David Hargreaves has a dig through the Government's new draft legislation to create special purpose vehicles that would levy homeowners for new infrastructure and concludes it's a bad and maybe dangerous idea. What do you think?

Well, we’ve been having this argument forever.

I’m talking about the construction of local infrastructure to support new housing developments. Who should pay for it and how?

Whenever a new housing development is built the incoming house owners want the best possible supporting infrastructure facilities such as: stormwater, good roading, bridges, tunnels, cycleways, footpaths, busways, bus shelters, community facilities and so on.

Ah, but who pays for all this? Let the bickering commence…

Congrats to the current Government for having a go at coming up with a solution.

Unfortunately I think they’ve come up with something that could be extremely hazardous if it’s put in place as currently envisaged.

My great concern is that the Government’s contemplating putting something in place that could result in potentially thousands of homeowners, particularly of new homes,  paying more for vital infrastructure services than they should and also that those same homeowners could face delays in the construction of that infrastructure if something goes wrong.

The Coalition Government’s trying to solve this deadly riddle of who pays for what infrastructure through a new piece of legislation, the Infrastructure Funding and Finance Bill, which was introduced into Parliament right at the end of last year and which the Government is hopeful of passing into law by mid-2020.

In going for this legislation the Government has rejected the options of either gearing up local authorities with (yet) more debt or alternatively of bankrolling infrastructure directly through the crown (IE taxpayer’s money.)

I quote some of the Department of Internal Affairs/Treasury impact statements for the new legislation:

“Cabinet has ruled out directly funding local infrastructure. This would require the Crown to materially change (in the short or long term) the approach to financing of local government infrastructure and potentially change the core purpose of local authorities. It may also require the Government to either not fund other central government priorities or to operate outside its budget responsibility rules.”

So, two options ruled out.

The Government has found a third way.

In essence the new legislation uses a new middle-man device  – the Special Purpose Vehicle (SPV) – to act as the conduit for collecting levies directly from the home-owners (effectively a new layer of targeted rates).

An SPV is specifically set up for each new development. It raises the money for the infrastructure, including debt and equity and it is then paid back over, ideally 30 years, through a levy collected via the local council. A kind of additional rates payment.

It IS complicated, but this graphic included with the legislation impact statement material helps:

In developing the new legislation the Government and officials have lent heavily on the model used for the Milldale development north of Auckland. Interest.co.nz’s Jenée Tibshraeny had this detailed look at the Milldale scheme late last year. There's also this earlier article.

But there are differences with what’s now proposed. I quote the impact statements for the new legislation again:

“While the Milldale model was able to access long term financing without being limited by the financial constraints of the local authority, it has limitations as to its replicability. This is because the Milldale model relies on a contract where beneficiaries agree to pay the infrastructure payments. This approach is difficult to replicate in a situation where there are many beneficiaries, existing beneficiaries, and/or beneficiaries who are unwilling to contribute.”

Okay. I read that as implying that the Milldale scheme, which I have huge doubts about anyway, is a more naturally solid model than what’s now proposed through the legislation.

Now, I’m actually in favour of homeowners in new developments being levied to pay, over time, for local infrastructure and facilities they will benefit from.

This could cause problems

I will, however, stick my neck out upfront and say that as currently designed this scheme could cause more problems than it’s aimed at solving.

We – and potentially thousands of homeowners - could have a long time to regret going down this path.

So, what’s it all about?

There’s a lot of detail contained in the draft bill, and in the supporting impact material compiled by the Department of Internal Affairs and the Treasury.

It’s complicated, real complicated, but I’ve tried to get my head around it and apologies if I can’t explain everything that leads me to conclude it’s a potentially flawed idea.

I do absolutely recommend you try to have a read of the bill and the impact document and see what you think. Very interested in your views.

What follows is an outline of some of my concerns:

The currently drafted bill seems to leave a lot to chance with the structure and operation of the SPVs. It leaves a LOT to chance. The approach seems super-flexible, which will allow the SPV operators a lot of leeway. Presumably this is to attract parties to get involved. But with any scheme, if you don’t put clear rules and limits in place you are running big risks.

Much of the draft legislation focuses on the levy and how that will all work. But the rules (such as they are describe at all) around the SPVs look very open to interpretation – and therefore in my view to abuse.

