The charge had been running at around $576 million per year, in the 2024/25 estimates. Drop it and nothing much changes, because Health New Zealand was funded by the Crown to pay it to the Crown in the first place.
If the charge really is a pointless money-go-round, then it’s right that the Finance Minister is reassessing things. But there is more than one potential solution here. And I hope the alternative way of fixing the problem is considered. It would do more good over the longer term.
Rather than abolish capital charges, the government could fix and extend them more broadly. Done properly, it would bring a coherence to Crown spending, and to asset holdings, that is sorely needed.
The charge is meant to put an explicit price on the capital that an agency ties up.
Agencies should have to consider the cost of capital when deciding on investments. People sometimes talk about the whole-of-life cost of an investment: the up-front cost of a project, as well as its operating and maintenance cost over its lifetime. An investment that only passes muster if we ignore the Crown’s cost of capital is an investment that should not be made.
Suppose that an agency were funded for the outcomes the government wants from it, allowed to decide how best to achieve those outcomes, and charged for the Crown’s capital used in the process.
If an agency had land that it didn’t particularly need, holding onto it rather than returning it to the Crown would come at a cost – a five percent charge on its value every year. Finding ways to tie up less of the Crown’s capital would mean a smaller capital charge, and more money left in the agency’s budget. It would also provide new options for the Crown, which could put that capital to better uses.
Or at least that is what the charge is meant to do. If an agency simply gets top-up funding to cover whatever the capital charge works out to be, then the charge cannot do that work. If capital charges have turned into a money-go-round, that’s a design fault rather than a law of nature.
Consider a hospital deciding whether to invest in a new parking lot. It could build one on its own land, charging those whose visits the hospital does not want to subsidise. Or the hospital could release the land, let someone else provide parking, and buy vouchers for the patients whose visits the hospital wants to subsidise.
Which is the right decision might vary case by case, but a hospital that faces no charge for the capital tied up in a parking garage is more likely to make the wrong decision.
The problem spans the government’s holdings.
Take roads and rail. People using both networks do pay user charges. But neither road nor rail returns a cent to its owner, the Crown, for the capital tied up in those networks.
The state highway network is worth around $89 billion and sits outside the capital charge entirely. A five percent return on that would be something like $4.5 billion a year, and is the return the network would have to justify if it had to pay for the capital locked up in it.
KiwiRail's 18,200 hectares of land are held by a separate Crown-owned corporation that leases it to KiwiRail for a dollar a year, expects no return on it, and pays no dividend. The Crown's own valuation of its rail investment sits below zero, before subsidies in from the government are considered.
So when a freight customer weighs road against rail, and when a Minister weighs spending on one against the other, both work from prices that do not reflect real costs or value. Road transport looks cheaper than it is when the capital tied up in the network is not priced. And rail's real cost is buried in a complicated mess of cross-subsidies across commercially viable and non-viable lines, and substantial subsidies to the network as a whole.
Put both on an honest footing, charging for the capital, and recovering it from the users who benefit. The choice between them then becomes mode-neutral, made on real costs rather than on whichever subsidy happens to be larger.
Where the government wants an uneconomic line running, whether for resilience, for regional development, or for other reasons, the government could contract for that outcome directly. It would then be a transparent line in the budget that anyone could see and argue about.
This is the coherence the comprehensive version buys. Decide what outcomes the government wants, whether in health, conservation, or transport, and fund those directly. Then let the cost of capital fall where it may. Crown agencies would get better at delivering what people actually value, and the capital they don’t need for those purposes would be freed for those who can do more with it.
Capital that costs its holder nothing tends to stay exactly where it landed, however long ago that was. Stewardship land is the obvious conservation example. At DOC’s formation in 1987, large areas were placed in a transitional category while their conservation values were to be assessed. Much of that work was never completed. Where assessment shows high conservation value, the land should be funded openly as conservation. Where assessment shows low or no conservation value, disposal, exchange, covenanting, or transfer should be a live option.
