Debt keeps Christchurch’s mayor up at night

Christchurch is dealing with a flood – of debt. The city’s council intends to borrow an extra $846 million over the next 10 years to help fund $4.3 billion in planned capital works. That’ll leave it with little financial wiggle-room, David Williams reports.

At the mention of her council’s debt, Christchurch Mayor Lianne Dalziel cringes and turns away in mock shock. She admits, in an interview with Newsroom, that it’s “what keeps me awake at night”.

If Dalziel had trouble sleeping before, her insomnia is set to get much worse.

According to the Christchurch City Council’s draft plans for the next 10 years, expected to be endorsed at a full council meeting today, its gross debt is forecast to rise about 50%, from $1.8 billion in the next financial year to $2.7 billion by 2025/26, before easing back to $2.65 billion in 2027/28.

Compare that to 2013 – the year Dalziel, a former Labour MP was first elected mayor – when the council’s long-term borrowings were $680 million.

“I still think that there is a lack of understanding of the significance to the costs to council of the earthquake and the associated rebuild,” Dalziel says during our interview on the sixth floor of the city’s civic centre. “Because there are costs that were covered by insurance but we got a global settlement so by no means did we get our claim met. And that means that there is a shortfall, and in that there is also a shortfall in terms of expectations, so people expecting things to be back the way that they were.”

Expectations like having roads without potholes, perhaps, and having houses protected from regular flooding, as well as big projects being completed, like a new sports facility and stadium in the central city.

Dalziel is particularly scathing of the cost-sharing agreement with the Government, signed by the council just months before she was elected – “I personally think that the previous council should not have signed a cost-sharing agreement so close to an election”.  She also criticises SCIRT, or Stronger Christchurch Infrastructure Rebuild Team, put together to repair the city’s broken “horizontal infrastructure”, like sewage, stormwater and water pipes.  

“I think that there was an unfortunate representation around the SCIRT programme that the Government was going to help the city out and basically create a 21st century, resilient city. I’ve got a number of quotes that various ministers used to describe what we would be getting back. And unfortunately, the SCIRT programme was only ever designed, in terms of the strict wording of the cost-sharing agreement, to cover the restoration of what was the essential network, to get the city operating – which means that there are a lot of damaged roads, a lot of damaged underground infrastructure, or infrastructure the life of which has been reduced by the earthquakes, and that’s going to put pressure on the city’s spending for many years to come.”

Council's tough balance

The council’s draft long-term plan outlines its planned spending – and ballooning debt – over the next decade. The plan is to spread the expensive work of repairing and replacing infrastructure over many years, to keep rates increases down. Next year’s average residential rates rise is 5.5 percent (plus an extra $7.29 annually for each property for the $10 million ChristChurch Cathedral rate) with the average annual increase over 10 years of 4.37 percent.

The $4.3 billion programme of capital works prioritises better roads, community and sports facilities and parks. The cycleway network will grow by 101 kilometres. Construction of a metro sports facility will go ahead before a new stadium. The city’s water and stormwater systems will be patched to stay in their current state.

The loser, as such, is the wastewater network, which could mean more sewage overflows into rivers. The overflows might last longer, too, with the council warning “response/resolution times will decline for faults and blowbacks”.

(There are also gaps in the decade-long outlook, with no money set aside for development of the 530-hectare residential red zone or for any meaningful spending to protect areas from sea level rise or coastal erosion.)

Suggestions of new sources of funding, beyond rates, include following Auckland in adopting a local fuel tax. A 4-cent-a-litre levy could raise more than $15 million a year, the council says, to be spent on fixing roads and tackling congestion.

But the council certainly can’t pay for its planned spending by rates alone – hence the plan to take on up to $2.7 billion in long-term debt.

Christchurch city’s projected level of debt has tripped its own “debt servicing benchmark”, which tracks borrowing costs as a proportion of planned revenue. But the long-term plan says: “There is no concern around the council’s ability to service the debt.”

The interest costs are set to rise from $95 million next year to a peak of $141 million in 2025/26.

“I hate that,” Dalziel says. “I just feel like it's just such an incredible amount of money to be investing in money.”

But she’s also pragmatic, saying the advantage of debt is that it spreads the cost of an asset intergenerationally, even if it increases the total cost of that asset.

