Money tap needs to be turned on
Councils have work to do. The funding is coming. Can we put the two together?
Spending up large on infrastructure is one of the things needed to haul the economy out of the deep recessionary bog it is mired in. And that is a challenge for local government as well as central government.
Unfortunately, many councils already faced funding and financing constraints going into the crisis.
Fast-growing cities like Auckland are bumping up against the limits of their ability to borrow — which is a multiple of their income — without triggering a credit rating downgrade that would push up their interest costs.
Other local authorities in rural New Zealand face the opposite problem of declining populations.
The economic aftermath of the epidemic will only make this worse.
Businesses which go out of business cannot pay rates.
The need for rates relief for homeowners on hardship grounds may well increase, too.
And the political economy of rate rises when incomes are squeezed is liable to be challenging, to say the least.
Yet the infrastructure deficits that need to be addressed are undeniable.
The neglected state of three waters infrastructure is one example. That is about $100 billion worth of pipes and treatment plant, much of which is overdue for renewal. It has been out of sight and out of mind for too long already, as Wellingtonians are all too aware.
Then there is the need to cope with impacts of climate change such as more frequent downpours and rising sea levels.
So the councils need to undertake more capital expenditure but their ability to access capital is constrained.
The capital is there, or will be. The Covid-19 crisis is a shock to confidence which is likely to see people who are not living hand to mouth save more of their income.
And the Reserve Bank’s quantitative easing (QE) programme includes buying bonds issued by the Local Government Funding Agency (LGFA). The bank’s current budget for that is $3b, or about 30 per cent of the LGFA bonds on issue.
The LGFA, established in 2011, gives 66 councils access to financing at the same credit rating at which the Government borrows.
So the challenge for policymakers is how to marry up the demand for capital with the supply.
Part of the answer might lie in legislation now before the transport and infrastructure select committee called the Infrastructure Funding and Financing Bill.
The title of the bill promises more than it is designed to deliver. It predates the Covid-19 crisis and is intended to facilitate the more widespread use of special purpose vehicles (SPVs), like that set up for the
Milldale project north of Auckland, to finance infrastructure for new and relatively large housing developments.
The debt an SPV would raise would be serviced by levy income from the new housing that it enabled. Crucially, the debt would be off the balance sheet of the council in whose territory the project occurred.
But Infrastructure New Zealand, in its submission on the bill, warns that the complexity of the model would reduce its attractiveness for projects smaller than $50 million.
“A ‘Recommender’ must be engaged, local authority endorsement received, ministerial approval gained, an SPV established and a levy raised, in addition to standard regulatory processes, including project consenting, which must also be traversed,” it says.
Cameron Partners, which is advising a steering group comprising the LGFA and several high-growth councils, suggests in its submission that the bill’s purpose provisions be widened to ensure the model can assist with financing a broader range of projects than those related to housing and urban development, “such as end-of-life replacement work across water networks, environmental resilience and the construction of new road and rail infrastructure.”
Cameron Partners also advocates setting up something similar to the LGFA to standardise and aggregate SPVs’ borrowing requirements and intermediate between them and the capital markets.
The submission predates the Reserve Bank’s announcement that it would be getting into the QE business but it would strengthen their argument.
“We see no risk in widening the purpose statement. The approval process as drafted is sufficiently rigorous to ensure that any approved projects would be demonstrably in the best interests of the levypayers who would bear the projects’ costs.”
The Society of Local Government Management, the professional body representing hundreds of local government officials, disagrees.
It notes that an SPV is a commercial entity expecting a rate of return on its investment. “This in itself is an unusual use of what is a power to tax.” An SPV need not be a public agency. “Indeed we suspect most will not be. The accountability to the ratepaying public is weak. There is no obligation on the proposers to engage with the ratepaying public in the levy area at any point as the SPV is being established.” Nor before the levy is set for any year. “The first point that many [people] will become aware of their liability for the levy will be when they receive notice of the levy along with the rates collected by the local authority,” SOLGM says.
The environmental umbrella organisation ECO shares those concerns about accountability and governance. It understands, it says, the dire need for infrastructure to service businesses, communities and homes.
“But we think the bill is too sweeping, would allow an extremely wide range of entities to hold powers that would allow other values,
Fast-growing cities like Auckland are bumping up against the limits of their ability to borrow . . . without triggering a credit rating downgrade.
interests and concerns to be swept aside.”
So the challenge facing MPs on the select committee is this. The problem of funding and financing local government infrastructure has always been broader than the bill as drafted addresses.
The epidemic and its economic fallout have made the problem much deeper and more urgent.
We need to do a lot more capital expenditure. The capital is there. But the bill as drafted will be of limited use in bringing demand and supply together.
Can it be amended to be fit for purpose in this new environment, so that it deserves its title?
And can that be done in a way that strikes a better balance between complexity and accountability?