In today's email we detail the developments in infrastructure funding.
1. Now they go off balance sheet
The Auckland Council yesterday secured $300 million of the $1 billion on offer in the Government's Housing Infrastructure Fund (HIF), but even more is set to be announced for two big projects in Auckland over the next couple of weeks.
Mayor Phil Goff and Finance Minister Steven Joyce held a joint news conference at Watercare's pipe storage facilities at Mangere yesterday afternoon and indicated they were working on creating a special purpose vehicle or vehicles that would take infrastructure funding for two new large projects off Auckland Council's balance sheet.
"The HIF fund, I’m sure minister, is not a one-off event," Goff said at the facility on Mark Ford Road.
They had earlier announced $300 million would be used from the HIF to pay for 10 roading and water projects to enable the building of 10,500 homes at Whenuapai and Redhills near the Hobsonville Point development, including 2,200 over the next five years.
"This is a partial answer to Auckland’s needs and the minister has foreshadowed that in a few weeks’ time there will be a further announcement which will assist us with infrastructure in a way that it does not become part of our financial balance sheet," Goff said.
"It does not create problems for us in terms of the debt to revenue ratio," he said.
Using a special purpose vehicle would ensure the council does not breach its 265 percent debt to revenue covenant that underpins its AA credit rating from Standard and Poor's. Goff said last month in an interview with Lisa Owen that the Council was already at 256 percent.
Auckland Council is also somewhat limited by the Government-sponsored Local Government Funding Agency, which limits Auckland Council to 40 percent of its overall borrowing and has a 250 percent debt to revenue covenant. Essentially, Auckland Council's AA credit rating sets the baseline for all council borrowing in New Zealand, which was $7.5 billion for 49 councils as at April 12. An Auckland downgrade would effectively increase borrowing costs across all councils.
Joyce and Goff indicated the new special purpose vehicle or vehicles could be used for up to another $600 million of infrastructure funding.
"I would imagine the package in a couple of weeks would be larger than the one we announced here today," Goff said.
Asked if the new projects would be double the $300 million announced yesterday (see details in graphic below), Joyce said (and Goff agreed) that: "I think you can assume that there are a couple of other projects that are at least the size of the one that is in front of us today. That’s probably fair."
The Auckland Mayoral Taskforce report on housing released last month included a section (page 30) that addresses in more detail how the special purpose vehicles might work, including that they need separate revenue streams from targeted rates and a separate equity provider, which in theory would be the Crown.
"For this model to function well, the new entity will require the ability to raise revenue streams from development that it unlocks, as well as an equity provider to underwrite its borrowing," the taskforce wrote.
"In the short term, development contributions are expected to be a key revenue source, but other revenue sources such as targeted ‘value capture’ rates and developer contributions are also likely to play a role."
A short post script to the announcement on Mark Ford Drive. Ford, who died in 2014, was the previous CEO of Watercare and was the chair of the Auckland Transition Agency that created the Auckland Council. Ford was integral in creating the structures that are now being used by the single council and the Government to fund this infrastructure. Most doubt it would have been possible before the creation of the Super City.
2. Specials for other councils too
The bulk of the infrastructure projects announced yesterday went to Hamilton City Council, Waikato District Council, Tauranga City Council and the Queenstown District Lakes Council.
But there may be more to come in these special purpose vehicles, which Joyce said were being considered for other councils.
"It is an Auckland story, but there are other councils around the country that would like to have the ability to fund the infrastructure without placing it directly on their own balance sheets so that they are not completely subject to the current ratepayers having to meet the costs of that," he said in the news conference covered by Newsroom's Co-Editor Tim Murphy.
"Certainly one thing we are looking at we believe will work for Auckland, but actually the intention is that it works for other councils as well."
Joyce said he had already had informal discussions with other councils and Local Government New Zealand.
3. It will take a while
The two stand-out features of the projects announced yesterday was the time it would take to ramp up housing production in the first five years (19,268 homes in total) and the heavy extra supply going into Tauranga (13,272) in the first five years.
