Crown company borrows money for infrastructure from Crown entity at rate of 5.37% for the sake of keeping debt off government books, when the Government could've issued bonds at 3%

Crown company borrows money for infrastructure from Crown entity at rate of 5.37% for the sake of keeping debt off government books, when the Government could've issued bonds at 3%
Image sourced from Pixabay

By Jenée Tibshraeny

New Zealand needs infrastructure, as much as it needs more houses.

This is a statement most of us can agree on.

Yet when it comes to local councils floating the idea of increasing rates, or central government (a left-leaning one in particular) increasing taxes, the consensus fades.

Public opinion gets even more divided when it comes to the government taking out more debt, possibly forgoing an aesthetically pleasing surplus.

There are capacity constraints, but it’s no wonder we have an infrastructure deficit.

Urban Development Minister Phil Twyford has identified another way of raising money to pay for infrastructure, which keeps debt off local and central governments’ books, and therefore hidden from voters.

The solution involves setting up a company that takes out a loan to pay for infrastructure in a new subdivision, which is repaid by levies charged to property owners in the area.  

However, the luxury of containing the debt and risk to that company comes at a cost. 

ACC issued long-term loan at 5.37%

The Government has permitted Crown Infrastructure Partners (CIP) to set up a special purpose vehicle, or subsidiary called Milldale Infrastructure LP, to help fund roading and wastewater infrastructure at the new Milldale subdivision in Wainui, Auckland.

The Accident Compensation Corporation (ACC) has agreed to lend Milldale Infrastructure LP up to $60 million over 35 years at a fixed interest rate of 5.37%.

Milldale Infrastructure LP will only start repaying the principal from 2026. The interest it owes ACC will initially be added on to the loan.

CIP will also make a $3.7m equity investment in Milldale Infrastructure LP on behalf of the Crown.

The plan is for Milldale Infrastructure LP to contribute a total of $48.9m towards the infrastructure, being developed by Fulton Hogan.

The loan and equity investment will be repaid using levies charged to property owners in Milldale over 30 years.

The expectation is for 3,027 homeowners and 153 commercial property owners to be levied $1000, and 680 apartment owners $650 in their first year, with these levies increasing by 2.5% a year.

There is also an option for property owners to make an upfront levy payment upon purchase. The amount they will be charged will depend on market interest rates, so will fluctuate.

If all the expected number of properties sell, no property owners take up the offer to pay their levies upfront (so far one property owner has opted to do so), and no owners default on their levy payments, Milldale Infrastructure LP will collect $159m over 30 years.

So, roughly $159m will be collected to cover the cost of a $48.9m infrastructure investment.

Government could’ve issued bonds at 3%

If the Government wanted to raise these funds the good old-fashioned way, it could’ve issued bonds.

The bonds it issued in November 2018, when the CIP deal was announced, had yields of 3% (these have since fallen with interest rates).

However, with 19-year terms, these weren’t as long as the especially long 35-year term offered by ACC for its loan.

The other upside of the ACC loan is that neither the Crown nor CIP need to provide a guarantee for it. 

However, the complexity of all the contractual arrangements involved between property owners, Fulton Hogan, CIP, Auckland Council (which will collect the levies), Auckland Transport and Watercare, add extra legal and administrative costs. CIP will also need to be paid a return, which is confidential for commercial reasons, for its equity investment. 

If Milldale Infrastructure LP took out a loan with an interest rate of 5.37%, and could start repaying it immediately, it would end up paying 2.2 times what it borrowed after 35 years.

But the amount it is collecting in levies is likely to be more than three times the value of its investment.

The cost of keeping face

Twyford isn't concerned about the cost of the set up. He said it had to be commercially viable. In other words, if it was a rip-off, sections wouldn’t sell.

Buyers are made well aware of the levy set-up.

Twyford plans to introduce legislation to Parliament in coming months to make it easier for the Milldale model to be replicated in other high growth parts of the country.

But one has to ask whether it’s worth a Crown-owned company taking out a loan from a Crown entity at 5.37%, for the sake of keeping debt off local/central governments’ books, when the Government could issue bonds at a much lower rate.

