The government has set up an investment company to encourage building of user-pays trunk infrastructure in Auckland in an effort to speed up certain road and water pipe construction for new housing developments.
Finance Minister Steven Joyce and Local Government Minister Anne Tolley announced the creation of Crown Infrastructure Partners over the weekend as a vehicle for government to co-invest up to $600 million alongside councils and the private sector to fund and own specific infrastructure projects.
Targeted rates and volumetric charging will then be imposed on residents in housing developments using that infrastructure. Investors in each special purpose vehicle for the respective projects will receive a dedicated long-term revenue stream from councils passing on these charges.
Labour Party housing spokesman Phil Twyford said the announcement was too long coming, pointing to his call in 2015 that Labour would encourage use of investment vehicles to finance certain projects which would be serviced with targeted rates.
Outside capital; Councils won't have to take on debt
The external funding and payment model will allow construction without local councils having to debt-fund projects themselves. Auckland Council in particular has been extremely stubborn about not taking on new debt which might put pressure on its AA credit rating, leading to clashes with the government over how to pay for new housing infrastructure.
Councils will have the option of purchasing certain projects at some point in the future, but won’t be obliged to do so, Joyce announced. “This is all about introducing outside capital to build this infrastructure, so current ratepayers don’t get burdened with all the costs of growth.”
Joyce, Tolley and Auckland Mayor Phil Goff announced two initial projects would receive funding – ‘Auckland North’ and ‘Auckland South’. “These two large projects can provide an additional 5,500 homes in Wainui to the north of Auckland, and 17,800 homes across Pukekohe, Paerata and Drury to the south of the city,” Tolley said.
“We learnt from the ultra-fast broadband programme that if we de-risk some of the early stages of the investment, we can bring in private sector investors to take on much of the heavy lifting as the investments mature,” Joyce said. “We would expect the Crown’s investment in each project to be matched with at least one to one with private sector investment over time.”
“This new model is another way in which we are helping Councils in our fastest growing cities to open up more land supply so more Kiwis can achieve the goal of home ownership,” he said.
Just weeks from an election
“What took you so long?” was the response of Labour’s Twyford. “You certainly could not accuse this Government of being even a fast follower. Now weeks out from an election, and after nine years in office, they are desperate to look like they are doing something.
“National has spent nine years cynically blaming Auckland Council for the city’s failure to manage its growth, but it has done very little to reform the planning system or turn on the tap for infrastructure finance,” Twyford said.
“Labour will abolish the urban growth boundary and replace it with a smarter planning approach that allows the city to make room for growth. And we’ll roll out bond financing infrastructure with the debt serviced by targeted rates.”
Read a government Q&A on the announcement below:
What is Crown Infrastructure Partners?
CIP is a Crown company (formerly Crown Fibre Holdings) that is being tasked with designing and implementing new commercial models to attract co-investment from the private or other sectors and achieve the Government’s objectives for the efficient deployment of water and roading infrastructure to support the timely increase of housing supply.
The aim is to increase the total investment in local arterial roading and network water projects needed to make more housing development possible by tapping private sources of capital.
Why repurpose CFH as CIP?
A number of corporate structures were identified during the review phase. Establishing a Special Purposes Vehicle (SPV) that investors, councils and government have confidence in requires a high level of commercial and financial expertise. This expertise currently exists which CFH and since the Ultra-Fast Broadband programme is nearing completion (Phase 1 is 75 per cent complete), that work will start to wind down which means there is capacity to start this new project. In addition, repurposing an entity like CFH is significantly cheaper and more efficient than establishing a new entity.
What is the aim of CIP?
CIP will work to speed up housing developments. The aim is that by introducing different sources of capital, it will allow the infrastructure required for this growth to be brought forward earlier than would be possible if it was funded entirely from Council balance sheets.
