New infrastructure financing regime criticised for limiting investment to greenfields housing and ignoring climate change. LGFA creators call for LGFA 2 instead
A group that helped set up the Local Government Financing Authority (LGFA) wants a new debt agency so that councils can borrow more for investing in projects beyond just new suburbs.
Hugo Ellis of Cameron Partners told the Transport and Infrastructure Select Committee on Thursday afternoon that new infrastructure financing legislation wouldn’t be useful to most councils unless a new debt agency was created along with it.
A new Local Government Financing Agency (LGFA) would then allow councils to borrow for a range of infrastructure projects. Ellis termed it: “LGFA 2”.
Cameron Partners are an investment banking firm who helped set up the LGFA. They are also part of a steering group of high growth councils.
Ellis said tweaking the Infrastructure Funding and Financing (IFF) Bill could allow a new Special Purpose Financing Vehicle to be created to raise money for council infrastructure projects.
The vehicle could levy rates across a number of different infrastructure projects and allow councils to collectively borrow at a lower interest rate than if each sought to raise money separately.
Ninety percent of council debt is funded through the LGFA. The debt achieves low interest rates because the risk is spread across a number of councils.
However, a debt covenant attached to LGFA bonds limits the amount each council can borrow to 270 percent of revenue in the case of Auckland, and 250 percent in the case of other councils up and down the country.
Auckland Deputy Mayor Bill Cashmore said all high growth councils were pushing up against their debt limits and the situation had gotten even worse in recent weeks. Breaching that debt limit would lead to a ratings downgrade and increased borrowing costs for every council.
“Covid has put a whole new set of problems in front of us,” Cashmore said.
‘Greenfield projects only’
The IFF would enable councils and developers to create ‘Special Purpose Vehicles’ to pay for new infrastructure and allow more houses to be built.
For example, an SPV could borrow to build water pipes in a new housing subdivision, and then have future residents pay that cost back via targeted rates over a 50-year period.
Cashmore said the new Bill would allow Auckland Council to borrow for new infrastructure without those debts appearing on their balance sheet, which would effectively allow them to borrow more for infrastructure spending without breaching debt covenants.
“At the moment the way it is currently set out the bill is likely to be limited to ‘greenfield’ projects only.”
However, Ellis said the off-balance sheet manoeuvre wouldn’t be worth much unless the text of the bill was changed to allow for a new debt financing agency to be created on the back of those targeted rates.
“At the moment the way it is currently set out the bill is likely to be limited to ‘greenfield’ projects only,” Ellis said.
The bill’s text said infrastructure could be financed if it met the purpose of supporting urban land markets or housing and urban development.
Ellis said council infrastructure projects like water treatment plants didn’t necessarily support urban land markets or housing supply. If there was ambiguity in the law many councils would likely adopt the most conservative definition of the rules.
High transaction costs like legal fees attached to the creation of SPVs would also make them too costly for smaller councils to use if a ‘LGFA 2’-type financing authority wasn’t created, he said.
Other submitters noted that the requirement for infrastructure to support land supply appeared to rule out some climate change infrastructure projects.
Hamilton City Council highlighted that SPVs likely wouldn’t be able to fund all the infrastructure required at greenfield sites either. They used a new development at Rotokauri as an example in their written submission:
“In the Rotokauri example, IFF is proposed to fund selected strategic infrastructure but not local roads and pipes, or community infrastructure and greenspace,” they said.
HCC said funding all of that infrastructure through an IFF targeted rate “would render the levy unaffordable”.
Hamilton city councillor Ryan Hamilton said they also had concerns the Bill allowed entities to get SPV projects approved without getting them ticked off by councils first.
That was a major concern for Wellington Mayor Andy Foster who has been vocal in his opposition to a special housing area development at Shelly Bay.
He was concerned a private developer could get Government approval to build and fund a development “without councils being comfortable with what’s there”.
Meanwhile, Horizons Regional Council policy and strategy manager Rebecca Tayler said the new funding tools for councils could also mean the Government would fund fewer infrastructure projects themselves.
“We are concerned that the Government is determined, through these policy proposals, to more clearly step away from contributing to infrastructure funding,” Tayler said.