In focusing on the levy system and leaving the SPV operation extremely flexible I think the Governments got things completely the wrong way around. The SPV, not the levy, is the engine room of this and it is the thing that should be governed.

While the impact documents envisage that at least the first SPVs to be established would be owned by the Government there’s no intended limit on who might actually own them. So private parties could own them. That’s okay, I reckon, but it does necessitate the need for strong monitoring. Private companies are in things to make money. The clear possibility here is they would make money from the homeowners.

The Government says not. But then it would say that.

How effective would monitoring be?

The legislation provides that SPVs have to be government approved, as does the levy and there’s also monitoring requirements and requirements for the SPV to produce annual reports. But you always have to question, I think, how effective such monitoring might be – particularly if there are a lot of these SPVs established. Will there be enough resources to monitor them properly?

The legislation again talks about there being mechanisms in place to avoid excessive levies, but again I come back to the issue of how well this might be monitored.

This is going to be asking a lot of departmental officials. How comfortable does that make you feel?

The aforementioned Milldale SPV scheme includes a 30-year, fixed-rate loan to the SPV. Now that’s sensible.

However, I see no direct stipulation in any of the supporting material for the new legislation that these subsequent SPVs would have to also take out fixed rate loans. This sounds dangerous.

We can’t envisage it at the moment, not with the super low interest rate environment we have now, but what if an SPV takes out a loan that is NOT fixed for the whole term of the levy and interest rates in future take a hike, like a big hike?

A lot could happen to interest rates in 30 years

Twelve years ago the floating mortgage rate was over 10.5%. Remember that? And we are talking about THIRTY years here. Who would be expected to make up the difference if an SPV was suddenly struggling to meet interest payments? Well, who do you think?

And yes, of course, there is always the risk that the SPV gets into financial trouble while it is still involved in the building of the infrastructure. Again there are promises of safeguards, but in reality, it could be an unholy mess if one of these special purpose vehicles tanks before essential infrastructure is completed.

The impact statements cite the Government’s financial responsibility rules as being a reason why the Crown could not directly take on this role of funding the infrastructure and then collecting the levies later itself.

And yet – the impact statements DO say that the Government would have to consolidate these SPVs in its accounts anyway as well as taking on certain risks and in some circumstances offering ‘support packages’.

Okay – in other words the Government is in any case taking on risk on behalf of the taxpayer but doesn’t have the level of control on what’s going on that it would have if it simply took on the infrastructure role directly itself.

Dare I say this sounds a lot like the ill-fated KiwiBuild ‘buying off the plans’ scheme – effectively a taxpayer underwriting scheme for private developers in which taxpayer funds were put at risk with the Government having little control over the outcome.

If this new infrastructure funding legislation is passed into law (and it could be by the middle of this year) the intention is for these SPV backed levy collection schemes to ideally run for 30 years. The Government’s talking about the first SPV being up and running by 2021.

A lot of money

If this does become legislation and if local authorities do embrace it as a means of providing infrastructure for their new housing developments we could end up with billions of dollars involved here and thousands upon thousands of homeowners. A lot of money. A lot of people. A lot of things to go wrong.

Thirty years is a long time to put up with anything. It’s an eternity if we’re having to put up with something that’s gone wrong. Perhaps horribly wrong.

And I think as drafted this legislation leaves far too much to chance.

My view?

Scrap it. Ditch this legislation.

As I said, I’m in favour of a kind of user pays levy in tandem with rates collection over a long period of time.

Say 'no' to the SPVs

But lose the middle-man. Get rid of the SPV. It’s a dangerous wildcard that could produce any manner of unintended consequences.

I think central government needs to bite the bullet itself and take direct responsibility for the funding of local infrastructure, with the government to be repaid over time through levies from the homeowners. So basically the same idea, but without the too-clever-by-half unpredictable element that is the SPV.

I’ll be watching the progress of this legislation closely.

Given that we are already now effectively into the election campaign with the Coalition Government’s announcement last week of a September 19 election date it’s entirely possible that legislation such as this infrastructure financing bill will be left sitting in the house and won’t get passed before the election.

In this instance that might be a good thing.