The Government is still in discussions with local councils about how best to treat funding from its $1 billion Housing Infrastructure Fund (HIF), with councils still balking at having to treat the injections as debt on their balance sheets.
Local Government New Zealand (LGNZ) CEO Malcolm Alexander told a briefing in Wellington on Tuesday his organisation’s understanding was that the Government was still open to innovation on how the funding could be structured.
Discussions are against a backdrop of New Zealand’s fastest growing councils nearing the buffers of their borrowing capabilities, not because they would not be able to service new debt, but because they could not meet affordability metrics imposed by the Local Government Funding Agency (LGFA), which borrows on behalf of 52 of the country’s 78 councils.
The eight councils considered fast growing and hitting debt affordability buffers essentially would need to increase revenue to take on the extra debt envisaged by the HIF, LGFA CEO Mark Butcher said.
New funding model needed
Revenue pressures on local councils faced with spending requirements on housing and tourism infrastructure has led to LGNZ calling for a share of the Government’s GST revenue – that coming from spending by tourists in New Zealand.
LGNZ President Lawrence Yule, who will stand for the National Party in September’s General Election, said a survey of councils regarding tourism infrastructure only, identified $1.38 billion worth of spending requirements for growth projects over the medium-term.
Pressures facing tourism infrastructure funding meant local government required a completely new funding model that moved away from the primary reliance on rates, Yule said. Co-funding was required between industry, and central and local government, he said.
GST receipts from tourists rose from $950m in 2015 to $1.6bn in 2016, Yule noted. The share brought in by the tourism industry could easily be identified and separated out to pay specifically for tourism infrastructure, he said. LGNZ would like an independent agency to allocate the funding, rather than have a central government agency dish it out.
Bed taxes and/or visitor levies should also be back on the table, with opposition to these seeming to have dropped off in recent years, he said.
Housing fund cannot be debt on balance sheet
And that was just to help local government pay for new tourism infrastructure. Turning to housing, Yule said there was massive funding pressure in the space.
The government’s announcement that it was looking at allowing councils to set up urban development authorities (UDAs) was welcome, and a number of councils were looking at the development as providing funding opportunities, he said.
But it was the government’s $1bn Housing Infrastructure Fund that raised questions of how best to help councils pay for increased infrastructure.
LGNZ and the fast-growing councils able to access the fund – Auckland, Hamilton, Tauranga, Christchurch and Queenstown – were looking to central government to propose more innovative ways for councils to be able to take the funding off-balance sheet.
Special Purpose Vehicles (SPVs) allowing the funding to be an equity contribution from central government as opposed to debt, would be one solution, LGFA’s Butcher said. Or funding that was very long-dated and subordinated to other funding, he added.
“For us (LGFA) it’s not actually about the debt side, it’s about the revenue side,” Butcher said. “Because they can still borrow cheaply through us or through other mechanisms. It’s about non-debt funding or alternative sources of revenue.”
LGFA chairman Craig Stobo raised UDAs as providing a structure that could fit the bill – a UDA could solve some of the pressures faced by councils, if they followed the lines of Municipal Utility Districts in Texas, he said.
Here, a group of prospective ratepayers who agree to be part of an urban development, would end up privately funding that development, to a standard that hooks into local infrastructure, Stobo said. “It’s a self-financing urban development that is not on the council’s balance sheet.”
Anything developed under a central/local government partnership would be shifted off into a SPV and later potentially transferred back onto a council’s balance sheet, depending on whether it would sit as debt or equity.
Co-investment could also allow for transfer of the control of assets as a way of taking funding off-balance sheet for councils. But all those discussions were still in the pipeline. “It’s a question of who wants to bear the financing and the ownership – where does that sit?”