Aaron Drew: Private capital can help fund Auckland

Without investment the city will not meet its potential. Photo / Brett Phibbs

Partnerships with cash-strapped government an untapped resource for critical big-ticket investment.

Auckland is on the cusp of leaving its awkward adolescent phase to be a truly global city, at least on a par with big sisters Sydney and Melbourne. The city is well on track to top 2 million people by the end of the next decade.

Bigger cities generate more ideas and innovation, lower business costs and help national competitiveness. But bigger cities bring challenges too, and these need to be addressed now for Auckland to unlock its potential.

These challenges include eye-wateringly high house prices, worsening traffic congestion that already costs the region $1.25 billion per year, and concerns over electricity and water infrastructure that might result in more power outages and beaches that are unsafe for swimming after heavy rain.

If Auckland fails to alleviate these pressures, people and business will leave. Some will go to surrounding regions, particularly support services and manufacturing. But probably more people, and the highest value-add businesses in sectors which depend on vibrant dense cities (such as finance and the creative industries) will go overseas. New Zealand as a whole will be worse off.

Some of these infrastructure problems, for example in roading, may be alleviated by technological innovation. But there is no escaping the fact that very large cheques need to be written. The big question is - who should sign them?

Given Crown finance constraints, the default Government position is to kick the can down the road, posing challenges for multi-year planning and development timeframes.

Auckland Council recognises that it can't fund the investment alone. Rates rises would be unpalatable, and it would be imprudent to issue debt to the levels required.

It has suggested new revenue sources, including user charges on motorways or regional fuel taxes.

But this is only a partial solution. A broader option is the role private capital can play in funding Auckland's investment needs. This funding source has not received much attention in the debate. We think it merits careful attention.

Private capital essentially spreads the burden of funding Auckland's investment from today's ratepayers and taxpayers to future generations. Development is funded today, in exchange for a stream of future cash flows (from direct user charges, local government transfers or some combination) from assets developed.

This makes sense as the benefits of assets such as sewerage systems, social housing, tunnels and railways are spread over a long-term horizon.

Bringing private capital to the table as an asset owner, either outright or through public-private partnerships, can also improve operational efficiencies given the sharper commercial incentives it operates under. If well regulated, this translates to cheaper prices for end users.

Australian State Governments facing similar funding constraints and development needs have launched ambitious programmes to attract capital - both to fund new investment, and to recycle capital back to state coffers via asset sales.

These are proving attractive to investors seeking long-term, stable income streams.

The very high A$5 billion ($5.56 billion) price tag recently paid for Port Botany in Sydney by a consortium of local and international institutional investors is but one example.

Like Australia, New Zealand is exceptionally well placed to capitalise on this demand. It is one of only a few OECD countries that offer the combination of a positive demographic outlook, a world-class regulatory environment, a stable fiscal outlook, and relatively normal monetary policy settings.

New Zealand assets also generally offer welcome diversification benefits for institutional investors.

Local investors may also have an appetite to write large cheques for Auckland's needs. Investors such as the ACC, the NZ Superannuation Fund, Maori investment entities, Infratil and others are potentially natural investment partners given their local knowledge, and perhaps greater willingness to take earlier stage project development risks.

Bringing private capital to the table does not mean wholesale asset sales to overseas interests, nor alienating New Zealanders from their land. Notably, many of the infrastructure developments and sales in Australia, including Port Botany, are for long-term leases rather than freehold title. Ownership remains in local hands.

What's missing is investor-ready information on opportunities. The key requirement for attracting private capital to help fund Auckland's investment needs is giving potential investors a clear account of the risks and how they might be shared. Once understood, they can be priced. Putting Auckland more firmly on the global investment radar also requires developing a pipeline of potential investment opportunities, and a credible and transparent transaction process.

Realising Auckland's promise is not a given. At a time of funding constraints, local and national, there is a risk the investment required to lift Auckland's and New Zealand's competitiveness, reduce bottlenecks and improve social wellbeing occurs too little and too late. A political consensus to bring private capital into the picture would reduce this risk and enable Auckland to realise its global city aspirations.

Aaron Drew is a principal economist at NZIER.