Does local government need more help to meet their big infrastructure commitments after Covid-19?
Councils on the hook for a multibillion-dollar transport plan in Wellington could still decide they’re unable to afford it, leaving the Government having to contribute more.
However, Let’s Get Wellington Moving is just one infrastructure project councils could find themselves having to defer or reconsider as financial pressures mount.
Covid-19 has caused massive problems for councils all over the country. In good times they had headroom to borrow more, but their ability to take on debt has fallen as revenues from services like parking have tumbled. High growth councils are the closest to breaching their debt caps.
Infrastructure Commission chair Alan Bollard said councils had submitted a “significant” number of projects to a $3b “shovel-ready” project fund that the Infrastructure Industry Reference Group (IIRG) will pass on to ministers next week.
Separately, two councils – Wellington City Council and Greater Wellington Council – are on the hook for 40 percent of a much-hyped $6.4b plan to bring mass transit and other pieces of roading, cycling and public transport infrastructure to the capital after they voted to support it last year.
“It’s a very large sum of money.”
However, Treasury’s Budget and Economic Fiscal Update 2020 noted the risk for the Crown around LGWM had changed since the Crown’s half-yearly update in December.
“Local government’s commitment to funding their share of LGWM is yet to be fully confirmed as their long-term plan process is ongoing.
“If the local government share is at risk of not being met, there could be requests for greater funding from central government.”
Wellington Mayor Andy Foster said his council had a duty under the Local Government Act to listen to ratepayer submissions on the size of the council’s contribution to LGWM with an “open mind” and take their concerns into account.
“It’s a very large sum of money.
“By law we have to go through a process with our community. Which is what the long-term plan is there for.”
GWRC chairman Daran Ponter said that was technically the case, however his council fully backed the plan and its price tag.
“Until the spades are in the ground and we’ve actually got committed contracts to build stuff, all parties will be raising questions about the cost-benefit of the expenditure that’s on the table.
“Things will be a little bit more constrained in coming years, but we’re not taking our foot off the pedal.”
Transport Minister Phil Twyford said all councils had endorsed LGWM and brought forward funding for the early part of the programme.
“Councils have to consult with ratepayers on these matters, as you’d expect.
“I haven’t had any indications that we wouldn’t continue to work together to unlock our capital.”
Councils under pressure
WCC isn’t a high-growth council, but like others it is grappling with a slump in revenues from city car parking and faces calls for rates freezes and deferrals from ratepayers.
Every week seems to bring a new piece of financial woe to the capital’s city council Zoom meeting. Next week it’ll be another cost blowout on the Omāroro reservoir project. The third blowout in three years. In 2017 it was costed at $30m, this year WCC will vote to approve a revised price tag of over twice that: $68.8m.
The pressure to make trade-offs between infrastructure spending and keeping rates down is growing. Documents attached to the new updated cost for the reservoir noted “in a post Covid-19 environment, the WCC needs to confirm the project’s priority against everything else in its programme”.
Finance Minister Grant Robertson said he wanted councils to stick to their co-funding commitments with the Government, but wasn’t considering giving them more cash to spend how they wanted.
Debt cap raise won’t be enough
Council debt caps are likely to increase from 250 percent of revenue to 300 percent, but this wouldn’t be enough to cover the kind of infrastructure spending needed.
Director of Sovereign and International Public Finance ratings for S&P Global Anthony Walker foreshadowed the risk of a ratings downgrade if debt went beyond that to 400 percent, as some wanted.
“Once you’re getting up to that level of 300-plus percent debt-to-revenue, we would start questioning that assessment as to whether the [council] is willing to do what’s needed to fund its fiscal position at the AA-rating level.”
Several high-growth councils were in danger of breaching their debt caps after Covid-19. Auckland Council would have breached its 250 percent debt cap in every scenario, according to a recently released report.
The actual effect a ratings downgrade would have on borrowing costs has often been overstated, but it matters a lot to councils and debt-averse ratepayers.
Their debt problems actually get worse if councils decide to cut rates because that reduces the amount of revenue they receive and the headroom they have to borrow.
Local Government New Zealand President Dave Cull and Sense Partners economist Shamubeel Eaqub have called for councils to be given more revenue from central government so they can keep up their infrastructure spending while staying below their debt-to-revenue caps (money given to them by the Government would count as revenue).
S&P’s Walker said many councils were confident central government would buck their historic aversion to providing money for local government.
“[Councils are] telling us that the Crown is looking to help recovery of the economy via infrastructure spending. And that involves New Zealand councils because they do a lot of infrastructure spending.”
“But there’s been very little when it comes to the size or scope of the total investment … as well as the Crown contribution.”
“And for us it’s really going to come down to the size of this and the size of the Crown contribution … whether it’s pushing too much risk down to the local council or whether the Crown is willing to actually support the sector.”
‘Shovel ready’ with conditions
Bollard said the Infrastructure Industry Reference Group would recommend the Government attach certain conditions to any local government projects it funded to make sure councils followed through with the projects they were given money for.
“[These conditions] will be related to the risks, the liabilities, and the timing of it all and even potentially some sort of ‘use it or lose it’ type of arrangement.”
Robertson said he expected councils would receive some money for partnership projects with the Government out of its $3b “shovel-ready” infrastructure fund, but he wasn’t considering providing direct cash grants to any council.
Regardless of what financial position councils were in, he wanted them to meet their existing co-funding arrangements with the Government:
“I think it’s important that they, in as many circumstances as possible, that they can meet those [commitments]. Because those are projects that have long-term value for their communities.
“I haven’t got any information to show me that there’s a problem with any specific project.”