The Minister is right that a charge which changes nothing when you remove it is not earning its keep. But the answer is not to pretend Crown capital is free. It is to make the charge real. Fund the outcomes government wants, charge for the capital used to deliver them, and let agencies keep the gains from using less of it.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
Rather than abolish capital charges, the government could fix and extend them more broadly. Done properly, it would bring a coherence to Crown spending, and to asset holdings, that is sorely needed.
The charge is meant to put an explicit price on the capital that an agency ties up.
Agencies should have to consider the cost of capital when deciding on investments. People sometimes talk about the whole-of-life cost of an investment: the up-front cost of a project, as well as its operating and maintenance cost over its lifetime. An investment that only passes muster if we ignore the Crown’s cost of capital is an investment that should not be made.
Suppose that an agency were funded for the outcomes the government wants from it, allowed to decide how best to achieve those outcomes, and charged for the Crown’s capital used in the process.
If an agency had land that it didn’t particularly need, holding onto it rather than returning it to the Crown would come at a cost – a five percent charge on its value every year. Finding ways to tie up less of the Crown’s capital would mean a smaller capital charge, and more money left in the agency’s budget. It would also provide new options for the Crown, which could put that capital to better uses.
Or at least that is what the charge is meant to do. If an agency simply gets top-up funding to cover whatever the capital charge works out to be, then the charge cannot do that work. If capital charges have turned into a money-go-round, that’s a design fault rather than a law of nature.
Consider a hospital deciding whether to invest in a new parking lot. It could build one on its own land, charging those whose visits the hospital does not want to subsidise. Or the hospital could release the land, let someone else provide parking, and buy vouchers for the patients whose visits the hospital wants to subsidise.
Which is the right decision might vary case by case, but a hospital that faces no charge for the capital tied up in a parking garage is more likely to make the wrong decision.
The problem spans the government’s holdings.
Take roads and rail. People using both networks do pay user charges. But neither road nor rail returns a cent to its owner, the Crown, for the capital tied up in those networks.
The state highway network is worth around $89 billion and sits outside the capital charge entirely. A five percent return on that would be something like $4.5 billion a year, and is the return the network would have to justify if it had to pay for the capital locked up in it.
KiwiRail's 18,200 hectares of land are held by a separate Crown-owned corporation that leases it to KiwiRail for a dollar a year, expects no return on it, and pays no dividend. The Crown's own valuation of its rail investment sits below zero, before subsidies in from the government are considered.
So when a freight customer weighs road against rail, and when a Minister weighs spending on one against the other, both work from prices that do not reflect real costs or value. Road transport looks cheaper than it is when the capital tied up in the network is not priced. And rail's real cost is buried in a complicated mess of cross-subsidies across commercially viable and non-viable lines, and substantial subsidies to the network as a whole.
Put both on an honest footing, charging for the capital, and recovering it from the users who benefit. The choice between them then becomes mode-neutral, made on real costs rather than on whichever subsidy happens to be larger.
Where the government wants an uneconomic line running, whether for resilience, for regional development, or for other reasons, the government could contract for that outcome directly. It would then be a transparent line in the budget that anyone could see and argue about.
This is the coherence the comprehensive version buys. Decide what outcomes the government wants, whether in health, conservation, or transport, and fund those directly. Then let the cost of capital fall where it may. Crown agencies would get better at delivering what people actually value, and the capital they don’t need for those purposes would be freed for those who can do more with it.
Capital that costs its holder nothing tends to stay exactly where it landed, however long ago that was. Stewardship land is the obvious conservation example. At DOC’s formation in 1987, large areas were placed in a transitional category while their conservation values were to be assessed. Much of that work was never completed. Where assessment shows high conservation value, the land should be funded openly as conservation. Where assessment shows low or no conservation value, disposal, exchange, covenanting, or transfer should be a live option.
The Minister is right that a charge which changes nothing when you remove it is not earning its keep. But the answer is not to pretend Crown capital is free. It is to make the charge real. Fund the outcomes government wants, charge for the capital used to deliver them, and let agencies keep the gains from using less of it.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
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