of taxi and rental car licences, again based on demonstration that there was adequate demand.  For example, major airports were only allowed to have two rental car firms with offices on terminal property.

Bear in mind that at the same time, there were requirements to obtain import licences to import motor vehicles completely assembled, in order to protect local vehicle assembly industries, this inflated the cost of new motor vehicles (of all sizes) by thousands of dollars (the removal of tariffs in the late 1990s saw new car prices in NZ drop overnight in the range of $3,000-$8,000).  This kept NZ with an old fleet of vehicles and meant that the cost of owning and operating a car was higher than it would otherwise have been.

Meanwhile public transport in cities was mostly dominated by local authority owned monopoly bus operators, alongside central government owned Railways Road Services and a handful of private operators running commercial services.  Railways operated a comprehensive commuter rail service in Wellington, a skeleton service in Auckland and barely a service at all in Dunedin.  Subsidies for urban public transport came from territorial authority ratepayers, unless the operation was commercially viable.  For example, Eastbourne Borough Council’s (subsequently amalgamated into Hutt City) bus service ran at a modest profit.  Railways rail and bus services were subsidised by central government, through annual budgeting processes, advised by the Ministry of Transport. There was barely any co-ordination between local authority and central government provided services. It is fair to say that both the Railways and the local authority owned bus services were starved of capital investment for new equipment, largely because of a lack of political interest at central and local levels in doing so.  However they were also characterised by inefficiency, inconsistent customer service and little innovation.

For the roads, the Ministry of Works and Development (MWD)  ran the state highway network, Councils maintained their own roads with their own works departments, and funding for road projects, both central and local government levels were decided by the Minister of Transport, Minister of Works and Minister of Finance following recommendations by the National Roads Board (itself an offshoot of MWD).

The MWD did design and build many good roads, Wellington’s Ngauranga Interchange for example, but also made some tragic mistakes. The worst example I know of is Upper Hutt’s River Road, opened in early 1987 (although the lack of median barriers on many motorways in Auckland and Wellington isn’t far behind). Queuing behind trucks and other slow traffic saw the Ministry of Works (which effectively was the state highway manager as well as builder) craft passing lanes out of the tarmac on the cheap.  A road that was one lane each way with sealed shoulders gained passing lanes, but they were built by removing the sealed shoulders and narrowing lane widths by 0.5m.  Within four months, seven people were killed in four accidents.  Within months funding was granted (not least because the Minister was also the local MP – Bill Jefferies) to widen the seal for the lanes to be built to the proper standard, but it also saw Bill Jefferies agree to fundamental reforms to the road funding and governance system.

Competitive tendering

The politically stacked National Roads Board under the auspices of the monopoly state-owned MWD was abolished in favour of a professional state highway manager and land transport funder, with the MWD corporatised and privatised, as all road construction, maintenance, design and investigation work was required to be put out to competitive tendering.  The same applied to local authority owned roads, as Councils were required to put works departments into Local Authority Trading Enterprises (LATEs) and put all central government funded works out to tender, so most Councils privatised their works LATEs.  The effects of this were dramatic, with significant savings in road maintenance spending, averaging around 15-20%, which enabled funding to be directed towards capital improvements.  The concept of asset management for roads was invented by Transit New Zealand, the then state highway manager and funding agency. Both Transit and territorial authorities established inventories of their networks and road assets and would have to keep track of their condition in order to obtain funding for maintenance and renewal.  This may seem basic now, but this is still unknown in multiple developed countries, including many US states and UK local authorities.  There was a concerted effort to ensure that spending generated value for money. 

Funding decisions by Transit New Zealand were initially recommendations by the board, which were signed off by the Minister of Transport as part of annual National Land Transport Programmes.  From 1993 funding was guaranteed at 97% of the previous year to avoid the catastrophic cuts in funding in 1991 that meant much essential maintenance was deferred. From 1993 until 1996, the Ministers of Transport and Finance decided on the amounts of funding by output class and total envelope of funding for roads and public transport.

