Funding Auckland s greenfield infrastructure Efficiency, fairness, affordability and incentives Presented by Harshal Chitale Senior 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 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 identifiable and quantifiable benefits to those targeted Ability to vary them periodically
Revenue by source: Snapshot for 2015-16, $m Total Revenue $3.7 billion DC s 131 m (3.6% of total) (42%) Rates Fees and user charges Grants and subsidies Development and financial contributions Other revenue
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
Mid-point $ per square metre Evidence: Land values by development stage 350 300 250 Infrastructure Installed Future Urban Zone Farm Land 200 150 265 235 137.5 170 100 50 0 55 60 82.5 75 North North-West West Auckland South Auckland Area 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? harshal.chitale@aucklandcouncil.govt.nz