Infrastructure expenditure doesn't exist in a vacuum, and as well as common funding constraints, the investment landscape including economic, political, social and environmental factors, is constantly changing.
This means that in addition to conventional funding streams, local authorities and their partners must be open to creative new approaches.
In terms of conventional funding streams, Auckland Council can access the debt capital markets, and does so successfully. In order to continue to efficiently access those markets for funding it must retain its credit rating.
A key driver of how the credit rating agencies rate councils is the ratio of their debt to their revenues. Keeping debt to revenue under 270 per cent is considered prudent by the rating agencies and though Auckland Council is under that level, it is not massively under it.
This therefore constrains how the council can use traditional funding markets to pay for things such as roads for new housing developments, more public transport and upgrading existing water infrastructure.
In recent years several major central government infrastructure projects have been financed by public private partnerships (PPPs).
These focused on efficiency of whole of life costs and risk transfer to the private sector.\
They delivered more private sector learnings into Government's existing service delivery platforms.
While this procurement mechanism has brought the Government and private sector together to deliver infrastructure outcomes, it hasn't yet been applied to help address the balance sheet constraints local councils face when delivering similar infrastructure.
The new Labour-led Government has the opportunity to build on New Zealand's PPP experience and support new procurement methods at a local Government level.
These should retain key PPP learnings, but also shift the financing off-balance sheet, with local council infrastructure delivered through separate Government sponsored or controlled entities, with their own revenue sources.
The finance industry must also move to support these new Government off-balance sheet entities through the provision of new financial models, particularly for greenfield projects and the construction phase of infrastructure builds.
They should develop accelerated access to longer-dated and cost effective infrastructure bonds, acknowledging that this requires a higher level of certainty of long term revenue than may be found in a standard PPP.
This will enable 30+ year bond financing by institutional investors such as superannuation and sovereign wealth funds.
We look forward to the outcome of the Government's deliberations on how it might mandate Crown Infrastructure Partners (CIP) to fund horizontal infrastructure (such as roads, sewerage and storm water systems) for new housing developments and the revenue stream it chooses to repay any related funding.
CIP, previously called Crown Fibre Holdings, successfully delivered open access national broadband network.
We believe CIP can fulfil the role of funding Auckland's infrastructure build outside of Auckland Council's current balance sheet constraints, supported by the domestic and international financial markets.
As it's not burdened by the debt ceilings of councils, this funding method could be made available to local authorities struggling to fund new long-term infrastructure from their own balance sheets.
Government would also retain the option to move it from their balance sheet to the private sector as investors gain greater confidence in the projects.
In Auckland it is envisioned such a structure may facilitate major projects such as Watercare's $1 billion Central Interceptor project, a 14km underground waste and stormwater tunnel designed to reduce overflows into the Manukau Harbour.
Social infrastructure and public amenities — such as libraries and parks — for new housing subdivisions could also benefit from similar procurement and funding solutions to ensure new communities have the same level of social infrastructure amenities as those enjoyed by longer established suburbs.
The Government has a real opportunity to help address Auckland's current and future infrastructure needs.
There are many procurement methods available, so it will be interesting to see what path the Government decides to pursue. It will also need to decide whether to extend an invitation to private sector equity investors to help fund the projects.
Signalling a target of Net Crown Debt equalling less than 20 per cent of New Zealand's GDP will be a strong consideration in this process.
- Paul Goodwin is Managing Director, Institutional NZ, ANZ
