funding auckland’s greenfield infrastructure

Funding Auckland’s greenfield infrastructureEfficiency, fairness, affordability and incentives

Presented by Harshal ChitaleSenior Economist, Auckland Council

NZPI Conference, 21 March 2018

Disclaimer

The views and opinions expressed in this presentation

do not necessarily reflect the views of Auckland Council.

What I will cover

Funding Auckland’s greenfield infrastructure

• The path ahead: Growth outlook and the planning response

• Long term greenfield infrastructure needs

• Financing vs Funding – they mean different things!

• Urbanisation and the value of land

• How should we fund greenfield infrastructure?

• Watching out for unintended consequences – who finally pays?

• Summary and conclusion

30 year growth outlook

• Population expected to grow by about a million – consistently ranked among the most desirable cities to live

• Grew 45,000 annually over the last 2 years and by about 170,000 over the last four

• Unitary Plan - provided for 422,000 commercially feasible dwellings

• Two-thirds in existing urban areas and a third in greenfield areas


Longer-term planning

• Unitary Plan: Defines what can be built and where

• Future Urban Land Supply Strategy (FULSS): Where Council is planning for

greenfield growth over the next 30 years

• Auckland Transport Alignment Project (ATAP): What transport and where

over the next 30 years


Unitary Plan


• 5 year process

• Extensive areas up-zoned

• Inner, wealthier suburbs

escaped the up-zoning

FULSS


Sets out where we

intend to develop new

infrastructure over 30

years based on our

financial constraints

Cannot build homes without pipes and roads

Greenfield infrastructure needs

• Need new infrastructure to unlock development

• $20 billion – cost of major bulk infrastructure in greenfield areas – for 137,000 dwellings (FULSS) i.e. Approx. $146,000 per dwelling!

• Excludes local infrastructure (collector roads, local roads)

• Excludes maintenance and renewals – this is just the Capex!

• NZTA will pay its share of transport Capex but a large part of it will be Council costs (possibly about $80k-$100K per dwelling


Financing

Debt

Council has to stay within prudential borrowing limits:

• Debt-to-Revenue ratio maximum 270%

• Interest-to-Revenue ratio – 12%

Average cost of capital is about 5.25%

Average maturity is 7 years

• Infrastructure Capex is financed by debt

• Spreads the costs across generations of beneficiaries


Debt constraints


Public Private Partnerships

• Taps into private capital

• Debt still sits on Council balance sheet

• Often Council ends up insuring demand side risks while still paying a high

cost of capital


Special Purpose Vehicles

Entities financed off central government balance sheet

Way around Council’s debt constraints

Potential to take on initial demand risk

e.g. Crown Infrastructure Partners


Funding

General Rates

• $1.56 billion in 2015-16 or 43% of total revenue

• Property rating valuations (Capital Value) used as a basis to divide

overall collection

Opportunity: Ratings based on Land Values rather than Capital Values

Provide better incentives to develop land to more productive uses


Development Contributions

• Used to fund the bulk infrastructure required for growth

• Can only be charged for planned and funded expenditure on identified projects in LTP

• Can only be collected when sub-division is completed

• DC’s average about $21,000 brownfields and between $21,900 and 27,500 in greenfields

The Local Government Act 2002 (LGA) states the purpose of Development Contributions

(DCs) is to enable territorial authorities to recover from those persons undertaking

development a fair, equitable, and proportionate portion of the total cost of capital

expenditure necessary to service growth over the long term.


Fees and User charges

• Water charges (Infrastructure Growth Charges, Volumetric)

• Public transport

• Recreation Centres & Community Facilities

• Consents

These are voluntary - targeted rates are not


Targeted rates (Beneficiaries pay)

• Rates charged on specific land/property owners for provision of infrastructure or services that benefits them

• Need to be for delivery of amenities or infrastructure that yield identifiableand quantifiable benefits to those targeted

• Ability to vary them periodically


Revenue by source: Snapshot for 2015-16, $m


Rates

Fees and user charges

Grants and subsidies

Development andfinancial contributionsOther revenue

Total Revenue$3.7 billion

DC’s 131 m (3.6% of total) (42%)

How should we fund our greenfield

infrastructure?