“We're more exposed than we were, but we have allowed headroom for that reason.” – Lianne Dalziel

Even at its highest debt level, Christchurch council’s debt-servicing costs are about 20 percent of its rates revenue – a good indicator of its ability to repay debt.

The real sticking point might be its ability to borrow more if it needs to. The council’s last annual plan said Christchurch was susceptible to damage from earthquakes, flooding and tsunamis.

“Council has limited insurance cover in place for damage to infrastructure networks,” the document said. “Council is self-insuring on the basis of the strength of its balance sheet but could not meet the cost of another event similar to those in 2010 and 2011.”

The long-term plan says that by 2024 the council would only be able to borrow $420 million if it needed to, before hitting financial covenants. The document says: “This is considered a prudent level of headroom.”

Asked if her council is financially exposed, Dalziel says: “We're more exposed than we were, but we have allowed headroom for that reason. So we've not borrowed to our limit, as other cities have.”

Christchurch city’s debt situation could have been different if its planned sale of maintenance and construction company Citycare had gone ahead. Public opposition scuppered the plan in July 2016. Instead, the council demanded $280 million of special dividends from Christchurch City Holdings Ltd (CCHL), its holding company with stakes in major assets, like Citycare, Christchurch International Airport and Lyttelton Port Company.

The latest long-term plan explicitly states: “The council has no plans to sell assets owned by CCHL.”

But perhaps that stance is nuanced. Dalziel – who’s still smarting from the concerted anti-asset-sale campaign – says the city needs to have a “proper discussion” about the uplift in value of its assets.

Figures provided by CCHL estimate the “real uplift” in value of the four main assets – the international airport, Lyttelton Port, broadband network company Enable and electricity lines company Orion – is $1.18 billion over the last 10 years.

Dalziel wants to ask the public if it’s time to bring in “strategic partners”.

“And not to think of it as an asset sale, but to think of it as using the increased value that comes with our assets to bring in other strategic partners that have a long-term interest in our city, as much as we do.

“For example, Ngai Tahu. Ngai Tahu's going nowhere. They're not an overseas corporation; they never will be. Ngai Tahu covers all of the boundaries of greater Christchurch. The Canterbury region, all within Ngai Tahu's boundaries. So why couldn't we think of them as a strategic partner?”

Other potential partners might be sovereign wealth funds, like ACC and the country’s superannuation fund, she says.

Asset sales or strategic partners?

So based on the council’s debt not ballooning, is she suggesting a grown-up conversation with the community about asset sales?

“No, I don't want to call it asset sales,” Dalziel says, sitting forward in her seat.

But it's the same thing, isn’t it?

Dalziel raises her voice: “No, it's not; no, it's not.”

She declares she’s sick of slogans “because it's not a constructive way to have a conversation”.

She then speaks staccato and slowly, in case any children in the room don’t understand: “Can we take a share of the uplift of the value and turn that into a strategic relationship with someone else and get some cash, which enables us to pay down some debt.”

Which, to most people, sounds like asset sales.

Debt isn’t necessarily bad for councils. In fact, the 2007 Local Government Rates Inquiry found councils, generally, were in a good financial position and encouraged them to use debt to pay for long-life assets.

However, a 2011 Department of Internal Affairs report into local government debt warned that excessive levels could limit the ability of councils to borrow to meet the costs of unforeseen circumstances, like natural disasters.

“This means that while some individual councils may be in a prudent position, others are likely to be taking on (or looking to take on) levels of debt that are unsustainable.”

A year later, Auditor-General Lyn Provost said councils were generally taking on reasonable amounts of debt. Provost’s office issued what’s called a modified opinion on Christchurch City Council’s last long-term plan, prepared in 2015, because of uncertainties about earthquake damage to its infrastructure, insurance payouts and the value of its assets. The council amended its long-term plan the following year.

(Auckland Council is in a world of its own. In the last round of long-term plans, Auckland’s estimated debt in 2025 was $11.6 billion, or 58% of the total council debt in the country. On those projections, three years ago, Christchurch City would be the country’s second-most indebted council.)

Submissions on the Christchurch City Council long-term plan will close sometime in April, with hearings held in May.

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