Congestion charge has merit for Auckland

Suggests some ways to bridge the infrastructure funding gap

Auckland has the vision to be the world’s most liveable city. Immigration into New Zealand is at record levels and most newcomers and returnees wish to come to Auckland — so our city must be an attractive destination.

However, partly as a result of this inflow, our transport infrastructure is stretched.

In August last year Auckland Mayor Phil Goff noted the productivity losses from congestion alone are estimated at between $1.5 billion and $2b a year. Currently during the morning peak period, some 27 per cent of commuters’ time is spent in severe congestion.

Moreover, pressure on our transport system will intensify as the city’s population is estimated to grow by almost 50 per cent over the next 30 years, adding a further 700,000 people for a total of 2.2 million residents.

The amount of freight travelling on Auckland’s roads is projected to rise by 78 per cent over the same time.

For transport alone, the gap between the 30-year funding requirement identified in Auckland Council’s Long-Term Plan and the funding available from current sources is estimated to be $12b.

The shortfall cannot be financed by borrowing more as the council’s debt will reach some $10b over the next three years. That is because the council is already operating close to the 270 per cent ratio of debt to revenue it needs to operate within to preserve its AA credit rating.

But even if the council was to borrow more, the increased interest burden needs to be serviced now, ahead of the increase in rating revenue arising from future growth. So what additional revenue sources are available to the council to fund, that is pay for, the increased infrastructure spend?

Half of the council’s $3.2b annual operating revenue comes from rates. If the $400 million average annual shortfall in infrastructure spending identified above was wholly funded from this source alone, it would require a step-up in the annual rates bill of around 25 per cent in the current year. This is politically unsustainable. Some form of road pricing could be used, such as a regional petrol tax or congestion charging. However, a regional petrol tax has been ruled out by central government because it is “administratively unwieldy and prone to leakage”, according to the Minister of Finance.

A congestion charge has much to recommend it because it would assist in demand management. Through shifting usage away from peak periods, it defers the need for future investment and buys time for new and more cost-effective technologies to emerge.

It could also be a means of delivering increased revenue which could fund additional infrastructure. However implementation of congestion pricing might be 10 years away. So what do we do in the interim?

Public private partnerships (PPPs) have been proposed. PPPs are a longterm contract to deliver a service, where provision of the service requires the construction of a new asset, or enhancement of an existing asset.

Private sources finance the asset, while the Crown/council concerned retains full legal ownership.

For example, a PPP has been used to design, construct, finance, operate and maintain the new 27km Transmission Gully highway for 25 years after the five-year construction period. The New Zealand Transport Agency expects the PPP will deliver the project at a lower “whole of life” cost than the public sector could obtain through conventional procurement.

The PPP model also encourages the most advanced technology and innovative approaches from overseas to be brought to this and, potentially, other projects.

Though PPPs are an innovative way to procure infrastructure with significant efficiency benefits, they are not a means of project funding where the loans and interest are repaid by the sponsoring government or local authority.

A form of funding that has found favour with the New Zealand Productivity Commission, in its recently published report on urban planning in New Zealand, is called “value capture”. The essence is that landowners are taxed on the uplift in unimproved land values arising from the infrastructure put in place by the council concerned.

It is only fair that a portion of the windfall gains enjoyed by landowners should be retained for the benefit of the community.

The value capture tool has been used to part-fund London’s Crossrail railway line, currently under construction. The Greater London Authority is raising £5.2b of the estimated £14.8b project cost from valuecapture sources — a third of the total.

Auckland Council’s Long-Term Plan includes some $25b in capital expenditure on transport projects over the next 30 years.

Even where only half of this expenditure was amenable to value capture, the potential additional revenue of $4b would make a material difference to bridging the funding gap.

Jim McElwain is the Executive Director, Institute of Finance Professionals NZ Inc (INFINZ) Big deals in the pipeline but they are taking a while to come to market D4 The sharemarket continues to be in a healthy state D8-9 wonders whether the pools of capital are going to the right places D10 of Direct Capital talks to Tim McCready about the state of NZ’s private equity industry D13