Separate funding agency - Transfund

In 1996 was a much more significant reform, with establishment of an independent funding agency called Transfund.  It was statutorily independent, with all revenue from road user charges and motor vehicle registration fees, and a majority of revenue from fuel excise hypothecated to a dedicated National Roads Fund.  No longer would the Minister of Finance decide on the budget for land transport funding, because the National Roads Fund was meant to keep pace with demand for spending, and no longer would the Minister of Transport approve the funding programme. Transfund had a statutory role to fund a safe and efficient land transport system, so it did.  The key political role was around decisions to increase motoring taxes, including how much fuel duty would go into the National Roads Fund, but actual funding decisions were now at an arms-length, and the Government of the day celebrated this. 

Transfund fully funded state highways, managed by Transit New Zealand (which became the state highway agency, but retained its old, confusing name), half-funded local authority roads (the other half of funding coming primarily from ratepayers and parking revenue) and paid around half of the costs of subsidising urban public transport (regional councils would contribute the other half from ratepayers).  Subsidies to public transport were on the basis that public transport benefits road users by reducing congestion, and funding was available for “Alternatives to Roading” if they would generate net economic benefits at the required funding threshold.

Funding decisions were made by Transfund with the Minister of Transport legally prohibited from directing whether any specific project received or was denied funding. In essence, the system was as close to user pays as had existed in road funding.  Funding allocation was mostly (but not exclusively) based on a benefit/cost ratio threshold, in that all capital projects that returned $4 in benefits for every $1 of cost would get funded, after maintenance funding was approved, and funding for subsidising public transport (mostly in Auckland and Wellington).  It meant funding proposals for state highways, local roads and public transport were all considered together, on the basis of the scale of benefits that would be generated primarily for those who were paying for it – motorised road users. 

Roads as an economic good

That system had serious limitations, all funding was on a Pay As You GO (PAYGO) basis, in that capital funding was based on cashflow from road user revenue, rather than debt financing to amortise the cost of capital over the depreciated life of the asset. This greatly limited potential to fund large projects. Furthermore, by allocating funding based primarily on benefit/cost criteria, it was only a generalised assessment of motorists’ willingness to pay for any combination of travel time savings, improved safety, trip reliability or comfort, rather than reflecting actual willingness to pay. As road user charges and fuel duty are essentially averaged national charges, it meant what road users paid varied only on the amount of road usage by distance and for heavy vehicles, the wear and tear caused by greater axle loads.  It did not reflect differing costs across the country, or by road type, or where demand exceeded supply (causing congestion), meaning overall there are poor price signals as to where capital spending should be directed.  Finally, funding of local roads is partly based on ratepayer revenue, which bears little resemblance to the cost of providing roads or the benefits road users obtain from using roads, or property owners gain from the access function of roads. For some local authorities, there is a lack of professional capability or capacity to obtain economies of scale for contracting and management of road networks, or scope for innovation in management or operations. 

Further reforms had been announced, as the National Government throughout the 1990s produced multiple reports that were ground-breaking in assessing the economics and policy of providing roads. The Land Transport Pricing Study, the reports of the Roading Advisory Group and discussion papers from the Ministry of Transport (such as “Roading as an Economic Good”) reflected a philosophy that sought to treat the provision of roads on a more commercial basis, seeking it to be fully user pays and for funding to follow user demand.   


The culmination of this was the reforms called “Better Transport Better Roads” which would have put state highways into a company, akin to a state-owned enterprise, and local roads into a series of companies.  They would all have been expected to generate a profit, pay company tax and also generate a return on capital (although only new capital). Transfund would have “bought” road services on behalf of motorists, but road companies could levy road users directly, with tolls, congestion charges or even direct road user charges, and get refunded the nationally collected road user taxes.  In the meantime, road user charges and fuel taxes were to be increased to eliminate ratepayer funding of local roads.  It would have been full user pays, with roads financed commercially, funded from users, paying prices that reflect cost, demand and supply, with independent regulation to avoid price gouging. The road companies would also have statutory responsibility to have safety management systems and even could have had responsibility for emissions escaping the road corridor.

However, it was all for naught. The 1999 saw a Labour/Alliance coalition government formed, with support from the Greens, and given almost universal local government opposition to the proposals (primarily because it would have removed considerable direct political power from local authorities, although they would still have owned local road companies), the proposals were abandoned and a progressive unwinding of some of the reforms of the 1990s would commence.

