Growth cities in New Zealand need innovative new financial solutions so that housing can be built faster and more efficiently.
Fiona Docherty Wright is the head of infrastructure funding & development strategy in Auckland Council’s Development Programme Office. Her team, and the council’s finance team, have been working with the government and private developers to find ways of bridging the financing gap to increase housing delivery.
If councils and government can collaborate to identify and agree on new structures to support the funding of infrastructure projects, that don’t require council to take a central role in financing or underwriting, then opportunities arise to respond to infrastructure needs with more certainty and pace.
The most recent funding solution, announced in November 2018, saw the creation of a government ‘special purpose vehicle’ (SPV) to enable private finance for infrastructure for the Milldale development at Wainui in north-east Auckland, with the debt not sitting on the council’s balance sheet. A partnership was created between Auckland Council and Crown Infrastructure Partners (CIP) with Fulton Hogan Land Development entering into the agreement.
Fiona Docherty Wright explains the background to this funding structure, and the need for alternative ways to access finance in an environment of unprecedented growth and change.
How has the SPV been designed for the Milldale development in Wainui?
The council has been discussing this challenge with government for several years to find new ways to support infrastructure investment in Auckland, as well as other fast-growing cities where debt levels within those councils are already high.
The Wainui development presents an opportunity to pilot a housing scheme. It aims to build approximately 4000 houses and new infrastructure which will allow for an additional 5000 houses in the future. This scheme has created excellent relationships between the developer, CIP and Auckland Council, who collaborated to identify the issues and overcome them.
The SPV will fund $48.9 million of the $86 million needed for infrastructure in Wainui using long-term debt raised from the Accident Compensation Corporation. The SPV funding will be repaid over time initially by Fulton Hogan Land Development and subsequently by section owners who pay an ‘infrastructure payment’ collected using the council’s rates invoices over
Auckland Council is contributing $33.5 million to the project for roads and wastewater.
With this development, capital is provided for bulk infrastructure and delivered by the developer acting as the council’s agent. The cost is then recovered from new home buyers through an annual charge over a few decades – basically a user-pays debt recovery scheme. The council collects this charge on behalf of the SPV and SPV uses this money to repay the debt.
Why have alternative funding structures not been in place previously?
There’s been a tipping point. The combination of rapid population growth, and the sheer volume of work that cities are now being asked to deliver in a short period of time, has resulted in council facing infrastructure demands that exceed what can be met through traditional approaches to funding and financing. We’ve absolutely had to look at different models to achieve increased pace and scale of development through private sector investment.
Is this CIP funding the first model of its kind used in Auckland to finance infrastructure?
Yes, CIP designed this innovative approach to financing infrastructure as part of the government’s Urban Growth Agenda.
CIP’s work followed the earlier Housing Infrastructure Fund (HIF) process which demonstrated that government and growth councils could work together using existing legislation to enable housing.
HIF was a bid process for a maximum amount of funds to be shared between infrastructure projects in growth councils. The intent was to enable housing through government financing, however, the outcome was a joint funding approach. It provided some additional investment capacity within Auckland Council’s debt limits, but still required commitment of council debt to enable the housing delivery.
It will result in approximately 6000 houses being built within 10 years, pending agreements with developers, and involves new arterial roads, wastewater and stormwater projects.
Where did this SPV originate?
An SPV is a stand-alone entity created for a special purpose – an entity set up for a specific financial exercise that is shut down once that exercise is complete. Liabilities, obligations and money generally go through it.
CIP was an existing government SPV, set up to deliver New Zealand’s fibre network. This organisation proved successful in delivering that network, and was re-purposed to focus on bringing forward delivery opportunities for housing by providing financing for eligible roading and three waters projects.
CIP offers a project financing solution by identifying growth councils’ bulk housing infrastructure projects currently unfunded, then seeking to finance them by establishing and connecting the revenue from the beneficiaries of these projects to the capital investment markets. It uses contracting models working within the existing legislation limits.
Using private capital to support the development of infrastructure for New Zealand, and therefore the growth of New Zealand, it’s an attractive investment for our financial sector – which is looking for good quality investments. Private capital is attracted to relatively low risk, long-term financing. And, it will help our economy.
What benefits have been realised as a result of this funding partnership?
With CIP funding a significant portion of the infrastructure costs; roads, water and wastewater services are now being built without overburdening council with debt and exceeding our debt-to-revenue ratio. SPVs are now a tool in our toolbox to enable us to lift the scale and pace of new housing development, and risk has been re-balanced from local authorities to the development sector.
The Milldale development, when completed, will be a modern, contained urban community with a town centre and education facilities, green spaces and parks, cycleways and walkways, and accessible public transport.
What challenges were faced in delivering this funding structure?
Auckland Council needed to fund the share of project costs relating to benefits that fall outside of the housing area held by the developer. Therefore, we still have a partially “on the books” solution. While the model requires repayment from the new housing development for its share of the infrastructure, the council is required to collect from the wider area that has use of the new infrastructure, so it still affects the council’s debt funding.
Other challenges included allocation of risk, bringing forward an infrastructure project at such an early stage, and the question of who carries the risk of cost escalation. In the Milldale case, the risk of escalation was taken by the developer.
Because we were negotiating a deal to bring forward future planned works, we didn’t have a detailed design for the project scope and cost assumptions. The parties were required to fix the scope and cost earlier than usual, also factoring in land, cost and ownership, legislation requirements, and volume and timing of land required.
Finally, the nature of the project required liaising with other government organisations, such as New Zealand Transport Agency, about other infrastructure requiring funding to enable the entire housing yield.
What lessons have come from this scheme that will inform future funding agreements?
To achieve cost efficiencies and bring forward maximum housing yield in growth areas, all funding required to enable a growth area needs coordination with all parties; for example, government infrastructure – NZTA, Kiwi Rail, education and healthcare. Collaboration on timing of delivery and funding and land ownership allows the investment in infrastructure to be maximised.
Legislation changes would create more certainty and give more direction to all parties to achieve housing growth faster.
Where to from here?
Auckland Council and Crown Infrastructure Partners are exploring future opportunities where CIP’s model can help finance bulk housing infrastructure which accelerates housing supply. We will also look to improve the tools available to us for alternative finance.
It’s important that we monitor the market response to the Wainui development charges applied to see how the home buyer responds. We’re also continuing to work with central government on the Urban Growth Agenda and changes to legislation that would better support these kinds of arrangements.
We are hoping that the other growth councils in New Zealand will take the lessons from this pilot scheme and use these financing opportunities the government has made available through CIP. Each growth council has their own specific issues to solve. Continued liaison and feedback on scope, scale and infrastructure requirements with government will benefit new tools.
In Auckland, our priorities are to work with CIP and other crown entities and housing programmes to enable brownfield housing developments at pace; and to work with developers delivering housing developments at scale in the council strategic growth areas around the region.
Auckland is undergoing unprecedented growth, the infrastructure networks’ historical under-investment, and required new networks coupled with aging networks creates additional financial pressure.
If we are to keep up with this growth and required funding and financing to get to a position of proactive rather than reactive management of our existing and expanding infrastructure networks, we need to look beyond the traditional tools available to us. We simply can’t deliver the demand at the pace required without alternative financing.
The government and council alignment to solve this is strong, however it is complex and will take time to gain momentum.
The solution is all about access to debt, alongside project alignment and prioritisation for infrastructure delivery. If we provide the industry with more certainty and manage the risks appropriately, the industry will have confidence and be enabled to respond with the housing we need.
This article was first published in the march 2019 issue of NZ Local Government Magazine.