Hive News Tuesday: How to cook up a NZ$1 bln policy in 33 days; Treasury suggests targeted rates and using Land Transport Fund to help Auckland

Pokeno housing development. Copyright Lynn Grieveson / Hive News

Treasury's OIA document dump yesterday on the Housing Infrastructure Fund revealed how Treasury and the Government scrambled over 33 days to come up with a NZ$1 billion fund in time for John Key's July 3 speech to the National Party's annual conference in Christchurch.

The accelerated policy-making on the run followed the lukewarm reaction to the May 21 Budget and then the similarly sceptical response to Nick Smith's National Policy Statement on Urban Development Capacity, in particular the lack of help for funding infrastructure for housing in high growth areas such as Auckland. See more on that 'elephant in the room' in my Hive News from June 3.

Early in the process Treasury repeatedly warned that the proposals had been "brainstormed" and that the eventual policy had plenty of loose ends. It also made clear it any fund would not solve Auckland's housing supply shortage any time soon.

It also warned that other mechanisms would be needed to deal with a bigger funding issue for Councils in the long term now that the Government had directed them to build a lot more infrastructure to make land supply more competitive, rather than the current 'just in time' system of building infrastructure for housing just before it was needed by developers.

"Most of the projects that would be brought forward if additional financing was available are medium-term projects that will enable the supply of land in 5-7 years and therefore will not alleviate pressure on housing in the short-term," an official wrote on June 3.

Treasury also suggested other funding mechanisms could be used to improve Council funding, including targeted rates, 'value uplift capture' tools so Councils benefit from rising land prices when land is re-zoned, and potentially using NZTA's National Land Transport Fund to accelerate road development.

"We would like to accelerate Auckland Council’s work on value capture and third party funding mechanisms for future infrastructure projects, particularly those that create large amounts of value such as big transport projects. This includes capturing part of the value for local residents, businesses and service users through targeted rates / taxes and user charges," officials wrote.

'Asset sales not the answer and water not the issue'

The Treasury documents also challenged some of the assumptions about Councils being at their debt limits, about land banking not being an issue, about funding being needed for water projects in Auckland, and raised questions about longer term funding problems not addressed by the NZ$1 billion fund. Treasury also raised the prospect of a review of the current Local Government Funding Agency limit on debt being no more than 250% of revenue, particularly for high growth councils. Lifting the limit at the moment would increase funding costs for all Councils.

Treasury also questioned whether asset sales would solve Auckland's problems, given they would produce a lump sum of capital upfront, but reduce ongoing revenues.

"The net impact on the amount of debt headroom would be much smaller than the headline selling price suggests," Treasury said.

Treasury challenged a lot of the early commentary around the need for extra funding for water pipes (former Mayor Len Brown initially suggested the fund could be used for the NZ$950 million 'Interceptor' from Western Springs to Mangere), pointing out instead that funding for roads was the issue. Watercare has also privately pushed back at the idea that funding was needed for its water plans, pointing to its longer term plans already being accounted for within the Council's existing funding arrangements.

"In Auckland, roads rather than bulk water is the constraint," Treasury said.

It was also sceptical about an early list of projects provided by Auckland Council (which weren't detailed in the redacted documents).

"Our initial view is that none of them would fundamentally address the housing issues facing Auckland, and there may be other projects that we are not familiar with that would be more beneficial," it wrote.

A long term issue brewing

Treasury's diagnosis of the problem was clear in its papers, which start as early as June 1.

"The surge in demand and the requirements of the National Policy Statement on Urban Development to make greater development capacity available have created both a short-term and a long-term challenge for councils/infrastructure providers," a Treasury official wrote on June 16.

"The short-term challenge is that the councils are operating at or near their debt constraints so cannot increase debt to finance the increased infrastructure capacity needed. Over the long-term the NPS is effectively asking councils to provide an amount of excess infrastructure capacity over and above what it has provided in the past. The costs of this excess capacity have not been built into current plans," the official wrote.

"Over the long-term councils will need to readjust their finances to ensure they have the revenue to cover those additional costs. The proposed infrastructure fund is a way of helping overcome the council’s short-term problem but does not help them address the longer term challenge of funding a greater level of excess capacity as this excess capacity will be needed on an on-going basis."

Treasury pointed out that other mechanisms would be needed to solve that longer term problem.

It was particularly interested in using the NZTA and its National Land Trasnsport Fund.

"It is possible that the NZTA could provide accelerated support to Auckland within the limits of the National Land Transport Fund (NLTF) and without Crown financing, however depending on the eventual size of any support package there is a risk that other NLTF priorities may slip as a result."

In other economic and financial news...

The services sector had a hiccup of sorts in September. The BNZ Business NZ survey of the services sector found a slowing of expansion. The PSI for September was 54.1. This was 3.8 points down from August, and very similar to the 54.3 recorded in July (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). BusinessNZ pointed to bad weather and the school holidays. BNZ Senior Economist Doug Steel said “looking through the monthly volatility, there has been some trend slowing in the PSI over recent months. It appears firms' difficulty in finding staff is one of the obviously many factors involved”.

However, small businesses are feeling better, although they're also having issues finding staff. ANZ's Small Business Microscope survey found a net 17% of respondents - up from 8% in June - say they are confident about the business environment in the year ahead. Finding staff has been the biggest problem constraining small firm growth in 2016 and has strengthened for the larger businesses, now out to 32%, ANZ reported.

The NZ Initiative published a report on the housing crisis, saying it was the root of inequality. ‘The Inequality Paradox: Why inequality matters even though it has barely changed’ argues that "too many New Zealanders are suffering real hardship, and this is largely due to very high housing costs."

Tweet of the day:

Helen Rosner:

If you think a huge group of journalists can pull off a long-lead multi-publication conspiracy, you've never met a huge group of journalists

Have a great day

cheers

Bernard