This seems particularly ludicrous when at 20.2% of GDP, New Zealand’s net Crown debt is low by international standards and credit rating agencies say more can be borrowed without the country’s credit rating being affected.  

It was fear of the public thinking Labour is bad with money that prompted Finance Minister Grant Robertson to impose Budget Responsibility Rules requiring him to cut debt to 20% of GDP by 2022 (a looser target than proposed by National before the 2017 election).

The Government should show some prudence by not getting property owners to pay an arm and a leg to keep debt off its books.

But sadly, it seems to think it's better off paying a high price to make it look prudent, rather than tackling the public's misconceptions around tax always being 'bad' and surpluses always being 'good', thus preventing it from spending what's necessary to provide infrastructure. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Scrap the whole thing then, and let the initial purchasers' of Lots pay for the capitalised cost of the infrastructure in their upfront price!
Sure, they'll have to get a bigger mortgage and pay for the capitalised component of the roads and water etc in the interest rate they pay over their 30 odd years of the debt. But isn't that the Kiwi way?
Let an unaware initial 'investor' pay the cost of the utility usage for all future users of the Lot, and hope to make it back, and more, from never-ending property price rises?
That's an even better way of keeping it off the Crown balance sheet! Load it in its entirety onto the Private balance sheets(s)
(NB: The above Scheme is 'the way to go'. It will be refined over time, but its structure is sound)

Yeah, this seems to be a very questionable way to save ~13k (ex. tax) off the developers cost of each property(, i.e. a developer subsidy). Its an "off the books" loan to the homebuyers providing them the credit to pay even more for their house. I don't think it would have been too harmful to the viability subdivision to add this to upfront price (but I guess it effect the profit margins of everyone involved).

A better way would be provide a "loan" to the developer secured against the subdivision which is replayed as the properties are sold.

You're on the money.

This setup is nothing more than a land developer subsidy, when growth is suppose to pay for growth. Hope future buyers are aware of this, and avoid these sections like the plague; or at least discount the section prices by a minimum of $30,000. I have calculated this proposed annual levy to cost $2,100 by the term it gets to 30 years.

You can guarantee the banks will factor these annual payments into their affordability calculations; or at least they should do. You cant guarantee anything with valuers; most of which rely on knowing what the sale price is to make a call on value.

You have a point. Currently can get 3.45% pa. Still a long way off 5.3%

... $ 159 million will be collected to cover a cost of just $ 49 million ...

That pretty much sums up government stupidity , this govt in particular ...

... oh , and looky looky , who's standing next to this bollicking nonsense ... Phil Twyford .... now it all makes cents to me ... SIGH !

I know, you know this, but plonk the figures into the Mortgage calculator on this site for a $49 million house over 35 years, and see how much that would end up costing!

.. as Jenee is saying , and Bernard Hickey too , we desperately need a government who has the guts to tear up the ludicrous 20 % debt limit , and get cracking on rebuilding / upgrading the nation's infrastructure ...

Debt taken on for capital works is good ... that is the message to relay to the voting public ...

... 3 % interest on govt bonds is the cheapest and easiest way bar none to get this country back on track ...

I have no problem with a Public Debt figure of 40% IF a commensurate fall in Private Sector Debt accompanies it.
That's the bit I think we are having difficulty with politically. It will mean that we need to... well, we know what that means we will need to do, and that ain't' gonna happen!
So given that, and not wanting to see our TOTAL national debt explode beyond our capacity to service it ( never mind leaving it for the great-grandkids to pay off!) the above Scheme seems like a good place to start. (NB: It's about "How we apply our National Debt" - a finite and precious resource - rather than "How much debt do we have?")

... what I'd like to see is some left-field thinking by a minister of finance ... such as govt setting up a series of infrastructure funds . . They borrow at 3 % and own 51 % of each fund , float 49 % onto the NZX as tradable shares to the public ...

Get the small investors of NZ onboard .. And provide a viable alternative to investing in houses .. also , itd add some breadth to our skinny stockmarket ...

Perfect!
And if that redirects investment in the retail sector towards the NZX rather the only current alternative, then mores the better. But perhaps that's what they have in mind, and why the interest rate of any NZX issue would have to be attractively high (5.37% should do it; I doubt 3% would?
Anyway, all good thoughts.

