Twyford’s big infrastructure gamble
The Government is rolling out investment projects partially funded with private money. Thomas Coughlan looks at whether it's the solution to the Government's infrastructure woes.
Housing Minister Phil Twyford has announced a $91 million infrastructure package to build 9000 homes at Milldale north of Auckland. The announcement is big news — not the 9000 houses or the $91 million, but where the money is coming from.
The Government itself will put up just $4 million in funding, the rest will come from Auckland Council and a Special Purpose Vehicle, which will put up $48.9 million.
It’s the Special Purpose Vehicle (SPV) that makes this project so interesting. SPVs are relatively new. In 2017, the Government’s ultra-fast broadband company Crown Fibre Holdings was repackaged as Crown Infrastructure Partners with the purpose of creating a raft of SPVs to fund essential infrastructure.
SPVs allow Crown Infrastructure Partners to tap the capital markets for infrastructure funding. This means when the SPV borrows, the debt it takes on isn't technically Government debt, but debt owed by an agency owned by the Government.
It’s a technical distinction — and it doesn’t fool anyone, certainly not investors, who charge a premium for small SPVs to borrow, but the Government was a huge fan. The funding model was announced by the former Government last year. It promised $600 million of investment through Crown Infrastructure Partners, and Labour is making extensive use of SPV borrowing too.
With Government debt so hotly contested, it’s not hard to see why SPVs are so popular. The Government can borrow money to spend on infrastructure while keeping the debt on its own balance sheet relatively modest.
But it comes at a cost. Government borrowing is the cheapest borrowing there is, but when politically important debt targets are in play, it’s a cost the Government is willing to pay.
Treasury isn’t keen, pointing out in a budget paper that Housing New Zealand, an agency allowed to borrow in its own name, could pay a premium of $11 million dollars each year for the privilege.
But Twyford says the problem is more about scale than cosmetic accounting.
“Even if the Government loosened the budget responsibility rules, or lifted council debt limits, council and Government balance sheets still couldn’t carry all of the debt to build the infrastructure that’s needed for urban growth,” he told Newsroom.
That’s a lot of infrastructure. Budget documents indicate off-balance sheet borrowing will be roughly $6 billion by 2022.
The scale of the problem
New Zealand has a massive infrastructure problem. It’s so large the Government has established a whole agency to estimate the size of the infrastructure deficit.
News stories have given us some sense of the scale of the problem: one in five hospitals is in ‘poor’ condition, the Government needs to build 40,000 houses a year (which would be a record in our history) to make any dent in the housing crisis, and we lose $1.3 billion a year just sitting in traffic.
Much of the problem comes from failing to invest to absorb the cost of the population shock New Zealand has experienced as a result of higher immigration.
In April, ANZ released data showing new capital spending for each 1000 additional people fell from $142 million in 2011/12 to just $37m in 2016/17.
But the Government is also blessed with an opportunity.
Large international fund managers are crawling over themselves to lend to countries like New Zealand. The quantitative easing policies used by central banks overseas to combat the financial crisis has meant there’s a lot of cheap money in the world, looking for a home.
Unfortunately, the Government’s self-imposed debt target means there’s little appetite in the Beehive to open up the books, borrow, and build.
Local government has problems too. The population boom has seen councils come within a whisker of their own debt limits, meaning desperately-needed infrastructure often goes unbuilt.
SPVs are a neat way of matching up investors who are keen to lend with projects the Government desperately wants to build, without central or local Government having to open the books themselves.
They also allow a more targeted “user pays” approach to infrastructure. The revenue for the SPV will come from Fulton Hogan Land Development, which is developing the site and an “infrastructure payment” that will be collected alongside council rate bills.
It’s a convenient way of financing large developments, without hiking rates across the city. Politically, it means ratepayers in Remuera can sleep at night knowing they’re not paying for infrastructure they will likely never use.
Twyford says the long life of the investment also keeps costs down for homebuyers.
“Instead of councils having to fund the infrastructure and then charge that cost to the developer, which gets passed onto homebuyers with significantly higher house prices, the cost is spread out over the lifetime of the asset, in this case 35 years, which reduces the cost of the new homes,” he told Newsroom.
It’s convenient for ministers too. Direct gives Crown Infrastructure Partners and Housing New Zealand a direct line to the capital markets, without having to rope in other parts of government, or bid against other ministries, all of whom are desperate for government funding.
And the investment is essential. The houses New Zealand desperately needs won’t be built without roads and water pipes connecting them to the city.
There’s also a huge appetite for this kind of financing overseas.
As part of the response to the financial crisis, central banks overseas have printed vast amounts of money and used it to purchase bonds, driving down the cost of borrowing. This means private investors have to work harder to find a good return. It also means when opportunities like Auckland infrastructure crop up, there is huge demand.
One investor with an appetite for this debt is ACC, New Zealand’s largest investment fund. It’s the major backer of the SPV, as the only debt provider.
ACC’s head of private markets, Martin Goldfinch, told Newsroom the corporation had a “large” appetite for direct investments like infrastructure SPVs. ACC has just 4 percent of the roughly $40 billion fund in direct investments like infrastructure and property, but it’s looking to grow that share.
“Fundamentally, these types of deals are naturally suited to what we’re all about,” Goldfinch said.
“From an investment perspective what we’re trying to do is match the long-term nature of our liabilities,” he said.
He said infrastructure assets were long term investments with guaranteed cash flows which sat “extremely well” in a long-term portfolio like ACC.
The strongest criticism against finance through SPVs is that the Government may still carry the majority of the risk for a project, which it may decide to bail-out.
But Goldfinch disagrees.
“This is more an exposure on ineffective property owners who will pay a levy for the infrastructure that’s gone in,” he said.
He said other investors were also keen to get involved, and several had been interested in getting involved with this SPV before ACC beat them to it.
Twyford is particularly keen to get more parties involved. He told Newsroom he would like to see other funds like wealth, pension and KiwiSaver funds investing in future urban infrastructure projects.
But other funds are cautions. AMP told Newsroom it’s KiwiSaver fund managers did not currently have any plans to invest in SPVs, although it was “open to examining such assets in the future”.
The Government may want to look further afield. There’s a ceiling to the appetite of investors like ACC and the NZ Super Fund, which want to diversify their investment positions across the globe, to avoid too much exposure in one country.
International pension and sovereign wealth funds are currently on the prowl for long-term investment opportunities in New Zealand.
Canadian pension fund CDPQ partnered with the NZ Super Fund to make a bid for Auckland’s future light rail system, for example.
The stakes are high for the Government. By 2022 it aims to be building 12,000 KiwiBuild homes a year, but for those houses to make a dent in the current crisis, it will need to make sure the private market continues to build roughly 30,000 homes a year as well.
But the private market will only build if there is infrastructure in place to support it.