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.
23 Comments
So you'll be wanting a lower price to offset the risk. If your position becomes the norm ways will need to be found by developers to mitigate that risk if they want to avoid a permanent discount on housing built in SPV suburbs. David Hargreaves correctly calls out the risks but doesn't provide a balancing look at the potential upsides of the SPV concept creating financial incentives to deliver lower infrastructure costs.
I would feel better about this if the government was able to deliver fit-for-purpose infrastructure in a timely manner. But I can only see this as an unaccountable cog in the machine designed to extract as much money as possible out of middle class NZers, while (presumably) providing infrastructure that is decades late and should have already been funded out of the taxes they already paid as part of their social contract - case in point: West Auckland rapid transit. Presumably you'd get stung for 1) using it via farebox recovery mechanisms; 2) not using it by way of congestion charging and 3) washed up as part of your general rates through this clawback. Can't see that being particularly equitable tbh.
GV27. Councils are already up to their gills in debt, trying to maintain creaking infrastructure and struggling with the enormous load of new people the Wellington power elite is continuing to impose on our larger cities. So new and future users carry their fair share of the cost, debt or some form of user pays should fund new infrastructure, not taxes paid by past residents.
That would be a great argument if all parts of Auckland had access to the same infrastructure. The North Shore has had a busway for a decade. East Auckland is getting one as we speak. North West Auckland, however, where there are tens of thousands of new houses going in over the next twenty years, has nothing. Unfortunately we are not all starting from an equal footing and you only have to look at how the North Shore moans about not having rail every time somewhere else in Auckland gets a bus stop to see how this is going to turn out. The more affluent areas will be able to lobby for central funding of their projects, while the places facing more intense housing pressure will be expected to stump up if they want the same, even if is decades later.
It's OK when your political survival depends on porkbarrel funding of high profile infrastructure projects such as a port at the end of a road and rail to nowhere but it'd be a very slippery slope with the electorate for any government to single out at a micro level individual suburbs for special funding treatment.
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?
What about a rate crash, where interest rates are cut in half twice towards zero? Hence the potential to witness a doubling or more of the discounted present value, of as yet, unpaid future liabilities.
Finally, some who understands the financial risk of what is being proposed.
In reality, most (if not all) large scale land development is undertaken by a select few; who probably have the financial capacity to pay for the full cost of infrastructure anyway. Why not design a system around them; say low cost central government funding as a first ranking security, with partial paydown over the release of the subdivision stages.
Prices for Milldale sections should be lower; not unlike leasehold, where there are ongoing extra costs of possession. Banks probably lend less on them too.
Totally agree. SPVs seem to have the special purpose of boosting landowner returns on land development. Much better idea to do that by way of central government funding via a first ranking security.
Awful that new homeowners are forced to take on these sorts of unknown additional future costs without the requisite lower entry prices, as would be the case with traditional leasehold.
I agree, it would make more sense for the gov't to operate the SPV directly. They can borrow cheaply, at fixed rates, without the temptation to seek a fat margin or the need for *another* regulatory organisation to make sure they're stable and not ripping anyone off. Then property purchasers could make their decisions knowing exactly how much their future levy will be and who they'll be paying it to.
I think this a good example of how seeking a 'free market' solution can lead to *more* bureaucracy than just having the gov't take direct responsibility for something.
Don't forget that while they may seem risky its not unusual when considering a new paradigm for the first time. They are commonplace in the USA I believe and spv's do have the ability to greatly increase the likelyhood of projects to be started as opposed to simply sitting in grass covered in livestock. With local councils long stripped of assets to raise finance against there isn't a lot of options available.
Can anyone remember a time when a New Zealand territorial authority defaulted on debt? I can't. Yet this incredibly complicated scheme is designed to put a fig leaf over the total debt held by a council. That way councils don't have to risk exceeding their fictitious debt limits. The easy way is for the government to either lend the money directly or stand guarantor to keep the ratings agencies at bay. Heck the government thought it was OK to stand as guarantor to South Canterbury Finance and AMI Insurance. Why wouldn't they back up the vastly more important construction of public infrastructure?
I have read the bill and there are so many things in it that worry me. There isn't enough space or time to go through them all.
One quick note is that the bill explicitly allows for a return on equity so a private SPV will make money from homeowners.
Note also that I wouldn't trust the fine words at the start of the bill. For example the preamble says that a levy order cannot proceed against the wishes of the relevant council. My reading of the bill (s27) suggests a minister can over-ride both the council veto and the negative recommendation of the recommender.