Well there already are Kiwibonds out there. Which pay a handsome 1%.
So the govt is already doing this. I cannot see why listing them or making them tradeable makes much difference. You could make money or lose money on them if they were volatile and tradeable by buying and selling them but I think we will see these things being stable at this low sort of return for years to come.

... no , I was thinking of each trust holding its infrastructure as income earning assets .... closer to a property trust model ... paying dividends to the owners ... divvies which can rise over time ... or fall ... thinking of a series of government established & 51 % owned Infratils ...

Public debt is private sector assets. Government bonds are private sector savings. Sure, we have a current acvount deficit so the foreign sector is saving too but if the nz government ran a sufficient deficit it would allow the private domestic sector to repair their balance sheets. Sectoral balances matter. G-T = S-I -X-M. When the government runs a surplus and foreigners have a surplus the private domestic sector, to sustain spending must run a deficit. Hence our household debt. This is not sustainable. Households have a strict budget constraint. Governments like nz do not. They should run deficits that offset demand leakages to imports and savings of sufficient size to promote genuine full employment.

And to be clear, what they are talking about is off site infrastructure like highway connections etc. which we are already pay taxes on.

As per other new developments, all internal public infrastructure is already paid by the purchaser in the price they pay when they buy in, and then this asset is handed over to local council to become part of their asset base.

Now they want the purchasers at Milldale to pay for other externalities that already pay a user pays tax on, plus benefit others that don't have to pay any contribution.

What would really be great to see is a breakdown on how they get to these external costs being $49 million, all the figure is missing is the .99 cents on the end to make it sound super cheap.

Yea sorry, I tried to get a better breakdown of that $49m +/- but couldn’t. Firstly, CIP doesn’t agree with my estimate that $159m will be collected in levies. I appreciate there are a number of variables, but can’t see how (using the available info) this isn’t the best estimate. 

Some of the additional funds will be used to pay interest that will be added on to the loan in the initial stages when the company can’t cover this cost. Some will also be used to pay CIP for its equity investment and some will be used to cover defaults. CIP was hesitant to go in to detail due to commercial sensitivity... 

And not a trivial sum will be expended on Legal Eagles, Company filing hence accountants, tax specialists and staff, plus other Overheads (shades of Arkwright....). The entire configuration is a ticket-clippers Nirvana.....

Apologies, what I meant was that the figures are not available to anyone as they won't relate to the true cost, ie this will be another revenue stream to them, and is not about just covering the cost of these assets. They don't want to have to justify the unjustifiable.

The original premise for this type funding was how they fund subdivision development in the likes of Texas (which works very well and makes housing so much more affordable), but in true 'give them an inch...' philosophy, they have expanded this to not only charge the customer for the subdivision infrastructure up front as per usual but also get them to fund infrastructure further afield and/or make them pay again for stuff they are already paying tax on.

Remembering that this investment is meant to help remove a capital upfront cost so to make the house more affordable, and noting they have said that purchasers would be given an opportunity to pay this upfront cost at time of purchase instead of a drip feed. This upfront cost should represent the discount off the today value of the property had it not been spread over time.

Therefore what you should be able to do, is take the present price, and add the once only payment option to equal the value of what this property is worth if had just been a status quo value/sale.

I bet it won't equal the status quo, because this figure they are trying to tack on is extra and not inclusive, ie the house price would have been the same regardless, effectively allowing everyone involved to make a this project work (read make money), except of course the purchaser who has paid extra, be it over a longer time frame.

Imagine being caught with this type of investment in a downturn when your capital value falls or stalls and your land service costs are about 50% greater than houses elsewhere.

Kiwis, always too scared to do what needs to be done, happier to not upset anyone....We're just as trapped in the current economic culdesac of 'low cost' government via low taxes and inherent low productivity that follows due to underinvestment and the eyewateringly high cost of failing services and infrastructure that such policy causes as we were also hopelessly trapped in the previous interventionist paradigm from the 1930's to the 1980s with high cost but investment minded government. At least kids weren't dying from measels when I paid higher tax and at least there wasn't this sort of debacle unfolding due to taking the cheap road to providing infrastructure...from John Keys legendary safe pair on hands no less...

https://www.rnz.co.nz/news/national/404496/waikato-expressway-temporary-...

