The Government is looking at new and novel ways of financing infrastructure without breaking its strict budget responsibility rules.
Housing Minister Phil Twyford, when quizzed about funding for new transport infrastructure, indicated the Government is investigating how to borrow money without it showing up as core Crown debt.
Twyford said the plan was to build on work done by National in establishing Special Purpose Vehicles, or SPVs, to fund government infrastructure.
“It’s a balance sheet that’s not council, it’s not government, it’s a kind of public purpose hybrid if you like and that’s one of the keys to unlocking this whole area,” he said.
Twyford then confirmed that money could be borrowed heavily using a SPV as it did not count as local government debt or core Crown debt.
This is big news for a government that has set itself ambitious goals for both infrastructure investment and fiscal prudence. It could allow funding for many of its infrastructure goals while still meeting its strict budget rules.
But shifting debt from one balance sheet to another carries significant trade-offs. Questions still loom over whether it's sensible or cost-effective to shift infrastructure debt into another entity.
A special purpose vehicles
There is no set limit on how much a government can borrow. The Crown’s borrowing limit as much as anyone is willing to lend it. That is why the measurement of debt to GDP is important. The ratio measures the size of the debt against the size of the economy, which is a simple way of assessing the Government’s ability to pay the bondholders who own its debt.
Core Crown debt is currently low, sitting at around 22 percent of GDP. Many OECD countries have debt-to-GDP ratios of 60 percent or more. In Greece, the ratio is 180 percent.
Labour and National’s fixation on reducing debt has been the cause of some debate. With the cost of borrowing currently low, there are growing calls to take on debt to build essential infrastructure like hospitals.
Ratings agencies that monitor debt levels have said New Zealand could borrow more without causing alarm. Standard & Poors, a rating agency, told Interest.co.nz that the Government could allow debt-to-GDP to rise two or three percent without negatively impacting its credit rating.
But others disagree.
In its report on the New Zealand economy, the IMF gave lukewarm support for keeping debt low, noting the economy is small and exposed to overseas shocks as well as internal shocks like an earthquake.
When debt isn’t debt
Unlike the Crown, local government bodies have a form of borrowing limit. Councils borrow from the Local Government Funding Agency, or LGFA. This borrowing is subject to a covenant which mandates the council’s debt-to-revenue ratio not exceed 250 percent. A council that exceeded this ratio would have to look beyond LGFA to borrow and likely face much higher borrowing cost as well as a credit rating downgrade.
To solve this problem, the previous government began investigating ways of financing essential infrastructure, particularly related to housing. Crown Fibre Holdings, the state-owned company tasked with rolling out broadband, was repurposed into Crown Infrastructure Partners for this purpose.
CIP could create an SPV to fund infrastructure. The SPV could then raise private debt to build infrastructure like roads.
The Labour Government has yet to detail how it will use SPVs, but Twyford has said that work is being done on developing the policy further. Treasury and CIP are looking at how they can be extended beyond what had been previously proposed.
Mark Butcher, chief executive of LGFA, told Newsroom that SPVs were a way of shifting both the asset and the debt off Crown balance sheets.
“The idea of these SPVs is that you are shifting off the balance sheet both the asset and the debt, this is our assumption,” Butcher said, noting that SPVs had been used to fund infrastructure in American cities like Phoenix.
“What happens overseas is that the SPV will take the asset on, they will take on the debt associated with putting in the infrastructure asset, and then they will receive revenue in the form of charges and fees to service the debt associated with those assets,” he said.
But that isn’t to say the Government takes no liability.
“Some of the details that need to get worked out is what happens to the maintenance of those assets, what happens to the ownership of the assets at the end of the SPV, what happens if the SPV falls over - those things need to get worked through,” Butcher said.
But the locus of ultimate liability is not quite so clear cut.
An SPV created by CIP would ultimately still be owned by the government. The debt it raised would not appear as core Crown debt, because it was raised by an SPV owned by CIP. But it would still appear as non-core Crown debt. If ratings agencies decide the debt is structured in such a way that it presents a risk to government finances, they could warn of a credit rating downgrade even though debt overall remained low.
If the debt ultimately ends up on the public balance sheet, questions could reasonably be asked why the Government would bother at all.
Its borrowing costs are extremely low. An SPV would be unlikely to borrow as cheaply as government directly. This isn’t necessarily a bad thing - if the government is able to shift the ultimate liability for that infrastructure to the private sector, it may gain by not carrying the risk or maintenance costs associated with the asset.
But if the SPV is still ultimately state-owned, it would ultimately mean the Government has created a vehicle to borrow at a higher rate than it could achieve directly.
Newsroom’s Bernard Hickey put this question to Twyford this week.
“It depends how you structure it, you have to take it on a case-by-case basis,” Twyford responded.
And ways around this are still being sought.
Amelia East, who is working on developing the policy around SPVs at Treasury, told Newsroom that while current public-private partnerships were on the public balance sheet, new settings might allow entities to raise revenue in ways not currently permitted. This could possibly include ways the debt did not end up on the public balance sheet.