Transforming infrastructure pricing

A study commissioned by the New Zealand Infrastructure Commission, Te Waihanga, has found that changing the way our nation charges for some of its key network infrastructure services might make sure that they are used more efficiently, guide better investment, and avoid costly capital projects in specific cases.

Geoff Cooper, General Manager of Strategy at Te Waihanga, says that while some funding approaches are obvious and connected to how much we use, like monthly electricity and mobile phone bills, other times they are far less visible, like fuel excise that’s included in retail petrol prices or rates and taxes, which pay for many of the infrastructure services that we depend on.

“We commissioned PwC to look at pricing in our four main network infrastructure sectors – land transport, water, energy and telecommunications sectors,” he said.

 “We wanted to understand three key things: First, what does good network pricing look like? Second, how do different sectors perform against best-practice principles? Third, because equity and affordability concerns are so important for New Zealanders, we wanted to know how households are affected when we change prices.”

Sector Pricing Differences

One key finding is that the telecommunications and energy sectors perform well against best-practice pricing principles, while the land transport and water sectors perform less well.

“Energy and telecommunications rely more on direct-user charges and perform far better against best-practice pricing principles as a result,” said Cooper. “Like shopping in a supermarket, customers can pick and choose how much they consume and pay accordingly.

 These are also the sectors that have kept project investment levels in check with population growth over the last three decades.

“Sectors with better pricing have an easier time raising the right amount of money for high-quality projects, can better identify the highest-value areas for investment and are strongly incentivised to maintain their assets. 

“These networks also tend to operate more efficiently, as users have good information and incentives to use infrastructure most efficiently.

“While land transport and water currently do not perform as well, we see significant potential for improvement. For example, more councils are introducing volumetric water charges, which are proven to reduce excess water consumption and improve leak detection. 

“Other examples include central and local government working together to progress congestion pricing, which will take the edge off urban traffic congestion and many local authorities are improving the way they price development contributions, which can see us building in areas that have lower infrastructure costs.”

PwC partner Dan Marshall adds, “Well-performing sectors, such as energy and telecommunications, have system settings that were designed to promote competition and incentivize efficient investment in services.

 “Pricing is a powerful tool in sending signals to suppliers about where and how they should invest, as well as to users about when, where, and how they can access infrastructure services.”

“Whether it’s finding ways to improve price signals in land transport, investing in water metering, managing technology risks in telecommunications, or incentivising efficiency in energy, there are lessons that can help strengthen our infrastructure networks,” Cooper said.

“The study makes clear that for many of the problems we face, it is not how much we are paying for infrastructure, but how we are paying for it.”

The Network Infrastructure Pricing Study follows Recommendation 56 in the New Zealand Infrastructure Strategy, which identifies a need to improve public understanding of how infrastructure is priced and funded.

Key Findings

The research outlines three best practice goals for how infrastructure networks should be priced.

Pricing should guide infrastructure investment to ensure that we can provide and maintain the infrastructure we need. This is the most important to get right, as network infrastructure is long-lived and can impact our future choices.

Pricing should send signals to users about when, where, and how they should use infrastructure networks to maximise the overall benefits of those networks. This is the second most important goal, as service levels and investment needs are highly influenced by user behaviour.

Pricing should be used to share the benefits of providing networks widely throughout society. Once the first two goals are achieved, pricing should be adjusted to address this.