Infrastructure fund will 'de-risk' costs to future-proof housing developments, Smith says

Monday 4th July 2016

The government's $1 billion housing infrastructure fund will "de-risk" the costs of future-proofing development in high-growth areas for a local government sector that still recalls the debacle over Kaipara District Council's Mangawhai wastewater scheme, says Housing Minister Nick Smith.

The contestable fund will be open to applications for interest-free loans from councils in Christchurch, Queenstown, Tauranga, Hamilton and Auckland but that list could change or grow as early as September when Statistics New Zealand releases local authority data for the second quarter. To qualify as a high-growth area, a city needs to have population growth of more than 10 percent over 10 years.

"With future capacity, the really hard part for councils is who meets the extra cost of infrastructure that's there for the future," Smith said. "This shares the risk."

In a sense, it was like bridging finance because eventually, a city's rating base grows when the new houses are built and sold, but in the meantime councils "are quite risk averse in funding extra capacity for growth that's unknown," he said. "Local government has been very aware of the difficulties the Kaipara council got into" funding a wastewater scheme for a community that didn't grow as expected.

Prime Minister John Key elaborated on how the loan funding might work, saying at his weekly post-Cabinet press conference that some councils were close to their borrowing limits so the government may choose to keep the interest-bearing lending on the Crown's balance sheet in arrangements akin to the funding of the ultra-fast broadband roll-out through the government entity, Crown Fibre Holdings.

However, he stopped short of suggesting a new entity be established, with the government "keeping an open mind" on how funding might be structured.

The government has also flagged the possibility of using urban development authorities (UDAs) to speed the supply of new housing and Smith cites overseas examples such as the London Docklands Development Corp as potential models.

Key sought to downplay suggestions that UDAs might have powers to compulsorily acquire private property, although the existing law to create Special Housing Areas included the ability "in theory" to change the designation of land, he said.

"I don't think we're looking to go in and march over peoples' property rights," Key said. "What we are trying to do is give the development capability the biggest boost we can and take away impediments", noting that successful UDAs in other countries "have total control over the particular area that they're developing or at least extremely broad-ranging control".

"We still believe the fastest way to ensure there is development is to make sure there's enough supply, which means that the capital gain from holding land doesn't outstrip the value that might be created by developing the land and that's our primary focus.

"Where you look at claims that people are land-banking in the special housing areas, more often than not there are other issues there or in some cases the sheer cost of development can be extraordinarily high and not fully understood at the time," said Key.

Examples of UDAs include Docklands Development Corp, which was established in 1981 to develop what was then a rundown part of east London. It was given ownership of the land, broad planning controls and the ability to enter commercial contracts. By the time it was wound up in 1998, with its powers returning to local government, it had transformed the land into upscale apartment blocks and office buildings favoured by financial services companies.

Local Government NZ welcomed the infrastructure fund, pending any fish-hooks in the details, although LGNZ president Lawrence Yule says people shouldn't lose sight of the fact that the loans will eventually appear on local authority balance sheets and be taken into account by the credit rating agencies.

Last week, Auckland Council deferred a bond sale, citing market volatility following the UK's decision to exit the European Union. The Local Government Funding Agency has a covenant on the net debt-to-revenue ratio for the council of 250 percent which it says is consistent with an A+ credit rating from Standard & Poor's.

The council's debt ratio currently exceeds 200 percent, according to the LGFA and Yule says Tauranga City Council is also close to its limit.

Yule says four elements need to be addressed to ensure the speedy development of new housing: rezoning land to change the consents required; infrastructure that's timely while not exposing ratepayers to risk to bring services to sections that may not be needed immediately; discouraging land banking; and the high cost of building materials and limited supply of builders.

"A $1 billion fund isn't a panacea for everything," Yule said. "If you build another 10,000 houses that becomes 10,000 new ratepayers. The problem is it takes a long time to get those 10,000 ratepayers added to your rating base and in the meantime, you're carrying all those costs."

He said LGNZ is open minded about using UDAs but wouldn't be comfortable if the UDA was a central government body rather than a joint venture with local government.

Costs of the Mangawhai wastewater scheme blew out and the council ended up settling with the Auditor-General's office while being roundly criticised for taking on financial liabilities without enough recourse to its ratepayers.

BusinessDesk.co.nz

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