Massey University economics professor Graham Squires
More weight needs to be put on innovative finance and public-private partnerships to solve New Zealand’s housing and infrastructure shortage, according to a high-profile economist.
Late last year, Prime Minister Jacinda Ardern said the country as a whole had a $75 billion infrastructure deficit.
Massey University economics professor and property foundation chief executive Graham Squires recently published a paper on the benefits of innovative finance for the United Nations Human Settlements Programme (UN-Habitat) and University College London’s Urban Maestro project.
Squires suggested innovative finance, which includes public-private partnerships (PPP), taxes, bond issues and more, alongside traditional funding, was the best “economic architecture” to sustainably fund the infrastructure needed to create a steady supply of affordable housing.
“The intense pressures from accelerating growth worldwide require innovative funding approaches to support sustainable development. This is certainly very true in New Zealand, with a difficulty of investing in infrastructure at scale and being open to the use of partnerships that mix public and private finance.”
Squires said the introduction of private equity into infrastructure development also dealt with budget overspend, which is often a feature of large-scale public projects.
Public budgets often projected low
He said PPPs often required more accurate projections or improved finance methods, whereas public budgets were often projected low in the first instance to ensure projects using public money win the bid and get the go-ahead initially.
“With public criticism of public sector overspend, some recommendations in rethinking finance are the introduction of equitable due diligence in public finance as is carried out in private business. Moreover, there is a call to involve rigorous expert scrutiny not just at the point of purchase, but also throughout the life cycle of public sector finance projects.”
He said partnering in any form of finance was an attractive idea.
“In economic terms, it helps to eliminate inefficiency as costs per unit of output are reduced. It also improves the dynamics of the market by putting the client more in control and improving the flow of information between the participants. Partnerships can also provide greater incentives to complete the contract on time, to budget, and to the expected standard.
“Local authorities are well-positioned to reduce risks and make projects more attractive for private investors to finance them, through locally relevant incentives. These could include development fee waivers, subsidised insurance, and property tax abatements.”
Infrastructure New Zealand policy director Hamish Glenn said a key to delivering affordable housing was requiring developers to pay for the infrastructure they require.
Currently, local councils fund trunk infrastructure from their limited revenue, with little benefit as rates don’t have a particularly good payoff time.
“Councils tend to stage their infrastructure investment and under-deliver on it, which means that there is a scarcity of developable land, so the land value cost actually ends up being higher than if the property owner or developer had just been able to fund the infrastructure in the first place.”
Instead of developers pushing up prices by banking land about to be released and given infrastructure by the council, Glenn said if developers were able to look outside of the city boundary, acquire rural land and tap into capital markets to fund infrastructure, cheaper houses could be constructed.
In 2018, a government special purpose vehicle was created in partnership with Auckland Council, Crown Infrastructure Partners and Fulton Hogan Land Development to funnel $91m into roading and wastewater for the Milldale development in North Auckland.
The special purpose vehicle allowed for private investment in new infrastructure with long term, fixed-rate debt sourced from ACC sitting on a balance sheet not directly owned by the council or government.
The funding model allowed for the debt to be paid partly by Fulton Hogan and partly by section owners as an infrastructure payment collected with council rates bills.
Glenn said the model meant Fulton Hogan was faced with increasing costs to pay off the infrastructure.
“The best way of course, for them to meet their cost, is to sell more homes, actually creating an incentive for the developer to roll out more homes faster.”
The infrastructure funding and financing levy legislation, passed in July 2020, reflects the model used in the Milldale development, using a special purpose vehicle to enable finance to be raised from the private sector and ring-fenced from a council’s balance sheet, not affecting their debt levels or credit rating.
The levy is to be paid annually, for up to 50 years, by the future homeowners who benefit from the infrastructure, to fund the finance raised for its construction.
Squire said the main barrier to successfully implementing innovative funding systems for housing infrastructure was scale, giving the example of linking the airport to downtown Auckland, an idea that has been floated for decades without any real progress because the money wasn’t there.
He said while New Zealand was behind on Australia, Singapore and the UK in developing systems for innovative finance, it meant there was a learning opportunity in looking at how other forms of PPP and innovative funding have panned out.
“There are certain things we are behind in New Zealand that need to be caught up but that’s no bad thing in terms of some of the lessons that can be learned. That’s probably the optimist in me, thinking about how New Zealand can transfer different policies around the world and place them in context.”