The Super Fund’s bid to build and own Auckland’s light rail lines is a political gift for Labour, but disguises a potentially expensive money-go-round between state-owned entities.
In a week crammed with Budget announcements, the revelation that the NZ Superannuation Fund made an unsolicited bid to build, own and run two light rail lines comes as a nice surprise for the Government.
In exchange for up to $1.8 billion of its own money, the Government and the Auckland Council would get two light rail lines costing an estimated $6 billion up to 20 years earlier than is currently planned. That’s a good deal for a Government wanting to position itself as “transformational” without breaking its self-imposed Budget responsibility rules, and for a council already up against its own debt limits.
As the managers of a $38b fund, the New Zealand Super Fund guardians will be the first to say there’s no such thing as a free lunch. Further details emerged later on Wednesday of just what the project might look like.
Firstly, the bidding process hasn’t properly ended yet. Transport Minister Phil Twyford said he expected this to take six to eight months, during which time a number of bidders with better offers may come to the table. Construction could then take a further six years, he said.
The fund itself hedged its bets, saying that it had not agreed to any of the proposed rail projects and would be reviewing the entire project to determine the most commercially feasible option.
“The options that have been presented to date may not be those that are decided upon,” a Super Fund spokeswoman told Newsroom.
It looks like the winning bidder will receive revenue through a mixture of value capture uplift rates and fare revenue, as well as a possible guaranteed income from the Crown.
This ‘public private partnership’ or ‘public public partnership’ (PPP) model does pose political risks for the Government, given it opens up the potential for foreign ownership of publicly used assets. Prime Minister Jacinda Ardern also refused to rule out any prohibition on foreign bids for the network, either now or should the winning bidder wish to sell it on in the future.
But there are other benefits to a partnership with a public or private entity.
A study published by Auckland Transport in 2016 found light rail had the highest maintenance costs of all the options surveyed. A PPP model allows the Government to defray those costs, along with any other liabilities, onto another party. Of course this could create an even bigger problem for the Government if it transpired that the Super Fund had been tapped to plug a light rail funding gap.
Captured by value capture
The issue of value capture is the perhaps the most interesting. It allows the Government to raise revenue from the increase in the value of a property after important infrastructure has been built nearby. It could be paid annually, or potentially as a lump sum when the property is sold.
Value capture revenue would mean the Government taxing the Government to pass revenue to a fund owned by the Government in exchange for a transport network run on behalf of the Government.
Value capture also reveals another interesting quirk of the proposed line. The most significant property owner along both routes is the Government itself.
Auckland Mayor Phil Goff told Newsroom that central Government would be one of the biggest beneficiaries of rising values along both routes.
“Value capture would be captured largely by central government, which means it is more likely to contribute to the cost of it because it has a lot of properties along the routes that are designated for light rail both to the North-West and to the South,” Goff said.
“Mt Roskill, Mangere, Onehanga – a lot of those are Housing New Zealand properties – so they get the value capture, and that will help them meet the cost of funding the project,” he said.
It all seems a bit complex.
Value capture revenue would mean the Government taxing the Government to pass revenue to a fund owned by the Government in exchange for a transport network run on behalf of the Government.
This raises a further concern. If the Government opts for a popular form of value capture which only yields revenue when the home is sold it would have to sell off the social housing stock along the routes to raise value capture revenue.
This could also raise some uncomfortable questions about who will benefit from the rail line: tenants who currently live along the route, or upwardly mobile young professionals moving into the area looking for a decent house with a good commute time.
Twyford has not ruled out a much simpler way of funding the project, which would be using the Government’s balance sheet to borrow to pay for the lines. The Government can currently borrow at 2.79 percent, which would be much cheaper than the capital costs used by the Super Fund-led consortium. It would need to build in a profit margin and a higher cost of capital in its assumptions, and therefore its price and demands for revenue.
Twyford said the procurement process would compare competing bids against the simpler debt-funded model, although the Government’s own self-imposed debt target of reaching 20 percent of GDP within five years would currently prevent it from taking this option.
An intensification contradiction
The southern route is itself steeped in controversy.
Auckland councillor and former head of Auckland Transport Mike Lee warned against a light rail line running along Dominion Road.
He said that the only feasible long-term option was heavy rail, which could handle the growing needs of Auckland airport. He said a light rail line would reach capacity too soon, given the rising passenger numbers expected by Auckland airport.
“People shouldn’t get confused with property development along Dominion Road and a fast and convenient journey to Auckland airport,” Lee said.
A light rail link would lead to intensification along the Dominion Road corridor, which Lee argues will mean journeys to and from the airport become more difficult.
“Some people thing oh great we can put in high-rise buildings and jam in a whole lot more people because there’ll be trams running outside and at the same time think it’s going to be better than trains in getting to the airport — that’s nonsense, there’s a contradiction,” he said.
Lee is also doubtful that the Dominion Road corridor has the necessary infrastructure to deal with the intensification light rail would bring.
“Before they jam any more people along that corridor, they need to sort out the sewage system, that’s already over-committed,” he said.
But others say its possible for the Government to have its cake and eat it too.
Matt Lowrie, of Greater Auckland, which advocates for better public transport in Auckland said the current proposal would only run on the road for around seven kilometres, from the Civic Theatre to the bottom of Dominion Road. Light Rail would have signal priority along these sections to help it keep to an efficient and regular schedule.
Most of the rest of the project from Dominion Road would be off-road, allowing significant time efficiencies. Taking this into account, Lowrie said the light rail route was as fast as the heavy rail route, given the heavy rail route would need to take a less direct path to the airport.
“Heavy rail can travel faster, but it has to travel further,” he said.