Some high growth Councils in New Zealand are constrained in their ability to take on further debt to invest in infrastructure. Many of these high-growth Councils are near their borrowing limits, and so cannot finance the infrastructure investments needed to keep up with demand. This limits their ability to open up the supply of land for housing construction, which in turn feeds into higher house prices.
How will CIP speed up housing developments?
CIP will look at how Crown investment through an SPV might be designed to bring forward the provision of infrastructure, particularly in these high-growth areas, to enable housing supply to be brought forward.
The long-term goal is to change the market for infrastructure provision in New Zealand. CIP will fix this problem by establishing SPVs. The role of the SPVs will be to invest in roading and water infrastructure assets in the place of Councils. In return the SPV will receive a stream of revenues from developers or the households that use the infrastructure. In the case of developers, that revenue may be in the form of a one-off payment. In the case of households, the cost of the infrastructure will be recouped over the life of the asset through a targeted rate or volumetric charging.
The advantage of the SPV model is that it allows land owners and developers to bring forward the infrastructure projects that would otherwise not have started for a number of years due to councils’ financial constraints. This is because a key feature of a SPV is that the debt it takes on is reflected on the SPV’s balance sheet, not the council’s. As such it does not affect councils’ debt limits, and frees up the local infrastructure funding bottleneck.
Why look for private capital instead of traditional rates funding?
Rates are tax levied against property owners to pay for the goods and services they receive from their local council. As such there are affordability and equity considerations that councils have to take into account when setting rates. For instance, it is not equitable to ask ratepayers to fully pay for long-term infrastructure today when it will be used by multiple generations. Most councils overcome this by accessing long-term debt, spreading the costs over the life of the asset. However, some Councils’ ability to do this is constrained by their debt limits and limited borrowing capacity.
By accessing private capital, councils sidestep this financial constraint and provide the necessary infrastructure their growing communities need.
Is this just a tool for Auckland to use?
No. This model will be scalable and used in other fast-growing centres across New Zealand.
However, as most population growth pressures are concentrated in Auckland, the first SPV being explored will be within in New Zealand’s biggest city. Other Councils will be eligible to apply to set up SPVs provided their projects meet certain criteria.
What are the SPV criteria?
CIP will develop these criteria over the next few months, but at a high level projects must show an ability to generate sufficient revenue to cover their own costs over time, including the cost of capital in most cases. They must also include an exit pathway to allow the Crown to recoup its capital within a reasonable time period. Projects should include a mechanism through which external providers of capital can invest in infrastructure.
What investment opportunities are there in Auckland for CIP?
As part of the Housing Infrastructure Fund (HIF), two proposals were put forward by Auckland Council for an additional investment in roading and water infrastructure so as to accelerate the pace of house building in Auckland. The North project encompasses the Wainui area, and the South project encompasses the areas of Paerata, Pukekohe, Drury West and Drury South.
These projects did not receive HIF funding as they did not meet the specific criteria set by the Government, such as falling within the current 10-year planning period, and they couldn’t be funded from within the Council’s balance sheet using HIF funding. The characteristics of these projects make them highly suitable to fund roading and water infrastructure through and Special Purposes Vehicle (SPV).
Should projects proceed to completion, it is expected that combined they will open up sufficient land for the construction of 23,300 additional houses, taking total housing capacity in these areas to 28,300. The total infrastructure investment being sought is $588 million.
A Q&A on the two Auckland projects is below:
How big is the opportunity to the North of Auckland?
New urban areas in the North, including Silverdale, Wainui and Dairy Flat have been identified by Auckland Council as areas where greenfield housing development can be significantly expanded over the next 30 years, provided the necessary infrastructure is in place to support the expansion.
What infrastructure investments are needed in the North?
The North project focuses on Wainui, where the existing infrastructure can only support the construction of 2,000 new houses in the area zoned for residential use in the Auckland Unitary Plan. It is estimated that an infrastructure investment of $201 million ($149 million for transport; $52 million for water) could sufficiently increase infrastructure capacity to service up to another 5,500 houses in Wainui.