Its ridiculous, we know when the science is undertaken that the cheap way out of any situation is not really a way out, its a trap. Yet we refuse to change our meanfisted ways...unless you are an aluminium smelter, a yachting syndicate or a movie mogul....

All too inevitable:

When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures. [my bold] Link

Not now - the NZ government has blatantly engineered a publicly documented scheme to recover the increased present value cost of it's future liabilities by passing them on to gullible citizens.

"ACC posted an $8.7 billion deficit for the year, with record-low interest rates taking a major chunk of out its long-term forecasts. Lower interest rates mean the fund has to invest more now to cover costs down the track." Link

This deal (ACC issued long-term loan at 5.37%) helps offset the fact that invested ACC levies collected today will be compounding at a reduced rate due to RBNZ price stability policy actions.

And it's just the beginning of ramping expenditure demands to fund the rising present value of future liabilities such as pensions, salaries, insurance premiums, and general living costs while interest rates are poised to fall further.

Yeah, ACC getting 5.37% return with first ranking encumbrance on the properties seems like a significant conflict of interest to me. I'd put my entire savings into this if it was tradeable.

It seems like a good deal to me. More of this should be on offer. The Superfund, Kiwisaver investors, ACC, overseas international institutions would then be competing the interest rate costs down for viable infrastructure projects (which we have lots of due to our infrastructure deficit). NZ would have a healthy infrastructure bond market. NZ government investment would be augmented by private sector investment to competitively lower the cost of housing and urban expansion, which would over time decrease household debt (because most of that is mortgage debt to banks).

Whether you think that government debt at 3% over 19 year term versus crown infrastructure holding debt at 5.37% over a 35 year term is a good deal or not is in my opinion partly to do with your view about the risk that the government 'knows best' or not.

Because if the infrastructure turns into a white elephant when it is government debt it means the taxpayer takes the hit. For the special purpose vehicle it is bond holders who take the hit.

Thanks Jenee for the information about the financing arrangements for Milldale. I had not seen the interest rate figure. That has allowed me to write about how NZ could fund a dry year energy storage scheme as a special purpose vehicle. Also of note the risk that infrastructure debt providers would be taking in my proposal is that Transpower could become defunct over the 35 year life cycle of the loan because -say households switch from the grid to their own personal renewable generators (solar?) and battery systems.

My full write up is here
https://medium.com/land-buildings-identity-and-values/who-will-pay-for-z...

And the key passage re special purpose vehicles is here.

"As discussed earlier, it is unlikely that any existing generator would build a dry year energy storage scheme, because it devalues their future revenue by lowering wholesale electricity spot prices.
The government might choose to build a large scale energy storage scheme as a project of national significance and then gift the scheme to Transpower to run on a cost neutral basis with respect to operating costs. The overall aim being to ensure security of supply as the electricity market delivers more renewable generation capacity.
Alternatively, Transpower could build and operate the energy storage scheme as a special purpose vehicle, borrowing for the capital costs and repaying the debt by either adding a ‘security of supply’ line charge, or by increasing the spread on the storage scheme’s electricity buying and selling prices to cover capital as well as operating costs.
The special purpose vehicle option would add $14/month onto household electricity bills over a 35 year term, if all of the infrastructure cost was added to a ‘security of supply’ line charge. In exchange for this higher line charge, per unit charges would be lower and more stable, as wholesale electricity spot prices would not rise above $75MWh, possibly even lower if renewable generation costs continue to fall, and of course electricity would come from 100% renewable sources.
Financing figures based on the estimated $4bn infrastructure cost of the Lake Onslow pumped hydro scheme, New Zealand having approximately 1.5m households, the debt having a 5.37% interest rate and a 35 year term. This financing option would be a similar to the arrangement given by ACC for the Milldale special purpose vehicle infrastructure financing structure."

Teehee. You couldn't make it up. Dopey government brings in 500,000 extra people into a country that has great difficulty in building enough houses to replace the existing chicken shacks that were built to leak because previous dopey government buggered up the building code. Present dopey government unable to actually build houses as dopey governments over the last 30 years have engineered ludicrous planning system and financial system that ensures that it is well nigh impossible to build a new house that anyone earning less than the top 10 percentile can afford.