Crown funding returns

It started with the use of Crown funding for land transport, topping up revenue collected from road users with various funding packages for Auckland, Wellington, Canterbury and the Bay of Plenty under the Clark Government. Specific funding for regional priorities using general tax revenue was a recognition that the PAYGO system of funding land transport through current cashflow could not accommodate large capital projects. The use of Crown funding has been seen regularly since then.  It started with funding for Auckland, then Wellington, then Wellington again, Canterbury, then the Bay of Plenty. Following the complete hypothecation of fuel excise duty in 2008, there was much less recourse to Crown funding for some years. 

Funder/provider merge and Government Policy Statements

The other key moments were the merger of the funder and its biggest recipient of funding, and the land transport regulator into NZTA/Waka Kotahi, and the requirement to produce Government Policy Statements on Land Transport Funding (GPS) that introduced the greatest degree of political control on land transport funding since 1989.  The Minister would determine the objectives of land transport funding, it wasn’t just about economic efficiency and safety, it could be any set of objectives.  Furthermore, the Minister would determine what the spending categories would be and how much money would go to each one. No longer could the land transport funding agency decide to prioritise maintenance over capital spending. No longer could it decide whether more spending for public transport or road construction would be the best use of funding. 

The GPS would decide what weighting NZTA would have to give to project proposals, and because it was not just the funder, but also the recipient of the bulk of that funding (as state highway manager), it could pivot its core activities to fit political objectives.  Ministers could make safety the top priority, or could ignore it.  Ministers could make fixing congestion a priority, or enhancing alternatives to driving.  In short, a system that once prioritised optimising spending for maintenance and sustaining public transport services, followed by capital works based on a largely rational basis for weighing up priorities, informed by economic modelling and user preferences, had been transformed into a system whereby there is direct political determination of what factors matter in funding, and how much funding ought to go to different outputs.

Of course Ministers might make the right calls, and they get advice from officials on what to prioritise and how much funding to allocate to different output classes.  However, this is a step back to the pre 1996 era when the Minister would approve the National Land Transport Programme, deciding how much money is allocated to each output class. 

In short, the funding system became much more based on the subjective interests and focus of the Minister of the day, with much less interest in what users wanted, or in economic efficiency, or in weighing up where best to spend money to achieve the greatest outcomes.  

Benefit/cost ratios went from being nearly the only factor that determined funding in the 1990s, to being one factor in the 2000s, to no longer being important in the 2010s, so that by the 2020s they were rarely published. 

What are the risks of this?  

Maintenance could be de-prioritised, as happened during part of the Key Government, and see it deferred, so funding could be directed to capital projects. This is a common issue in the USA, where political direction of project funding sees maintenance denied all of the necessary funding in favour of high-profile projects.  

High-value projects that don't meet Ministerial objectives get denied funding. This could be road realignments, seal extensions, grade-separating of intersections, busways or bypasses.  Projects that could generate high benefits to road users or the economy get denied funding because there isn't enough available in a specific output class.

Poor-value projects get advanced on a whim, because they offer political advantages or are perceived to be high value.  Indeed the system encourages this, because of perception that if your own side is not in power, the types of projects you want to see wouldn't progress - for National that means rural expressways, for Labour and the Greens that means light rail.  Beforehand there was not concern that a project such as Transmission Gully wasn't funded yet, because in due course growth in traffic would justify the project, but once funding could chop, boost and change there was concern that a future government would not value reducing congestion or travel times. Likewise for public transport, beforehand improvements would be progressed and built upon based on demand, but if a future government could cut spending then the incentive is to boost spending exponentially whilst your side is in power.  Hence the funding for "Rapid Transit" since 2017, which to the disappointment of the Government has resulted in no construction progress.

None of this stops projects getting cancelled with a change of government despite  tens of millions of dollars being spent on them being investigated and designed (see Auckland Harbour Cycling/Walking Bridge).

In short, the funding system has gone back to a system which enables and encourages waste, poor quality spending and radical changes in priorities and direction based on political rather than economic or user imperatives. Furthermore, the structure of that system promotes advancement of poor value projects because the rest of the system is too unpredictable, and feeds into an unnecessary culture war around funding priorities. 

How far New Zealand's land transport funding system has fallen. Part 2: What's wrong?