What water infrastructure developments would this cover in the North?
The estimated $52 million infrastructure investment in the North would pay for a number of water developments including the:
· New Wainui service reservoir ($15 million)
· New water supply booster pump station ($10 million)
· New Wainui sewer and pump station ($25 million)
· Wainui Storm water ($2 million)
What transport infrastructure developments would this cover in the North?
The estimated $149 million infrastructure investment in the North would pay for a number of arterial transport developments, including the:
· Wainui Arterial Road ($60 million)
· Curley Ave Bridge ($89 million)
What is the opportunity in the South?
The greatest opportunity to create new urban areas in Auckland is to the South of the city, where around 5,300 hectares of land has been identified for urban development. The areas of Paerata, Pukekohe, Drury West and Drury South offer the greatest opportunity to fast track the supply of housing as they are the most ready to develop.
What infrastructure investments are needed in the South?
Although areas in the South have significant potential to expand greenfield housing capacity in Auckland, only 3,000 additional houses can be supported by the existing water and roading infrastructure.
It is estimated that an infrastructure investment of $387 million ($215 million for transport; $172 million for water) could increase the supply of new houses by 17,800 across Paerata, Pukekohe, Drury West and Drury South.
What water infrastructure developments would this cover in the South?
The estimated $172 million needed for water infrastructure in the South would pay for a number of developments including (but limited to) the:
· New Paerata water main ($30 million)
· New Paerata sewer ($40 million)
· Drury West wastewater reticulation ($20 million)
· Drury South pump station ($25 million)
· Bremner Road sewers ($2 million)
· Bremner Road pump station ($20 million)
· Paerata storm water ($1 million)
· Pukekohe storm water ($26 million)
What transport infrastructure developments would this cover in the South?
The estimated $215 million infrastructure investment in the South would pay for a number of transport developments, including the:
· Rail stations at Paerata and Drury West ($60 million)
· Paerata rail crossing ($20 million)
· Bremner upgrade ($38 million)
· Mill Road, Great South Road/Spine Road ($97 million)
Why is Drury South being considered for the first SPV?
Drury South is one of the four areas (including Drury West, Paerata and Pukekohe) situated to the South of Auckland that has been identified as having the greatest opportunity to create new urban areas. Out of the four areas it is the most developed and is in near ready-to-go status, having already obtained planning permission, with the design and consenting expected to be complete in 2017. Should major civil works commence in October 2017 it is expected the project will be ready for the first occupants in 2019.
What will be built in Drury South?
The Drury South project being developed by Stevensons Group is an integrated development that will provide for more than 700 houses as well as an 180Ha business and industrial development adjacent to the Stevenson Drury Quarry. The business park will facilitate 15,400 jobs across the Auckland region, 5,000 of which will occur within the business park, which is expected to contribute $2.3 billion to the regional economy every year.
What transport infrastructure is needed in Drury?
To facilitate and accelerate development within the southern sector of the city, Auckland Council and NZTA are investigating the southern section of the Mill Road Corridor, a Primary Arterial Road/Expressway that will link Mill Road in Manukau with Pukekohe.
The Drury South project proposes that a Mill Road Arterial be constructed that will intersect and connect to SH1 within the bounds of the Drury South Development Area and Great South Road in the West. This interconnection via the spine road will provide important network resilience to both the Mill Road Arterial and SH1.
What water infrastructure investment is needed in Drury South?
The project requires new wastewater and freshwater connections. This includes a 4.5km trunk sewer between the project and Hingaia pump station north of Drury, and a new connection to the Waikato water pipeline in Drury. This infrastructure will be designed to integrate with other developments in the area and could service in excess of 10,000 households.
How much will it cost?
Civil works to deliver the land ready for development will total $300 million, of which an estimated $68 million in road and waste infrastructure will be assessed for CIP funding.