Many governments are concerned about how to stimulate economic activity once the COVID-19 health crisis is in a manageable state.
This blog examines New Zealand’s unique stimulus approach, which focuses on “shovel-ready” infrastructure. This approach promises to stimulate economic activity while minimizing risks of wasteful spending. The New Zealand approach could inform how governments and multilateral development banks (MDB) approach financial stimulus support in developing countries.
Infrastructure spending is a safe stimulus option to overcome the unprecedented demand shock.
The world will be able to get back to work once the pandemic spread slows, probably later this year. It will be essential to get people back to work quickly and stimulate economic activity. Furthermore, the infrastructure spending could make the post-crisis world more resilient.
Sound infrastructure underpins all economic activity and, in most countries, infrastructure constraints are usually well-understood by both the government and the private sector. Therefore, with appropriate controls in place, the chances that a government-supported infrastructure project will fail to stimulate economic activity, or be wasteful in the long term, are lower than for a non-infrastructure project.
New Zealand’s “shovel-ready” approach is interesting.
New Zealand has an interesting and potentially replicable idea for fiscal stimulus. The government has announced a plan to increase infrastructure spending quickly once the pandemic restrictions end. What is special about the New Zealand approach is that the government has announced the plan now, even though it may be months before it can be implemented.
The government has called for information about “shovel-ready” projects. These are infrastructure projects that can commence in the next six to 12 months. The deadline for submitting information is 14 April 2020.
By announcing and kicking off this plan now, in the midst of the pandemic restrictions, the government is providing a clear signal of its intentions, and some certainty to the infrastructure sector about which projects might be under consideration for fiscal support.
The New Zealand plan rapidly identifies potential infrastructure projects that can be commenced soon. This increases the likelihood that the positive economic impact of infrastructure project development occurs during the period that demand is suppressed and people are out of work. The plan also provides government support at a time when economic activity in the private sector is likely to be low, thus reducing potential “crowding out” of private spending.
New Zealand’s criteria and process for “shovel-ready” infrastructure projects.
New Zealand has appointed a reference group of infrastructure experts and senior officials to receive information about potential projects. The group will further develop criteria to evaluate projects for the Government to consider.
At this initial stage, in addition to the time-driven “shovel-ready” requirement, the following high-level criteria will apply:
- Demonstrated positive direct and indirect employment effects
- Demonstrated social, environmental and economic benefits, with emphasis on the New Zealand Treasury’s Living Standards Framework and the UN’s Sustainable Development Goals.
Project developers must also outline how COVID-19 has affected the project and how COVID-19 presents risks to on-time construction and completion to specifications. Project developers are also asked to outline specifically how Government could support their project. This can include:
- Financial support
- Expedited regulatory approvals (for example, environmental permits or planning permissions)
- Regulatory or law changes to enable infrastructure (for example, fast-tracking foreign investor rules)
- Other government support (for example, commitments by government to use the infrastructure or purchase services).
The full criteria and process for evaluating projects will be developed in the coming weeks. New Zealand has well-developed infrastructure evaluation frameworks for public capital investment (Better Business Case framework, overseen by the Treasury). We expect further information on a robust evaluation process to emerge soon.
Developing countries can develop a “stimulus tool kit” borrowing from New Zealand’s “shovel-ready” approach.
There are some lessons from the New Zealand approach that developing countries and MDBs could apply. Developing countries are likely to be fiscally stretched, and therefore infrastructure stimulus might be financed by MDBs and other donors.
Many countries will want MDB support. MDBs should consider developing a “post-COVID infrastructure stimulus toolkit”, which any interested country could adopt.
The toolkits should be rolled out as soon as possible. This will allow countries to identify projects and get them shovel ready now. An information-gathering exercise, such as the New Zealand “shovel-ready” approach, can be done quickly. The sooner MDBs begin to think about criteria for infrastructure finance, the faster infrastructure developers and investors can respond with projects that can deliver immediate economic and longer-term resilience benefits.
Key features, which can be rapidly developed, include:
- Ensuring a project evaluation body is appropriately qualified and suitably independent
- Identification of the key results sought from projects, such as jobs, environmental sustainability, social inclusiveness, and resilient infrastructure
- Mechanisms to determine project timeframes and risks to meeting timeframes.
Some precedents already exist for rapid disbursement methodologies. These could be applied for post-COVID infrastructure. P4R (Pay for Results) could be incorporated. A P4R loan, for example, could disburse X amount per km of road built to the required standard, which would be much quicker than normal MDB processes.
Even so, provisions to ensure that the projects funded are ones that are needed, would be important—here the New Zealand “shovel-ready” criteria could be considered as a base. Proper construction supervision would need to be ensured also.
Author: Andreas Heuser, Andreas.Heuser@castalia-advisors.com
Disclaimer: The views expressed are those of the author’s alone. This work has not received funding from any other organisation or interest.