The developments would see a further 19,365 sections made available in the second five years and a total of 103,000 sections over the longer term.
The focus of the announcements yesterday morning was in Hamilton, where Prime Minister Bill English began the infrastructure funding spree day, announcing the first two projects would enable the development of 10,700 homes in the Waikato region over the next 10 years.
English, Joyce and Construction and Building Minister Nick Smith announced that the fund would be used by the Hamilton City Council to build roads, a bridge and water infrastructure for an 8,100 section development on the southern border of Hamilton near the hospital and university, while the Waikato District Council would use the fund for a greenfield development adjacent to Te Kauwhata for 2,600 houses within 10 years.
The first homes in the Peacockes Development south of Hamilton would be completed by the end of 2018, with at least 1,000 built by 2022 and a further 7,100 released progressively as demand required, they said.
Here's my article from yesterday on Newsroom Pro with more detail of the projects and the reaction from Labour, which argued its infrastructure bonds plan would be more effective and the latest plans risked creating 'ghost houses' in similar ways to the Special Housing Area announcements.
Here's the summary of the HIF projects announced in graphic form.
4. Reshuffling family incomes
The other big spending announcement yesterday came from Labour with its rejigged family incomes package, in which tax cuts for all were redirected to poorer families and other government spending.
Labour's plan is effectively around $500 million smaller per year than National's $2 billion plan announced in Budget 2017. Labour said it would redirect that $2 billion in savings over four years into other public services and infrastructure.
The key differences between Labour's plan and National's plan are that Labour has removed the broad tax cut for all income earners, included a $60 per week baby bonus for children in their first year, given the independent earners tax credit back, and introduced a winter energy payment of $700 for couples and $450 for singles.
Labour is keeping National's accommodation supplement increases.
Labour will be hoping the swap of tax cuts for more benefits targeted at poorer families with children and those struggling with winter power bills will appeal to those seeing no need for tax cuts. It hopes the winter energy payments for superannuitants and other main beneficiaries will help offset the tax cut that superannuitants benefited from in particular.
See a lot more analysis and detail in Shane Cowlishaw's full wrap of the announcement published on Newsroom Pro yesterday.
5. Retail spending slowing
Retail spending in June was weaker than expected as extra hospitality spending on the Lions tour failed to offset slower spending elsewhere.
Statistics New Zealand reported yesterday that seasonally adjusted retail spending with debit and credit cards was flat in June from May as a $24 million rise in hospitality spending during the Lions tour was mostly offset by a $19 million fall in fuel spending because of lower petrol prices.
The flat result was weaker than economists' forecasts for a rise of around 0.8 percent. Retail spending in the June quarter rose 0.7 percent from the March quarter, which was slower than the 1.5 percent rate seen in the March quarter.
There has been a definite slowing in retail spending growth rates since late 2016 as household borrowing growth slowed and the Auckland housing market came off the boil in the wake of the Reserve Bank's new 40 percent deposit requirement for rental property investors.
ANZ said growth in the last three months vs the same three months a year earlier was just 0.2 percent, which was the slowest rate in seven years.
This chart below via ASB shows that slowdown:
6. Quote of the day:
Property Council CEO Connal Townsend talking on The AM Show about the HIF announcement:
"It's more than a drop in the bucket, maybe its a plastic bucket in a bath. It's still not sufficient but it's still a good start."
7. While you were sleeping
The Donald Trump story just gets more and more incredible by the day and night.
Donald Trump Junior tweeted an entire email trail overnight that showed he welcomed Russian Government help in the US Presidential election, which reinforced allegations of collusion that are now being investigated by a special counsel. (Reuters)
8. One fun thing
Tweet of the day had to go to Dave Pell on the latest revelations in the New York Times that Donald Trump Jr was warned in emails before his meeting with a Russian lawyer that Russia wanted to help get his father elected:
"President Trump reportedly furious that the media is focusing on Don Jr’s collusion instead of his much better collusion two days ago."