Beneficiaries of greenfield growth

Greenfield land increases in value through the planning cycle due to

up-zoning and infrastructure servicing

• Farmland on average $50 psm

• Future Urban Zone land ranging from $55-$83 psm

• Infrastructure serviced land $137-$26 psm


Evidence: Land values by development stage


55 6082.5 75

265 235137.5 170

0

50

100

150

200

250

300

350

North North-West West Auckland South

Mid

-po

int

$ p

er

squ

are

met

re

Auckland Area

Infrastructure Installed

Future Urban Zone

Farm Land

Source: Chief Economist Unit, Auckland Council and CBRE

That meant…

For a 500 sq metre section

Infrastructure servicing added $68,750 to $132,500 of value

Urban zoning and infrastructure servicing added $110,000 to $160,000 of

value


Applies to brownfield up-zoning as well..


How should we fund this massive investment?

Some guiding principles: what would we like our funding system to achieve?

• Promote efficient land use via accurate price signals – build where it is socially least costly to (e.g. latent capacity in existing urban areas)

• Beneficiaries pay model – fairer cost-sharing

• Incentivise faster building and discourage land-banking

• Promote affordability

• Increase funding certainty


Development Contributions

• Developers pay a share of capital costs to service their development with bulk infrastructure

• Can only be collected when sub-division is completed

Potential Issues with DCs

• Uncertainty of timing of funding

• Incentivises land-banking

• (May) get passed on to the retail purchasers – more on this important point

towards the end!


Fixing our DCs

1) Need to accurately reflect the full cost of servicing

• Beneficiaries (new growth areas) ought to pay their fair share• Ratepayer subsidies put great pressure on balance sheet • Incentivises development where it is costly to Auckland

2) Need to reflect any spatial cost variations of servicing land

• To incentivise development where it is lowest cost to ‘Auckland’ – in economic parlance, achieve allocative efficiency of society’s resources


Watching out for unintended consequences

• Who pays?

Retail section purchasers or owners of raw/undeveloped land?

Do developers absorb some of these by tolerating reduced margins?


The theory

• If retail purchasers of developed sections have substitutes or have

affordability issues, they may be price sensitive

i.e they will reduce their purchases if prices increase

• Leaves developers with the option of passing back the DC’s via

lower price offers for undeveloped land

What does the empirical evidence suggest?


Empirical evidence

• Depending on the structure of the market, there can be:

• retail price increases

• lower land prices and

• a slowdown in development

So what might happen in Auckland? Waitakere City Council study showed

minor impacts on all three. But more work is needed!


Targeted rates

Imposed on land owners that benefit from infrastructure servicing

• Incentives to develop faster – add to holding costs

• Can reduce the value of undeveloped land –promoting housing affordability

• Reduce incentives to lobby for urban zoning until developer is ready to sub-divide

• Provide timing of funding certainty to Council


Making them work in practice

• Robust evidence of benefits (and project costs)

• Address cash flow issues of landowners

• Match revenue stream with debt servicing profile (Council)

• Provide clarity of rates schedule to potential buyers so land can be valued

appropriately


Efficient use of existing infrastructure

• Congestion charging – to manage demand – revenues can fund better PT

• Rapid busway roaring success – carries 3 times as many people at peak

times as private vehicles

• Additional funding tools – Regional Fuel taxes in the interim to boost PT

investment

• Better signalling to market of latent capacity in brownfields


So what would I like you to take away?

• Infrastructure costs vary spatially

• More efficient land-use can result from accurately pricing in cost variations

• Need better targeting of cost of growth to beneficiaries

• Targeted rates incentivise development, provide funding certainty, can lower

land values and improve affordability

• We can extract more out of existing infrastructure via signalling latent capacity

and smart PT investments


Any questions?

Feedback or further conversation?

[email protected]

funding auckland’s greenfield infrastructure

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