Perhaps we should be taking power from these plonkers, or is that just too radical in a lefty country? The Swiss do it by having a referendum on just about everything.

Do you mean?

"Dopey government brings in 500,000 extra *households* into a country that has great difficulty in building enough houses to replace the existing chicken shacks that were built to leak because previous dopey government buggered up the building code. Present dopey government unable to actually build houses as dopey governments over the last 30 years have engineered ludicrous planning system and financial system that ensures that it is well nigh impossible to build a new house that anyone earning less than the top 10 percentile can afford."

Because that seems to sum it up.

I am not sure why people like Bernard Hickey think that the government is good at this planning stuff and that if the government were given free rein to invest in 'anything' that can be labeled 'infrastructure' that politics would not trump all other considerations.

Oops, sorry, I mean 500,00 extra people. In my mind I wrote "people", but mysteriously , my computer interpreted it as "houses, or was it my hands?

I'm crying into my vindaloo reading what you have posted Roger. Let me ask you this, are we a lefty country at all? I doubt it because lefties tend to be early adapters, intelligent, open minded and aren't afraid to act for the greater good according to the evidence to hand. The Swiss do their referenda brilliantly, but they are more socially coherent too, having decided long ago what their country stands for and the sort of society it is willing to sustain. I tender that we are none of that, we don't know what we stand for hence our acceptance of terrible political leadership cycle after cycle...what will be the circuit breaker to change that?

Sorry for the Lefty jibe, just my frustration getting away with me. I think there are a lot of things that make for a civilised society, and we are largely unaware what they are. It is as if we have inherited a great estate but have no idea how it works. When society stagnates and declines we start argueing with each other and calling each other names.

I do believe that capitalism drives progress, and that much of what passes for socialism is just stealing by those who think they know best. The key difference is choosing a system that creates choices, rather than one that seeks to manipulate.

Robertson has just sent out this press release FYI:

The Government has decided to bring forward major investments in New Zealand’s infrastructure to future proof the economy.

“Cabinet has agreed to a significant boost to infrastructure investment. I have directed the Treasury to help bring together a package of projects that can be brought into the Government’s short and medium term plan of investments," Grant Robertson said.

“We have this once in a generation opportunity because of the Government’s good management of the books and resulting low debt.

“It makes sense to take advantage of this low debt and record low interest rates to make investments now to benefit generations to come.

“The Government inherited neglected infrastructure when it took office, including run down hospitals, roads that had been announced but not paid for, overcrowded classrooms and a state housing shortage.

“We are still finalising the full list of specific projects but they will be spread across the country and will support a number of different sectors.

“The package will provide certainty to the construction industry about upcoming infrastructure projects.

“The investment will have a significant economic impact and create more job opportunities for Kiwis – especially our young people.

“This Government is not sitting on its hands when it comes to getting people into the trades – through programmes like Mana in Mahi and He Poutama Rangitahi we are supporting more and more people into work,” Grant Robertson said. 

The size of the investment package and how it will support the growing economy will be outlined at the Budget Policy Statement on 11 December.

Exactly as I have previously predicted. Much better for them to commit to financing projects than making more election 'promises' given their record of breaking promises.
If they are clever they will put half a billion to FHB leasehold housing in Auckland, to help garner more support from the critical middle class.

Leasehold? The worst of freehold and rented rolled into one big stinky ball. If the Govt is going to build, it should build for housing NZ. Let the free(ish) market sort out privately owned dwellings once the govt forces council to free up developable land

It's done through Europe. If it's govt controlled, long term and tied to inflation, no issues. It's dodgy perception is down to the horrid lease increases that can occur.
The private sector has shown it can't/ won't build affordable.

In Hamikton theres a metric shitload of redev work happening on HNZ sites so the govt is working hard to shore up that space which is good because I am sick of paying the accom supplament to slum landlords while my tax dollar has zero asset return, much better to actually own the asset if you pay the tax right? As for leasehold, jump on a plane to Europe and ask around, thats how its done up there and its very succesful.

