Money · Credit · New Zealand · Part 16
Should infrastructure pay for itself?
Sometimes yes. Sometimes no. The mistake is pretending every asset should be judged by the same kind of return.
It sounds like a sensible rule.
If infrastructure is worth building, it should pay for itself.
But that sentence hides three different meanings.
Does the asset generate enough cash to repay its finance?
Does it create enough economic value to justify its cost?
Does it create enough public value to justify taxpayers supporting it?
Those are different tests.
An asset can fail the commercial-return test and still pass the economic or public-value test.
Start by separating three kinds of return
Financial return is the cash return to the owner or investor.
Revenue minus operating costs, maintenance, financing costs and other obligations.
Economic return is broader.
It asks whether the project creates benefits for New Zealand that exceed the resources consumed.
That can include travel-time savings, avoided outages, lower logistics costs, higher productivity, health gains, reduced crash risk or resilience.
Public return includes outcomes society may deliberately fund even where they do not create enough direct cash revenue to repay the asset.
Universal access to schooling is an obvious example.
So is much of the health system.
Treasury's cost-benefit guidance explicitly distinguishes financial analysis from social cost-benefit analysis and requires consideration of who gains, who loses and wider externalities.
Treasury — Guide to Social Cost Benefit Analysis ↗
Some infrastructure really should recover its costs from users
Te Waihanga's 2026 National Infrastructure Plan draws a clear distinction between network infrastructure and social infrastructure.
Network infrastructure includes services such as transport, water, electricity and telecommunications.
The Commission's position is that these networks should largely fund themselves through users and direct beneficiaries over their lifecycle.
Te Waihanga — Using the right tools to pay for infrastructure ↗
That does not mean every road, pipe or power line must individually produce a profit.
It means the network as a whole should generally recover the cost of providing the service from those who use or benefit from it.
This is an important distinction.
Electricity is the clearest example
Electricity generation, transmission and distribution are overwhelmingly funded by electricity users.
Te Waihanga notes that the costs of generating, transmitting, distributing, retailing and operating the electricity system ultimately pass through to customers.
Te Waihanga — Electricity sector ↗
That model makes sense because:
the service is measurable,
users can be identified,
consumption varies,
and pricing can help signal when further investment is required.
A price also tells users something about scarcity.
Free electricity would not remove the cost of generation.
It would only move the funding burden somewhere else and weaken the demand signal.
Water is also a network service — but the pricing question is harder
Water provides another example.
Te Waihanga reports that around 57% of users are charged through volumetric water pricing, though that figure is heavily influenced by Auckland.
Elsewhere, many households still pay for water primarily through rates or fixed charges.
Te Waihanga — Water and wastewater services ↗
A user charge can help recover lifecycle costs and provide a demand signal.
But water is also essential to life and public health.
That means pricing has to account for affordability and equitable access.
The correct answer is not necessarily to underprice the whole network.
It may be to price the network properly and provide targeted support to households that cannot afford essential consumption.
A subsidy can be justified. Hiding the subsidy inside chronic underfunding is much harder to justify.
Transport sits in the middle
Transport infrastructure creates direct private benefits and wider public benefits at the same time.
A road user benefits from the trip.
But a transport network can also support freight productivity, emergency access, regional connectivity and wider economic activity.
Te Waihanga's current plan argues that maintaining, renewing and enhancing the existing transport network should be funded predominantly by users and that stronger pricing signals are needed.
Te Waihanga — Planning what we can afford ↗
That does not mean every road should be tolled.
It means the funding model should reflect the relationship between use, benefit and cost more clearly than a system that relies indefinitely on general Crown top-ups.
Social infrastructure is different
Now consider a public hospital.
If the hospital had to generate enough direct revenue from patients to cover its full capital cost, operating cost and financing cost, access to healthcare would change fundamentally.
The same is true for state schools, courts, prisons, defence infrastructure and many public parks.
Te Waihanga therefore separates social infrastructure from network infrastructure.
Its purpose is not primarily to operate as a self-funding commercial network.
Its purpose is to provide public services and equitable access.
Te Waihanga — Funding social infrastructure ↗
That means taxpayers may appropriately fund the asset even where the asset itself produces little or no commercial revenue.
A hospital can “pay for itself” without making a profit
This sounds contradictory until we define return properly.
Suppose a hospital redevelopment:
reduces waiting times,
reduces avoidable complications,
improves workforce productivity,
reduces emergency transfers,
and avoids the cost of operating obsolete buildings.
Those benefits may justify the investment even if patients are never charged enough to produce a commercial return.
Treasury's CBAx framework is designed for exactly this kind of analysis.
It encourages agencies to take a long-term view of societal benefits and costs, monetise impacts where possible and make assumptions transparent.
The absence of a cash return does not mean the absence of a return.
But “public value” cannot become an excuse for weak projects
This is the danger on the other side.
If every project that cannot generate revenue is simply labelled “public value”, discipline disappears.
Public value still needs evidence.
What benefit?
For whom?
Compared with what alternative?
Over what time?
At what probability?
At what full lifecycle cost?
Treasury's CBAx guidance makes clear that value-for-money analysis includes quantified and unquantified impacts, the underlying evidence base, assumptions and implementation risk.
It is not enough to assert that something is good for society.
Externalities are one reason user charges do not tell the whole story
An externality is a cost or benefit experienced by people who are not directly part of the transaction.
A flood barrier may protect homes, roads, businesses, power infrastructure and emergency services.
A rail investment may reduce congestion experienced by road users who never board a train.
A wastewater upgrade may improve environmental quality beyond the households connected to the pipe.
