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Treasury examines asset 'buy-back' scheme for Council

Tuesday 26 April 2016 03:20 PM

Treasury examines asset 'buy-back' scheme and taxing powers for Auckland Council

By Pattrick Smellie

April 26 (BusinessDesk) - Central government could buy assets for Auckland on the city council's behalf under a buy-back scheme to help accelerate the infrastructure required to ensure the fast-growing city's housing and population needs are met more urgently.

In a "Budget-Sensitive" Dec. 15 paper for Finance Minister Bill English, now released under the Official Information Act, the Treasury advised that there is little short-term gain in Auckland Council selling assets to fund urgent infrastructure requirements if the objective is to make a quick difference to the availability of affordable housing.

Spending cuts in other areas controlled by Auckland Council wouldn't yield big savings, especially as much civic infrastructure is already budgeted for a decline in quality from 2018. Likewise, the council is carrying too much debt to borrow much more without breaching Local Government Funding Authority covenants, triggering a credit rating downgrade and in all likelihood raising borrowing costs for the whole local government sector.

Among ways the government could help would be to consider an "asset purchase and repayment option," proposed by Auckland Council.

"This could involve substantial investment by the Crown and may involve the transfer of financial risk without a guarantee of more housing."

Officials recommended against considering such a scheme until after the completion of the Auckland Transport Alignment Process (ATAP), which will decide how to fund Auckland's future transport needs, with a final report due in August.

They also propose developing "innovative solutions to the local infrastructure financing (and funding) coordination issues", which could include "new revenue streams."

To date, the government has rejected Auckland's desire to impose roading taxes, although that could change once the ATAP is agreed and would require legislation.

The recommendation would appear to clear the way for considering a Labour Party policy, which proposes using long-term local government-issued bonds to finance infrastructure and reduce the impact of up-front development levies on the cost of new houses in Auckland, where house prices are spiralling from a combination of slow construction rates, insufficient supply and very strong inward migration over the past two years.

The paper suggests increased investment in schools may be one way to "maximise housing potential in areas with existing infrastructure capacity."

Part of the infrastructure challenge in Auckland is that while there may be technically enough capacity to meet growth projections, the assets themselves may not be in the most attractive parts of the city for would-be home builders.

"The efficient provision of infrastructure would entail maximising the economies of scale by forcing development to occur where there is existing infrastructure capacity. However, developers and house purchasers prefer a choice of locations. The challenge is to find the optimal amount of over-capacity that enables market choice," the report says.

The report also says Auckland's biggest infrastructure bottlenecks are not the large-scale "bulk" or "trunk" infrastructure that central and local governments fund, but funding for infrastructure to new residential developments, which the developers themselves have to pay for.

The problem has been exacerbated by the creation of special housing areas (SHAs) where red tape is supposed to be removed to allow new house-building more quickly. Instead, some SHAs with multiple land-owners are hampered by competing priorities and development timetables.

"In one case, there are 75 different landowners within an SHA," the report says. "Getting agreement from them all about how to allocate costs is difficult, particularly when not all landowners want to develop (or at least not immediately) and some are trying to free-ride on the investments of others."

On a quick scan late last year, the Treasury found 24 Auckland special housing areas with a capacity for 7,500 dwellings had been declined because of "a lack of available local infrastructure".

The report also exposes a difference of opinion between Auckland Council and its fresh and wastewater arm, Watercare Services, about whether there's enough infrastructure planned to meet growth and notes the council could improve its debt headroom by taking Watercare off its balance sheet. That would force a credit rating downgrade for Watercare, and "many other considerations" would need to be addressed.

Treasury also has its doubts about whether the council's assumed 3.4 percent annual rates increase is likely to be achieved, further eating into the council's ability to fund essential services.



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