Yep, same in Auckland in Mt Roskill, 5 or 6 old state houses in a row on Richardson road behind temporary fencing waiting for the excavator to turn them into piles of scrap. And huge swathes of land behind them that already been cleared and is having the infrastructure installed. Totally agree the govt shouldn't be paying landlords for long-term rentals, short-term as a buffer while more state housing is built is fine.

Still have my doubts about leasehold, maybe with govt ownership and some published formula for annual lease increases related to median income it might not be as crap as existing leasehold land.

I think NZ has a massive infrastructure deficit especially in the areas of housing and climate change. So I am broadly supportive of increased infrastructructure spending.
The aspect of Grant Robertson's infrastructure spend up I will most closely be looking at is whether the particular infrastructure projects chosen are picked for political reasons or for genuine practical viability reasons i.e. do they pass the 'sniff test' as being the best options for tackling the crises that the country faces.
This is the interesting factor behind the higher interest rate for special purpose vehicles -the likes of Milldale might turn out to be a dog -the houses might not eventuate, the debt might not be paid, the future cannot be predicted with 100% certainty. The benefit of using the special purpose vehicle approach is the taxpayer does not wear the cost if the infrastructure project turns out to be white elephant (the benefit though comes at a higher interest rate cost).
The question in my mind is have we opened the door for a reincarnation of Rob Muldoon?

For the record I think that projects which positively address inequality (the housing crisis), the environment (climate change) and productivity (poor transport and housing choices) would give the best bang for the buck.

Did Rob Muldoon like watching hotel porn?

... he guest starred in it ... as the narrator in the Rocky Horror Picture Show . .

Brings a new meaning to Think Big

... he groomed young Winston Peters to become a future leader of the National Party .... next time you see old Winnie snarling at a journalist , you'll get the picture .. Piggie's golden child . . Ha haaaaa !

Saw him live - he was actually quite good..

Great - however I keep hearing of a critical skill and labour shortage currently in NZ’s building and construction sector.

Is there a massive surplus looming on the horizon or do we simply throw open the doors even wider?

Great piece Jenee on another Twyford-led debacle.

Spot on. Bloody ludicrous. PPP except more stupid. Government can borrow at lowest rate in 50 years and won’t. ACC has $40 billion parked that could be employed and now we find them getting 5.37% for an aeon. While we are on subject, NZ wonderful ACC I notice is not being reviewed unlike every other thing. Why? It’s targets for refusing claims are a disgrace and denying people ability to sue is an international farce too. Plus they think chemical poisoning is mythical and Roundup is safe. Dinosaur institution

.. I'm not aware of a single piece of scientific proof that glyphosate is not safe ...

The surfactants etc in Roundup are pretty nasty. Glyphosate by itself is not very harmful to humans.

The argument is that roundup kills bacteria. If it gets in food it kills off bacteria in the gut. A healthy gut biome is believed to be vital to a healthy immune system. It could therefore be a major public health hazard, even at low levels. Notice how roundup has lost its political protection now it is no longer owned by Monsanto. Who knows what is true and what is lies.

... anti-biotics , prescribed by many doctors for any number of human ailments ... including influenza ... are a far greater risk to our gut bacteria than glyphosate will ever be ...

Roundup is Monsanto ( Bayer ) trade name ... the active ingredient in many herbicides is called glyphosate ...

This is just horrible.
Its like the opposite of a reverse mortgage. Yuck!
The concept of the govt borrowing the money at a lower rate does not keep it of the govt books. So thats why that isn't an option. Plus it would have to be targeted which could well be challenged in court.
The land is essentially lease hold.
Its just plane awful. But at least the other North Shore ratepayers are not being scre*ed as they normally are by this Council.

Oh well, it's made the housing affordable, ha ha.
Circa 900k for 3 beds, circa one million for 4 beds

It all seems a bit odd to me. If the ACC has spare cash lying around why don’t they just give it back to the government to pay back debt or invest?

How about ACC stop declining cover on grounds of prexisting injury or non injury related causes and actually use that money to support injured people instead of turning them into beneficiaries....

ACC doesn't have spare cash lying about, it has cash to invest to pay the on-going expenses of those injured today. ACC is supposed to be fully funded for the lifetime costs of its clients.

Labour are masters of this type of nonsense