Prioritising infrastructure when there’s not enough money

• Cost escalation means capital works budgets are not stretching as far.
• Many have tried approaches to project prioritisation in the past that have failed.
• Prioritisation fails because it ignores at least one of the three filters to a defensible, survivable prioritisation approach that GHD uses with clients:
  
  

1. Weed out projects that don’t fit within our mandate or funders’ objectives, and/or where benefits can’t be demonstrated to outweigh costs.
2. Determine which projects are realistically deliverable within the timeframe of funding and where project interdependence lies.
3. Prioritise, with minimal subjectivity, to survive political change, incorporating co-funding considerations into the funding envelope.

Severe inflation is hitting practically every economy. In Australia and Aotearoa New Zealand, it is set to stay above each country’s Reserve Bank mid-point target for years to come.

Hindsight is a wonderful thing, and looking back, the causes all now seem so obvious. Close huge swathes of your economy to slow down COVID’s spread and watch the supply chain disruptions cascade. Close your borders and watch labour shortages mount. Plan, along with seemingly every other economy, to build your way out of economic weakness and watch competition ramp up for materials and plant. Watch as central banks try to offset the COVID spend-up through strong rises in interest rates, and here we are, with massive cost escalation and higher borrowing costs gobbling up capital works budgets.

With twice Australia’s, or 15 times Aotearoa New Zealand’s, annual GDP to be spent on infrastructure each year over the next 20 years in just 56 economies, the competition for resources is not about to disappear. As a result, households, businesses and infrastructure delivery agencies are dramatically rejigging spending, and in doing so, having to review how they prioritise projects.

GHD has been working with clients in Aotearoa New Zealand and Australia to develop a way to prioritise investment in a defensible, replicable and subjectivity-minimising way. There are three filters to a good prioritisation process. We examine these filters here.

This seems obvious, but when it comes to prioritising or reprioritising infrastructure, it pays to start with the basics. I have already written in some detail about the importance of delivering the right infrastructure in the right place, paid for by the right people, at the right price, announced at the right time, using the right funding tool.

However, there are further practical questions to ask as part of the initial prioritisation filter of projects.

1. Who should deliver this type of infrastructure?

The private sector, central government, local government, an NGO, or a charity all have roles to play. Understanding who is responsible for delivering a particular piece of infrastructure and the rationale for them to do so is crucial. Economics 101 says if a good or service could be delivered by the private sector and the profit motive, it should be. Beyond that, we must ask whether the project in mind is sensibly dealt with at the central, state, or local government level.

2. Does it fit our mandate and objectives?

Over time, agencies tend to morph into much more than what their legal framework calls for. Often, there is mandate creep, often through good intentions, but without the responsibility, capacity, or funding to do so. Is a piece of infrastructure a “nice to have”, “feel good” or “ribbon-cutting” project rather than core business activity?

3. Will it satisfy our funders’ objectives?

For instance, will this project be part-funded by another government agency? If so, will it meet their objectives and requirements as co-funders?

4. Do its benefits outweigh its costs?

Government agencies should be in the business of delivering goods and services that would otherwise not be adequately provided by the private sector (see question 1 above). By definition, one would not expect these agencies to make a financial profit from their operations. Instead, their role is to deliver more intangible but no less real benefits, such as safety or transport access.

It is the project promoter’s job to demonstrate the benefits of their project. As an economist, I often point out that we make these implicit trade-offs every day in our own lives with every decision we make, but sometimes we lose sight of this vital equation when we’re using other people’s tax or property rates dollars.

At GHD, I use an approach called Quantify, Proxy, Describe to demonstrate benefits and costs. Even on a small piece of highly localised infrastructure, there should be a couple of paragraphs in an email exchange that make a strong case for this spending, identifying and providing some sense of its benefits. On larger projects, there should be a comprehensive business case demonstrating the value of the project. These business cases could typically cost up to 2% of the total infrastructure cost. Better to spend the 2% and realize the idea is not a good one, than spend the other 98% without clear benefits.

Having weeded out the obvious projects that don’t fit the mandate, funders’ priorities, agency objectives, or where we cannot show the benefits will outweigh the costs, there are still other questions to ask. These questions are about the delivery and deliverability of the project.

1. To what extent are other projects reliant on this?

Often, other parts of the network, or even other networks, may be reliant on the project in question. For instance, road access into a new greenfield area may need to be completed before other services – three-waters, electricity and telecommunications - can be added. If other work is waiting on this project, that’s a good reason to prioritise it.

This criticality or interdependence makes a strong argument for a project that has already made it through the first filter, but knowing the answer to this question relies on different network providers building and maintaining good relationships with each other.

2. Does this infrastructure complete a network?

A project may have little apparent value on its own merits but may be the final piece of a much larger network. A project to complete the last 100 meters of cycleway may not appear to have much value on its own, but if it connects the other five kilometers of cycleway, it likely has significantly more value.

