Govt likely to achieve only two parts of an impossible trinity

In the past five years, $6.6 billion. In the past three, $4.3b. Last year, $1.3b. Those are the dollar value of education building consents issued.

So, when Erica Stanford, the Education Minister, announces a review of up to 350 school upgrade projects where plans “are not able to be delivered on” because of budget blow-outs, the potential figures involved are not small.

Those consent figures are not just public schools. They will include tertiary institution spending and private-sector education investment.

Nonetheless, all education segments require essential infrastructure and the Government writes out lots of the cheques.

Education is a sector we have dropped the ball on over numerous years. You can’t just throw money at it, nor can you put the sector into park mode, which we now risk doing.

Stanford pointed particularly to “exciting, bespoke building projects” as presenting fiscal risk, with construction escalation rife and requiring a review.

An example was a Marlborough schools co-location project, Te Tā toru o Wairau, for which Cabinet agreed to funding of $170 million in 2018.

The estimated completion cost is now $405m, with the project scheduled to begin within weeks of the new Government’s formation before Stanford initiated her review.

Non-residential construction (capital goods) inflation has risen 25 per cent since before Covid.

That $4.3b list of consents over three years, whether completed, partway through or about to start, will likely be underwater, with budgetary allocations insufficient.

It’s a universal problem.

You have a budget, and inflation takes you well past it. That means going back to Cabinet for more money. Or do you cancel the project?

You put 25 per cent cost inflation on a $4.3b consent pipeline and it’s a billion-plus number — and this is before we include specific project risks.

Fletcher Building’s recent woes show just how tough it can be in construction and how projects can go awry for a combination of reasons, including inflation, despite having corporate governance structures.

The pre-election economic and fiscal update (Prefu) noted the Government’s investment pipeline faced cost rises and construction (capital goods) cost inflation has far exceeded living-cost inflation.

Roading and health are the same as education. Roading capital goods inflation is up 27 per cent in the past three years. Cue a road funding hole.

Civil construction costs, up 27 per cent over three years. Bridges, up 38 per cent. Water supply systems, up 27 per cent. Urban drainage and sewerage, up 30 per cent. Three Waters costs have escalated rapidly. Cost overruns are everywhere. The new Government will correctly point the finger at the previous Government in areas such as project management and financial capability. Local and central governments have never been good at managing assets and thinking with a portfolio lens.

The desired outcomes are not entirely financial. Public infrastructure is often a mixed economic and social asset, but you still need accountability. That attack will stick, up to a point. Some at the Ministry of Education should also be nervous. What the Government can’t avoid is that there is education infrastructure investment it cannot shy away from, but also cannot afford.

You might be able to modify here and there, but construction cost inflation of 25 per cent on an unchanged budget delivers 25 per cent less than planned.

Project designs can be tweaked and modifications made, but, as with Dunedin’s new hospital budget busts, it ends up with some things getting cut, including beds, an operating theatre and imaging services.

The need for good value for money has been cited. That is important; good governance and good government require it, but it is not an essential issue.

The essential question is: do we have school infrastructure and buildings fit for purpose, meeting the needs of the education sector, which forms an integral part of NNew Zealand’s economic future, and sufficient to fund projected roll growth?

We’ve had a 127,000-migration surge in the past year, so presumably a lot more classrooms are needed too.

Education building consents largely flatlined for the first two terms under the previous National-led Government.

Infrastructure investment in areas such as education and health were the sacrificial pawns used to keep debt low and look fiscally prudent in the shortterm but with a deferred liability.

That is a track record I would not like to see repeated.

Education investment lifted sharply in Sir John Key’s third term as fiscal pressures eased, but it lagged and was then playing catch-up, so the Labourled Government inherited problems.

Rescoping and delaying projects — which we could now see — buys time to let the economy improve and hit fiscal targets, yet still fund political promises. It’s classic short-termism.

There is growing tension manifesting over the Government’s desire and intent to deliver tax cuts and the realities of running a Government, which always includes inheriting deferred problems, operational spending pressures and pressing needs across public infrastructure — including education, health and roading.

Inflation has been ruthless, meaning a tough trade-off just to keep the dollar value of spending the same and pressure to prioritise and reconfigure. But you need a plan B before you stop plan A.

We are still waiting on plan B for the Interislander ferry mess.

Education has been a sector Stanford and Christopher Luxon have talked a big game about when it comes to the problems.

It would be incredible, given the talk, if a boost to education capital spending did not take place over the coming three years — and even a decent nominal rise in capital allocations to education would likely be a “cut” once inflation-adjusted.

Another week and another fiscal hole. They keep adding up.

The Government looks like it can achieve two parts of an impossible trinity with a lot of hard work: tax relief, return to surplus/achieve debt objectives and providing essential infrastructure/social investment.

Good luck delivering on all three.

The essential question is: do we have school infrastructure and buildings fit for purpose?