When large benefits fall outside the group that can reasonably be charged, a pure user-pays model may underfund the investment.
Treasury's guidance on public-sector charges explicitly says externalities should be considered when deciding how a service should be funded.
Treasury — Guidelines for Setting Charges in the Public Sector ↗
Cross-subsidy can be legitimate — but it should be visible
Not every part of a national network will be equally profitable.
A dense urban connection may be cheap per user.
A remote connection may be expensive.
A strict project-by-project commercial test could leave some communities permanently underserved.
Te Waihanga's current framework explicitly says that while networks should largely cover their full lifecycle costs, this does not mean every part of a network must individually pay its own way.
Targeted subsidies or transfers can be justified where there are wider public benefits or equity considerations.
Te Waihanga — Network funding and targeted subsidy ↗
The discipline should be transparency.
Which users are subsidising which service?
How much?
Why?
And what public objective does the subsidy achieve?
Place-based infrastructure creates another category
Some infrastructure is built because development in a particular place creates new demand.
New subdivisions require water, transport, stormwater, public space and network connections.
In those cases, the beneficiaries may be sufficiently identifiable to justify development contributions, targeted rates, levies or other place-based funding tools.
That can be fairer than asking the entire national tax base to finance infrastructure whose value is concentrated in a small development area.
But the opposite can also be true.
A project may unlock national freight, employment or housing benefits much larger than the local revenue base can reasonably fund.
Again, the funding model should follow the distribution of benefits.
The commercial return still matters even when the project has public value
Suppose government is considering co-investing in an energy project.
If the project can generate commercial revenue, we should still ask whether the expected financial return is adequate for the risk.
Public purpose does not justify throwing away a return that is available.
Likewise, if the project needs concessional finance because its public benefit exceeds its private return, the concession should be visible.
This protects the taxpayer from an easy mistake:
confusing a good policy objective with a bad financial transaction.
The Treasury framework already begins with the public objective
Treasury's Funding and Financing Framework says the underlying policy objective and public outcomes should be determined before choosing the funding or financing structure.
It then asks whether alternative funding sources, user charges, private capital or Crown balance-sheet support are appropriate.
Treasury — Funding and Financing Framework ↗
This sequence matters.
We should not start with “make the users pay”.
We should start with:
What outcome are we trying to produce, who benefits, and what funding mechanism best matches those benefits?
My funding hierarchy
I would use a hierarchy like this.
1. Direct user pays.
Where use is measurable, exclusion is practical and the user receives most of the benefit.
2. Beneficiary pays.
Where infrastructure increases the value or development potential of identifiable land or assets.
3. Network cross-subsidy.
Where maintaining universal or geographically balanced network coverage has a clear public or system benefit.
4. Targeted public subsidy.
Where affordability, equity or external benefits justify support but the rest of the network can still be properly priced.
5. General taxation.
Where benefits are broadly shared, access should be universal, or direct charging would undermine the purpose of the service.
6. Mixed funding.
Where both direct beneficiaries and the wider public gain materially.
There is also a difference between recovering cost and earning profit
An infrastructure network can recover its full lifecycle costs without maximising profit.
Those costs can include:
operations,
maintenance,
renewals,
depreciation,
financing,
resilience investment,
and necessary future expansion.
A publicly owned network may decide that recovering those costs and maintaining financial sustainability is enough.
A private investor may additionally require a market return on equity.
Those are different ownership models, but neither removes the underlying cost of the asset.
“Free” infrastructure is almost never free
If a service has no direct charge, somebody else is paying.
Taxpayers.
Ratepayers.
Other users through cross-subsidy.
Future taxpayers through debt.
Or the asset itself through under-maintenance.
That does not make free-at-point-of-use provision wrong.
It simply means we should describe the funding honestly.
Free at the point of use is a distribution choice, not the absence of a cost.
What about infrastructure that produces both commercial and public returns?
This is where mixed models become useful.
An urban transport project may generate fare revenue but also reduce congestion and enable development.
An energy project may generate commercial revenue and also improve energy security.
Digital infrastructure may generate customer revenue while also improving regional access and productivity.
Those projects should not automatically be fully taxpayer-funded or fully user-funded.
The funding contribution can be split according to the benefits and risks.
That is more sophisticated than choosing one ideological model for every asset.
A practical “who pays?” test
Before deciding how an infrastructure asset should be funded, I would ask:
Can users be identified?
Can use be measured?
Would charging change behaviour in a useful way?
Would charging undermine equitable access?
How large are the benefits to people who are not direct users?
Does the asset create value for identifiable landowners or developers?
Can the network as a whole recover its lifecycle costs?
Is there a deliberate cross-subsidy?
If taxpayers are contributing, what public return are they buying?
If the asset produces commercial revenue, is the Crown receiving an appropriate return for the risk it carries?
My conclusion
Should infrastructure pay for itself?
For many network services, broadly yes.
The users and direct beneficiaries should usually carry the lifecycle cost where that is practical and fair.
But social infrastructure is different.
Some of the most valuable assets a country owns will never produce a commercial profit because that is not what they were built to do.
The correct test is not whether every asset can write its own cheque.
It is whether the funding model matches the asset, the beneficiaries and the public purpose.
Commercial return tells us whether an asset makes money. Economic and public return tell us whether the country is better off because the asset exists.
Next
That brings us to the next hard question:
When should New Zealand borrow instead of tax?
Part 17 will examine intergenerational fairness, long-lived assets, operating deficits, debt service, tax smoothing and why the timing of who pays can matter just as much as the amount.
Primary sources
Te Waihanga — Using the right tools to pay for infrastructure ↗
Te Waihanga — Planning what we can afford ↗