3. How far advanced is costing?

If a piece of infrastructure is still a glint in the eye, or its cost estimate was written down in pencil at a lunchtime meeting last Thursday, it is not a priority. It may become a priority once it has been properly scoped and costed, but until such time, it should not be prioritised. Deprioritising a project because of its weak cost data will incentivise proponents to get that work done to make a more informed decision.

4. How far are we with approvals and design?

During our first brush with COVID in early 2020, there was a rush in Aotearoa New Zealand to provide central government with a list of “shovel-ready” projects to stimulate economic activity in response to COVID lockdowns. Many of them are still barely underway, three years later. The label did not fit. To be prioritised, projects should be advancing through their design and consenting process and should be buildable within 18 months at most.

5. How advanced are discussions with co-funders?

We have already touched upon the role of co-funders. Many projects fall down because of misplaced optimism about the likelihood of outside funding. Projects need to adequately consider what level of funding is likely from a third party, and how likely that funding is to materialise.

GHD has recently completed a comprehensive prioritisation process with a major Aotearoa New Zealand client, looking at over 350 projects ranging in scale from tens of thousands of dollars to hundreds of millions of dollars. The prioritisation process we developed answered several questions that every good prioritisation framework should, but sadly these basics are often lacking.

1. Have we minimised subjectivity?

Many prioritisation frameworks are underpinned by subjectivity. It is almost impossible to remove all subjectivity from the process, but you can reduce it substantially by:

a. Setting highly prescriptive criteria on scoring, rather than vague “exceeds” or “significantly exceeds” type criteria. For instance, on deliverability, to score the maximum may require evidence that the project has been approved by local authorities, is in detailed design, and is able to start within 18 months.

b. Setting minimum acceptable scores rather than weighting different objectives more highly, for example, if objectives for a transport network include safety, equity, efficiency, and climate responsiveness, the priorities of individuals setting the weightings will affect the outcome. Instead, it makes sense to weight these sometimes-competing objectives equally, then to progress projects that score above a certain minimum acceptable score, by excluding projects that, for instance, have significant disbenefits for climate responsiveness.

2. Can we spot optimism bias?

We all tend to think our pet project is the most worthy of funding. A good prioritisation framework will have a way of identifying projects that appear to have been over or under-valued, such that moderators can have another look at them and adjust scores to better reflect reality.

3. Will political change kill this project?

By adopting a less subjective approach that does not assign arbitrary weightings to certain objectives, project prioritisation processes are less prone to winds of political change, which otherwise tend to lead to reviews of projects for their relative alignment with the guiding principles of the new government.

4. Do we consider value appropriately?

A good prioritisation framework will provide more than one lens on value. For instance, it is common for bigger projects (read: more expensive) to be best at achieving the funders’ objectives; one might expect this outcome. But this approach risks ignoring smaller projects that may achieve the objectives to a lesser individual extent, but at a far better bang for buck. In the absence of a comprehensive cost-benefit analysis, which is infeasible on small projects, a good prioritisation framework will allow the agency to consider the value per dollar spent of different projects on the list.

5. Can we use this approach across domains?

The objectives may be different in water, energy, transport, or social infrastructure, but a good prioritisation framework can be applied across these different domains. It should be able to be used by agencies responsible for delivering across multiple domains, to make the inevitable trade-offs across those project areas.

6. Does this project sit inside the funding envelope?

Finally, we are in the position to prioritise projects and recommend progression of projects that fit within the funding envelope. By linking the funding envelope to the scale and likelihood of co-funding, we can provide a probability-adjusted estimate of funding used up by each prioritised project.

Further reading
Part one: Local government: The why, who and implications of accurately charging for infrastructure
Part two: Infrastructure Funding Tools Part 2: A Dispassionate Comparison
Water reform: An economic wellbeing view

With prices and borrowing costs rising, capital works programmes are having to be re-thought. This needs to be done in a structured, defensible way rather than being ad-hoc. Projects that even make it onto the prioritisation long-list should pass through one filter, before deliverability and prioritisation further narrow down the list to fit within the funding envelope.

The GHD Advisory team works with clients to build easy-to-use prioritisation tools that deliver on the principles described here. Reach out if this is something you are grappling with.

David has held a number of roles in Economics advice over the last 15 years, across practically every Council jurisdiction in New Zealand and with around 10 different economic development agencies.

Prior to joining GHD, he was Chief Economist at Auckland Council for four and a half years. He understands the challenges facing local governments and economic development agencies across New Zealand dealing with growth and constrained funding. Prior to Auckland Council, he worked for Westpac as Regional and Industry Economist, BRANZ (the Building and Research Association of New Zealand) as Senior Economist, and in economic consulting at PwC and BERL. His experience spans strategy, economic modelling, infrastructure and policy decisions, where trade-offs are made between what is often a financial cost, and intangible benefits such as better social, environmental or climate outcomes.