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Financing Infrastructure Properly

Housing Affordability: Financing Infrastructure Properly

Hugh Pavletich FDIA
Performance Urban Planning
Christchurch
New Zealand

June 15, 2010

The Municipal Utility District infrastructure bond financing system is employed widely in the United States – particularly within Texas, Georgia and Florida. The US Municipal Bond market is currently about $2.5 trillion.

It is critically important urban researchers and policy analysts have a sound understanding of the bond financing Municipal Utility District structures.

The simple reality is that those who own the infrastructure should be responsible for the equity and debt financing of it – for what should be obvious reasons of economic efficiency and intergenerational equity.

Other public service providers such as airlines, hotels and taxi services do not require a “capital charge”, but instead control their costs sufficiently (unlike Local Governments), so that they maintain the ability to finance capital and normal growth requirements from simple service charges.

If they don’t – they go broke.

Strangling fringe land supply (sold to a gullible public as “smart growth” - in reality “no growth”) and imposing irrational and indefensible Development Charges, is a sure indication that a Local Authorities costs are out of control and that it is incapable of coping with normal growth.

But what is “obvious” to most people with basic common sense and market sense (refer Housing Bubbles And Market Sense), is not “obvious” to those involved with the Local Government sectors of both Australia and New Zealand, due to the extremely poor quality governance, training and policy development standards.

Because of the currently poor governance standards, Local Governments in both New Zealand and Australia, are essentially run by those employed within them to suit themselves.

Senior managements simply administer them and elected representatives (with mostly little knowledge of what’s going on) before long become “parrots” for the desires of the employees. The Audit Offices of both countries (again due to poor governance standards) simply “rubber stamp” whatever Local Government generates. It is, for example, unheard of for the Audit Offices to “tag” financial statements generated by Local Authorities.

Local Authorities and particularly the larger ones, understandably become “bureaucratic nightmares” as Parkinson’s Law is allowed to take root, requiring ever increasing and insatiable financing requirements.

Understandably with these “hillbilly standards”, urban developers are seen as a “soft target” to extort money and the seriously irrational and destructive “Development Charges” are put in place, to assist in meeting the ever increasing financing needs of these out of control bureaucracies. The developers are of course only the intermediaries and it is the new home buyer who pay, with financing costs, subdivider and builder margins thrown in for good measure.

What may on the face of it be a $10,000 Development Charge can in the final wash become in reality a $20,000 Home Buyer Charge – a $50,000 Development Charge a $100,000 Home Buyer Charge. And that’s before the excessive new home buyers mortgage costs are factored in.

Compounding the problem is Local Authorities strangling fringe land supply, so that raw fringe land prices are artificially “cranked up” from their true rural values of just a few thousand dollars per hectare (in the case of Australia) or say $15,000 to $30,000 (in the case of New Zealand with more intensive agriculture) to $1,000,000, $2,000,000 per hectare or more.

Little wonder then, that on the fringes of Houston for example, serviced lots for new fringe starter housing cost around $US30,000,with completed 235 square metre starter homes on 500 to 700 square metre lots for $US140,000, as explained within a recent article “Houston, we have a (housing affordability) problem”.

This disruption of the residential development / construction industry in turn increases the risks, creates unnecessary housing bubbles and degrades pricing performance. New Zealanders for example currently pay about twice the cost per square metre for construction they should. This environment of poor quality governance in New Zealand triggered the leaky homes fiasco and the meltdown of the finance sector.

Indeed the situation in the major metros of Australia and New Zealand is currently so ridiculous, that on an income basis, a Houstonian could expect to buy two completed fringe starter house and land packages, for the same price Australians and New Zealanders pay for a single fringe lot!

To assist in encouraging quality discussion of the Municipal Utility District bond financing model in the United States, the following hyperlinks are provided -

(1) Fort Bend MUD No 109 - Information Kit . Fort Bend is a County on the south side of Houston
(2) City of Pearland In-City Municipal Utility Districts. “In-City” MUDs are employed as well – not only on the fringes.
(3) Texas Chapter 54 - Municipal Utility District - Water Code.

The Urban Technical Advisory Group announced by the New Zealand Minister for the Environment, Hon Dr Nick Smith, two days after the January release of this year’s 6th Edition 2010 Demographia International Housing Affordability Survey, will provide comprehensive information and recommendations on the appropriate mechanisms for urban land release and infrastructure financing and provision.

The New Zealand Urban Technical Advisory Group is to report back to the Minister for the Environment end of June – two weeks from now.

This important Report is expected to be released during July with accompanying Statements by the five Ministers - Environment, Local Government, Infrastructure, Housing and Building. No doubt these Statements will incorporate new institutional arrangements, so that Central Government can embark on a sorely needed performance relationship with the Local Authorities in New Zealand.

It is past time too, the Planning Departments of Local Authorities within Australia and New Zealand researched the United States infrastructure bond financing model’s. The days of “playtime planning” underpinned by “sun rises in the west” research are over.

END

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