Infrastructure

Beehive told to help councils out. A bit.

Councils are throttling infrastructure spending because they lack the new revenues needed to service extra debt. A Productivity Commission report tells them to use their existing tools more and suggests one or two little new ones. Bernard Hickey analyses the report. 

Many councils, planners, builders and developers had hoped the Productivity Commission's long-awaited draft report into local government funding and financing might provide the magic key to unlock New Zealand's infrastructure funding logjam.

But, although the report includes one interesting (but little) new idea that might help and re-proposed congestion and water charges, it has stopped short of recommending the substantial sharing of centralised taxes or a new property tax that might have turbocharged infrastructure spending.

The Commission proposes central Government make grants to councils linked to the amount of new construction work put in place and suggests around $290 million a year be allocated across councils. That would be around five percent of council revenues and 1.7 percent of construction spending.

It also suggests Wellington create a fund to help councils deal with climate change and that the New Zealand Transport Agency allocate more money to councils to help them strengthen and relocate roads to deal with climate change. It does not specify an amount.

Why was the inquiry called?

The frustration over the failure to properly fund infrastructure to cope with very fast population growth has been growing and the Commission's inquiry was seen as a crucial step towards a solution, especially since this report was ordered in this Government's foundational document -- the coalition agreement between Labour and New Zealand First in October 2017.

The agreement specified a public inquiry  “A decade after Shand” to "investigate the drivers of local government costs and its revenue base".

It's now 12 years after David Shand chaired the last inquiry into local government spending and revenues. It recommended more user pays charges, Government grants, the rating of Government property and more use of debt to help fund transport and other infrastructure. Just over a year later, in 2008, the then Labour Government was replaced and almost all of Shand's recommendations were ignored, meaning infrastructure spending has struggled to cope with the 20-30 percent population growth rates seen in Auckland, Tauranga, Hamilton, Wellington over the last 30 years.

The explosive population growth of the last 10 years because of record high net migration rates has added to the pressure.

So has the Productivity Commission recommended a transformation of the relationship between central and local Government finances that would unleash the needed wave of infrastructure spending? 'No' is the simple answer. It has opted mostly for more of the same, with a few tweaks.

Wellington sees councils as poorly governed with weak accountability. Councils see Wellington as continually dumping new costs and responsibilities onto councils without providing new funding tools to cope ...

The press release described the current funding system as "not broken, but will need help". Essentially, the Commission has stuck with the status quo, which will suit older and richer property-owning ratepayers who dominate the politics of councils and don't want extra debt and extra people living near them, but do want the leveraged and tax-free gains in property values that go with population growth without the necessary infrastructure.

A much more transformative approach would have shared the GST or income taxes that go with population growth so that growth pays for growth up front. But that's politically impossible and wasn't seriously considered in the report.

In my view, that's because central Government is very reluctant to give up the power of holding the main revenue levers and also doesn't trust councils to spend the money wisely. Wellington sees councils as poorly governed with weak accountability. Councils see Wellington as continually dumping new costs and responsibilities onto councils without providing new funding tools to cope with it.

Meanwhile, the minutiae of council decisions and local issues are no longer covered much in local newspapers and radio, which are closing down for their own reasons. Over 150 local reporters have been laid off in the last five years. A one-year trial programme to cover councils was launched by RNZ last month that would employ eight or nine reporters. Sadly, councils and the Beehive will remain at loggerheads and not much will change after this report.

The fundamental problem is local residents, particularly young renters, are disengaged from council issues and debates. A survey found people aged 65 and older were more than two and a half times more likely to have voted in the Auckland election of 2010 than people aged 18 to 24  Until that changes, little else will change because it suits the vested interests in the leafy suburbs and in the Beehive for it not to change. Sadly, younger generations and the unborn generations face brutal housing costs and no real investment to adapt to climate change.

What the Commission proposed

Here's the main recommendations from the Productivity Commission in the draft report, which was commissioned last year by Finance Minister Grant Robertson:

1. An incentive for councils to develop infrastructure. The Commission proposed "a system of central-government payments to territorial local authorities based on the amount of new building work put in place in each territorial authority’s jurisdiction. The payment would be proportional to a simple estimation of construction and development in a territorial local authority’s area (eg, based on the value of building consents or new construction measured by floor area)."

2. More use of Special Purpose Vehicles (SPVs) that borrow to fund infrastructure, such as the $50 million trial currently under way at Milldale in Auckland. 

3. More use of targeted rates, development contributions and other 'user pays' charges for council services, including congestion charges and volumetric charges for water (like those used by Watercare in Auckland). Using value-capture uplift rates that capture part of the land value increase whenever a property is re-zoned. The Government would have to legislate for congestion charges, SPVs and value capture tools.

4. Use NZTA to help councils fund the extra costs of transport infrastructure due to climate change.

5. Creating a climate resilience agency to manage a fund to "help at-risk councils redesign, and possibly relocate and rebuild, wastewater, stormwater and flood-protection infrastructure threatened by the impacts of climate change." No suggestion for the fund's size was made. It would be controlled by Wellington.

6. Legislation to allow councils to charge accommodation levies and bed taxes to get tourists to pay for infrastructure they use but don't contribute to through rates.

7. Abolishing the current Rates Rebate Scheme for older fixed-income ratepayers owning property, given they overwhelmingly are not experiencing housing affordability issues. Instead, it should be replaced by a national rates postponement scheme to allow those asset rich but income poor ratepayers to defer payment until their property is sold. 

8. Looking at a tax on undeveloped land to target land-bankers. This was included at the last minute after a directive from Finance Minister Grant Robertson. It was not covered deeply.

9. Removing the current cap of 30 percent of rates on Uniform Annual General Charges and targeted rates to allow more user pays.

What the Commission ruled out

The Commission ruled out sharing GST or income taxes with councils, or creating some kind of separate property tax linked to the rise in property values or property transactions such as a stamp duty, as is used in Australia. It was not allowed to consider charging rates on Government and iwi land, which are currently exempt from council rates.

It did not recommend exempting council rates from GST or rebating GST on construction spending back to councils.

Councils were hoping for a bigger share of the rivers of gold pouring into the Beehive through GST and income taxes so they can fund the infrastructure needed for rapid population growth, climate change adaptation and tough new water and environmental standards. Yet again, they have failed to convince Wellington to trust them.

In my view, the proposals will do little to change the current logjam and will eventually require the Government to trust the councils more. That is unlikely when Wellington sees councils as poorly governed with disengaged ratepayers, while councils are increasingly frustrated that Government gets all the benefits of population growth while loading up extra costs on councils with tougher environmental regulations and by pulling central government functions out of the regions.

Another doorstop for the next generation to read and sigh over

The end result is little change in the status quo, which just quietly suits the older property-owning rate payers who want to stop new development and the rates increases that go with it. The powerful side effect of no development with population growth is very fast rises in house prices and even faster rises in equity if they are leveraged. They also benefit from lower central Government taxes than would otherwise be the case as population growth without infrastructure spending boosts surpluses with GST and income tax revenues without the need to service extra debt.

The Shand Report was 298 pages long and can now be found archived online in the National Library. The Commission's report is 306 pages long. It will be in the same place in a decade or two. 

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