You are right to be concerned about the level of oversight. The monitor has to be a government agency. You would think that the Auditor-General would be well placed but the A-G is an Officer of Parliament and separate from government. In an era when you would suspect government agencies such as Worksafe, NZTA and CAA couldn't monitor jack you wonder who will get the nod? MBIE? Don't make me laugh.
My main problem with the bill is that it violates some of the basic principles of funding infrastructure. The government does it the easy way. They take money out of current revenue and direct it into capital projects. The people who fund these projects in most cases will never benefit directly from the investments made with their money. For instance the latest round of infrastructure goodies expects the residents of Bluff and the Chatham Islands to help pay for Skypath and Drury train stations. The government has always swatted that criticism away by asserting that all investment in transport infrastructure is good for the whole country. Transport is a physical communication network equivalent to the Internet. The more people that are physically connected the better off everyone is.
Fine. But we don't follow that principle locally - it has always been a hybrid system. Typically the price of a new section includes capital to pay for the construction of the last mile infrastructure (local streets, pipes and playgrounds). But development requires either the extension of trunk infrastructure (the big bits that all the cul-de-sacs connect to) or the upsizing of what is already there. It does vary but we tend to think of the whole community in the form of the council doing that upsizing. The community bears the carrying costs until the new stuff is fully subscribed. At which point all ratepayers return to to paying the historical average cost for infrastructure.
The IFFB shifts the cost of the upsizing away from the community as a whole to just the owners of newly developed sections. The key thing to remember is that these owners will not get any form of discount on rates, development contributions or taxes. They get a theoretical reduction in purchase price to reflect the ongoing commitment to pay the levy. But that is it. And I seriously doubt any private developer will pass that reduction on. Residents in levy areas are going to get stiffed.
Great summary.
'They get a theoretical reduction in purchase price to reflect the ongoing commitment to pay the levy. But that is it. And I seriously doubt any private developer will pass that reduction on. Residents in levy areas are going to get stiffed.'
Exactly, that is what the theory is, and which they should be able to show the difference with a discounted cash flow, but they can't, except say that if you pay $x amount on top of your section purchase price, then you don't have to pay the levy. So they have reversed the formula because as you say, they don't get discounts on rates, development contributions or taxes. They are paying on top.
Does anyone know of any arms length third party valuations of these sections, against what the developer price is, or an example of what they extra capital payment is instead of the levy?
The problem that is trying to be fixed is a lack of capital to fund growth infrastructure. SPV is fine, so long as its limited to funding from the government, where no additional profit is at play. This is basically what local government does already via development contributions. I agree that the middleman could be taken out and it would be much more efficient. I think your concerns about what would fall under an SPV can be fixed easily by aligning it with Development Contributions under the Local Government Act.
"Cabinet has ruled out directly funding local infrastructure."
There's the root of the issue. Central Govt refuses to take an active hand while denying local authorities to levy local taxes.
As others have noted, surely the answer is to cut-out the middle-man and let a state agency act as the investment SPV (lets call it something catchy like the Ministry of Works) that is allowed to offer infra bonds supplied by treasury.
Only Govt has the ability and opportunity to allow these costs to be recovered over a multi-decade time horizon. Why load the complete costs onto the initial purchaser?
I would have seen this as just like a toll road. User pays.
Local council takes out a fixed rate loan from the Crown for residential infrastructure, and all addresses affected by that infrastructure pay a levy on their rates to pay back the loan, while the maintenance of said infrastructure is paid for by a portion of their rates as normal.
Why introduce another level of "management", which would only slow down the process and end up being just a way for a select few to abuse the system and line their own pockets? This is not an umbrella entity to pull together a disparate range of actions. By adding the levy to the rates, city councils can just use their existing mechanisms.
Why should it be user pays?? Did earlier generations pay for the infrastructure for new developments upfront or did local/central government pick up the tab? Most infrastructure has a finite life, say 50 or 100 years so it seems to me that it is home owners in leafy inner city suburbs with crumbling roads/pipes that are getting a free ride when the council upgrades them at no extra charge...and it is these very same people squeal at the prospect of rate increases while they pay the lowest rates (as % of property value) in the country.
Funnily enough this bill actually eliminates pretty much any form of consultation. The only choice punters will have is whether to buy or not buy in a levy area. Spoiler: I wouldn't.
What is particularly tough is that existing landowners (mostly rural in fringe and discrete developments) get no say at all but will find themselves paying a levy of sorts during the construction and possibly sale phases. And may pay huge levies unless they sell their land to developers. Feels like coercive powers to me.
In theory normal planning processes also apply but once the Minister of Urban Development has approved a levy area no council will turn down a plan change to convert the levy area into residential dwelling zones.
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