funding auckland’s greenfield infrastructure
TRANSCRIPT
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
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
Unitary Plan
Funding Auckland’s greenfield infrastructure
• 5 year process
• Extensive areas up-zoned
• Inner, wealthier suburbs
escaped the up-zoning
FULSS
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
Debt constraints
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
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 Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
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.
Funding Auckland’s greenfield infrastructure
Fees and User charges
• Water charges (Infrastructure Growth Charges, Volumetric)
• Public transport
• Recreation Centres & Community Facilities
• Consents
These are voluntary - targeted rates are not
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
Revenue by source: Snapshot for 2015-16, $m
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
Evidence: Land values by development stage
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
Applies to brownfield up-zoning as well..
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
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!
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
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?
Funding Auckland’s greenfield infrastructure
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?
Funding Auckland’s greenfield infrastructure
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!
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
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
Funding Auckland’s greenfield infrastructure
Any questions?
Feedback or further conversation?