In an effort to circumvent strict credit rating agency rules, the Government and the Auckland Council are set to create special purpose vehicles that would allow either the Crown or others to own core roading and water infrastructure in Auckland.
The Auckland Council yesterday secured $300 million of the $1 billion on offer in the Government’s Housing Infrastructure Fund (HIF), but even more is set to be announced for two big projects in Auckland over the next couple of weeks.
Mayor Phil Goff and Finance Minister Steven Joyce held a joint news conference at Watercare’s pipe storage facilities at Mangere on Tuesday afternoon and indicated they were working on creating a special purpose vehicle or vehicles that would take infrastructure funding for two new large projects off Auckland Council’s balance sheet.
“The HIF fund, I’m sure minister, is not a one-off event,” Goff said at the facility on Mark Ford Road.
They had earlier announced $300 million would be used from the HIF to pay for 10 roading and water projects to enable the building of 10,500 homes at Whenuapai and Redhills near the Hobsonville Point development, including 2,200 over the next five years.
“This is a partial answer to Auckland’s needs and the minister has foreshadowed that in a few weeks’ time there will be a further announcement which will assist us with infrastructure in a way that it does not become part of our financial balance sheet,” Goff said.
“It does not create problems for us in terms of the debt to revenue ratio,” he said.
Using a special purpose vehicle would ensure the council does not breach its 265 percent debt to revenue covenant that underpins its AA credit rating from Standard and Poor’s. Goff said last month in an interview with Lisa Owen that the Council was already at 256 percent.
Auckland Council is also somewhat limited by the Government-sponsored Local Government Funding Agency, which limits Auckland Council to 40 percent of its overall borrowing and has a 250 percent debt to revenue covenant. Essentially, Auckland Council’s AA credit rating sets the baseline for all council borrowing in New Zealand, which was $7.5 billion for 49 councils as at April 12. An Auckland downgrade would effectively increase borrowing costs across all councils.
Joyce and Goff indicated the new special purpose vehicle or vehicles could be used for up to another $600 million of infrastructure funding.
“I would imagine the package in a couple of weeks would be larger than the one we announced here today,” Goff said.
Asked if the new projects would be double the $300 million announced yesterday (see details in graphic below), Joyce said (and Goff agreed) that: “I think you can assume that there are a couple of other projects that are at least the size of the one that is in front of us today. That’s probably fair.”
The Auckland Mayoral Taskforce report on housing released last month included a section that addresses in more detail how the special purpose vehicles might work, including that they need separate revenue streams from targeted rates and a separate equity provider, which in theory would be the Crown.
“For this model to function well, the new entity will require the ability to raise revenue streams from development that it unlocks, as well as an equity provider to underwrite its borrowing,” the taskforce wrote.
“In the short term, development contributions are expected to be a key revenue source, but other revenue sources such as targeted ‘value capture’ rates and developer contributions are also likely to play a role.”
The obvious candidate for the equity provider is the central Government, but other investors could be called on, including the likes of the New Zealand Superannuation Fund or ACC. They have already been called in to buy a share of Kiwibank.
However, questions remain as to whether the ratings agency would accept that the assets were truly off Auckland Counci’s balance sheet, given at some point in the distant future the Council would either inherit or buy back the asset, and would continue to need to maintain and service the asset. Ratings agencies have been wary of off balance sheet vehicles since the Global Financial Crisis.
Not just in Auckland
The bulk of the infrastructure projects announced went to Hamilton City Council, Waikato District Council, Tauranga City Council and the Queenstown District Lakes Council.
But there may be more to come in these special purpose vehicles, which Joyce said were being considered for other councils.
“It is an Auckland story, but there are other councils around the country that would like to have the ability to fund the infrastructure without placing it directly on their own balance sheets so that they are not completely subject to the current ratepayers having to meet the costs of that,” he said in the news conference covered by Newsroom’s Co-Editor Tim Murphy.
“Certainly one thing we are looking at we believe will work for Auckland, but actually the intention is that it works for other councils as well.”
Joyce said he had already had informal discussions with other councils and Local Government New Zealand.