A quarterly snapshot of issues and trends for New Zealand’s infrastructure sector.

What’s in the National Infrastructure Pipeline

The National Infrastructure Pipeline (Pipeline) provides a forward view of planned infrastructure projects in New Zealand. The project information is provided directly from government agencies, councils, and private sector entities that are involved in providing infrastructure services to New Zealanders, to support the way we live, work, and play. At the end of the March 2022 quarter, the Pipeline included more than 2,700 projects, worth about $69 billion.

The Pipeline focuses on projects that have a higher level of certainty, encouraging industry to make informed decisions about planned activity in their sector and region, coordinate timeframes and to scale capability and capacity for delivery. The Pipeline continues to grow and evolve into a comprehensive summary of planned activity in New Zealand across all infrastructure sectors.

Pipeline snapshot

Key changes in the March quarter update from December 2021 include:

• A total of 33 organisations have updated project information
• 46 projects on the Pipeline were completed, totalling $630 million
• Additional projects from the Ministry of Health have been added
• We’ve welcomed several new contributors & projects including
  • Wellington City Council
  • Let’s Get Wellington Moving
  • Powerco
  • Spark

Forecast spend by sector

The forecast annual spend by sector for the projects in the Pipeline has been modelled. This year, spend on infrastructure projects is forecast to be $11.2 billion. Against this spending in 2023 has increased significantly, from $9 billion projected in the last quarter, to $10 billion. This increase is due to the addition of new projects to the Pipeline and some project completion dates shifting.

Transport projects continue to dominate total spending on pipeline projects, accounting for just over 30% of forecast spend in 2022 (see Figure 1). Annual spend on water projects is forecast to continue increasing, up approximately 70% from just over $1 billion in 2022 to nearly $1.8 billion by 2024.

Source: National Infrastructure Pipeline - Te Waihanga

Regional spotlight: Wellington

There is lots of project activity in the Wellington region. The infrastructure Pipeline currently includes projects from some, but not all, Wellington region councils, as well as central government and some private infrastructure providers. Table 1 summarises significant projects in the Pipeline. Noting, of course, we have recently seen the completion of Transmission Gully.

Significant Pipeline projects elsewhere in the Wellington region

Source: National Infrastructure Pipeline - Te Waihanga

Project spotlight: Wellington Water

Wellington Water is installing 250 smart water meters in Greytown, Wairarapa.

The trial, funded through the Government’s water reform stimulus funding, will assess the ways in which smart water metering technology can help residents better manage their water usage and assist in detecting potential water leaks at private properties.

While the existing water meters are read once a year, the new smart meters will record real-time water usage and proactively identify water leaks. This helps local communities understand their personal water consumption habits, and ways to conserve water. This insight also helps Wellington Water and the council deliver water services and plan for the future.

Installers Eru Te Kahika (left) and Lu Fonoti (right) with one of the 250 smart meters Wellington Water is putting in Greytown, Wairarapa.

Economic insights

By Nadine Dodge, Senior Economist, Te Waihanga

Inflation – what are the implications for civil construction?

It’s common knowledge that inflation is rising rapidly in New Zealand. Everything is costing more these days, whether it’s building a house, going to the grocery store, or filling up at the pump. The residential construction sector has been hit particularly hard, reflecting rising demand and constrained supply. We know that the civil construction sector is also facing challenges, with a rising infrastructure deficit and a constrained workforce available to deliver the investments that our country needs. However, inflation and its implications can be quite different for the residential and civil construction sectors.

The chart below looks at how inflation rates over the last decade compare between four price indices: residential buildings, non-residential buildings, civil construction, and the consumer price index (CPI). Over the last decade, civil construction inflation has tended to follow the CPI with inflation rates of 1-2% per year. In contrast, non-residential and residential building construction have tended to have higher inflation levels, at around 4% per year.

In 2021, non-residential and civil construction costs rose about half the rate of residential construction prices. However, inflation was still at the highest rate in a decade in these sectors: 7% for civil construction and 8% for non-residential construction, as compared to 14% in the residential construction sector.

How we measure up

We know that our current inflation problems aren’t unique to New Zealand – 32 of 45 middle and high-income countries saw inflation rates over 3% at the end of 2021. However, the implications for construction prices varies across countries. The chart below compares CPI and residential construction inflation over the last year in selected high-income countries. We see that some places, such as Australia, Canada, and Ireland, share New Zealand’s conundrum: high construction inflation that exceeds CPI inflation. However, in the United States and the European Union, construction inflation doesn’t appear to be higher than elsewhere in the economy. This suggests that high construction inflation isn’t an unavoidable problem.

What’s coming next?

If trends over the past decade continue, we can generally expect civil construction costs to follow the CPI. So, what are the predictions for the CPI over the next year? For the first quarter of 2022, the CPI growth expectation one year out was 4.4%. This would be an improvement on the third quarter 2021 inflation rate of 5.9%, but still higher than the RBNZ target of 1-3% over the medium term.

Given that our current inflation problems weren’t expected, how much can we trust those predictions anyway? The following chart digs into this question by comparing expected and actual CPI growth one year out since 1988. While we don’t have a crystal ball, expectations are a reasonably good predictor of actual inflation levels over the following year. Since 1988, predictions have been within 1 percentage point two thirds of the time and within 2 percentage points of actual levels 90% of the time.

The last year has been an historical aberration. Unpredicted periods of high inflation (with CPI inflation over 3%) are uncommon and have only happened in 13% of quarters. What happened in the last half of 2021 – inflation forecasts off by more than 3 percentage points – is the largest gap between expectations and actuals that we’ve seen over the last three decades.

The question is: Have forecasters captured the changing environment and the ongoing global shocks? Given that the current RBNZ forecast is for 4.4% inflation in a year’s time, should we be more pessimistic?

If we look at the distribution of CPI growth expectations, we see there is substantial disagreement on what the future will hold. While most people think inflation one year out will be in the 4-5% range, a large share of people think it will stay high, at around 6%. This pattern continues over the longer term; most people think inflation will drop to near the target band in two years, but many disagree.

Recent experience shows that there are unusually high risks, and the past isn’t always the best predictor of the future. Predicting the future turns out to be a tricky business, especially during times of war and global pandemics.