Patrick McVeigh: Cities could get share of tax take - Ateed

The scale of the infrastructure investment required in Auckland cannot be met solely by the ratepayer. Photo / Martin Sykes

Opinion

Manchester model could be used to help fund infrastructure deficit.

Patrick McVeigh is general manager business innovation and skills for Auckland Tourism, Events and Economic Development (Ateed).

The challenge of funding Auckland's infrastructure requirements is a discussion often repeated in both media and political circles. Auckland is not the only city that faces this challenge. Cities worldwide face similar challenges, particularly as the global economy continues to urbanise.

There is a strong and recognised link between infrastructure investment and economic growth. Typically major infrastructure projects create new jobs, pump new capital investment into local economies and have a positive impact on productivity.

In the United States alone, estimates suggest there is need for investment of US$3.32 trillion between 2016 and 2025 and a funding gap of US$1.44 trillion. A recent report by the American Society of Civil Engineers stated that failure to address the infrastructure deficit would have a negative impact on gross domestic product of some US$4 trillion between 2016 and 2025 through lost business sales, rising costs and reduced incomes.

While the longer term benefits are obvious, in the short term - beyond the immediate boost to the construction sector - the benefits don't materialise immediately, and there can be a significant lag before downstream economic returns can be realised.

The question then is, who pays today for tomorrow's benefits? Clearly in the case of Auckland the scale of the investment required cannot be met solely by the ratepayer, and while national government and the private sector are already playing a role, more needs to be done.

So are there alternatives that could work for Auckland? Well, if we aren't the only city dealing with an infrastructure deficit, then we can't be the only city looking for a funding solution.

There are financial mechanisms that have been tried and tested including various forms of land value capture mechanisms (a tax on the uplift in land values resulting from public investment), or community infrastructure levies (a form of developer contribution to the cost of community facilities arising from increased demand from new developments), or evergreen loan funds (low interest loans to support new infrastructure and are then recycled when repaid).

While some of these tools have been considered and dismissed elsewhere, there is a compelling case for Auckland to continue exploring such mechanisms. One specific response to our infrastructure deficit that is potentially worthy of further consideration is the "city deal" model that has continued to make ground across UK cities.

The city deal model was first introduced to UK cities in 2012. It is essentially a contract between central government and city-regions where investment is made available for agreed priority infrastructure projects in return for real and measurable increases in economic growth through job growth and productivity improvement within the city-region, ultimately delivering financial returns to the national exchequer.

The first city deal was signed with the Greater Manchester city-region and included innovative new financial arrangements, such as the "earn back" arrangement whereby the city's investment in growth earned it a share of the national tax take.

There are now nearly 30 city deals, signed or in development, with enhanced infrastructure investment playing a central role.

However, it doesn't end there. An examination of the city deals highlights some of the new ways cities are responding to growth challenges as diverse as youth unemployment, skills development, private sector investment, and support for small business growth and exporting.

These are areas that Ateed, on behalf of the Auckland Council, is actively pursuing in partnership with the private sector and central government. But if a step change is to be achieved we need to consider new funding structures that will accelerate the pace of investment and bridge the infrastructure gap.

There is no simple solution for Auckland's infrastructure deficit. However, the benefits that could be realised make it worthy of attention. Ultimately, a city deal might not be the answer, but there are clearly lessons to be learnt and fresh thinking needed if we are to unlock Auckland's economic potential for the good of both the city's current and future residents and businesses, and for New Zealand's future as a whole.

* Patrick McVeigh is general manager business innovation and skills for Auckland Tourism, Events and Economic Development (Ateed).