Letter to the Editor, The Independent, 5 April 2006

Infrastructure Woes

The article on 'Infrastructure stuck in the slow lane' (Independent 8 March 2006) reminds me of some earlier research on investment in the economy (Independent 29 Sept 1999). At that time Bob Edlin quoted my research showing that the period before the 1984 election has been characterised by high investment in a wide range of sectors with consequential benefits to sector productivity. Most rapid expansion of assets was in fishing, mining, chemicals, metals, energy, transport and communications. After 1984 the annual rate of investment in assets slowed considerably. Those sectors that were still investing in the economy included fishing, chemicals, basic metals, communications, finance and community services.

As the graph in the recent article demonstrates, the transport sector and the energy sector did not feature in this latter period. In the NZIER study this is shown as the ratio of gross capital formation in each sector to GDP as a whole, whereas the above data refers to the gross capital stock in each sector after investment was added but depreciation deducted. The latter data was derived from the work of Professor Philpott.

More recent data on capital stocks in use using the same capital formation data shows that the real stock of energy capital increased by 8.5 per cent in the period 1984-95 and by 5 percent from 1996 to 2003. Transport capital fell by 12 percent between 1984 and 1995 but rose by 1 percent between 1996 and 2003. Communications capital rose by 69 per cent in the first period and by 57 per cent in the more recent period. Over the periods 1984-95 and 1996-03, real national income increased by 12 and -4 per cent in energy, by 36 and 31 per cent in transport and by 79 and 119 per cent in communications.

National statistics do not distinguish between government investment and private investment so we have to surmise a bit to explain the causes of these changes in investment patterns. It is clear that transport and energy are usually seen as the area of government investment whereas telephones and the internet have largely been privatised since 1984. More generally, the decline in investment can be explained by the natural tendency to live off depreciation and not replace assets as they wear out. The argument can be made that it is highly desirable to put depreciation tax allowances back into better performing assets rather than disperse it to shareholders or whatever.

It seems to me that these trends in capital investment structure have been caused by the hands-off attitude of successive governments since 1984 and the lack of a central planning mechanism that took into account the more longer term needs of the economy. Roger Douglas said that privatising investment would lead to more efficient use of capital investment. If this is right there is something wrong with the market signals in recent years which should be telling us that the main infrastructural assets are wearing out viz. electricity networks, road and rail configurations and aeroplanes to mention a few. I am a disciple of the 1984 reforms in general but in this case it seems we need to go back to some earlier planning practices in the area of national investment in strategic assets.

By Robin Johnson

(Dr Johnson is an economist and former civil servant)