16 March 2018

Making value capture financing work for NZ

Simpson Grierson is encouraged that the Government is open to moving beyond traditional funding sources and structures to pay for infrastructure projects – including consideration of value capture funding models.

The law firm says that with Government support there is an opportunity for Councils to employ these models, which have worked overseas, to help pay for infrastructure and housing development needs.

Simpson Grierson Partner Josh Cairns says rates are a taxing mechanism with attributes that can make normal project financing techniques effectively impossible for Councils.

“Borrowing is an accepted way of distributing the costs of infrastructure across current and future users. However, many Councils don’t have the capacity to borrow enough to finance new infrastructure projects,” says Cairns.

“This is especially so in areas where rapid population growth has led to high and urgent demands for infrastructure and housing.”

Councils can easily fall behind in providing sufficient infrastructure to cope with population growth, and liquidity can be a problem, even when property values in their districts are soaring.

“Places such as Queenstown, Tauranga, Hamilton and Auckland come to mind, and we know that Auckland Council has included value capture as part of a range of funding models they’re considering. We think it seems equitable that where investments are made by ratepayers, private landowners’ windfall gains should be shared with those ratepayers,” says Cairns.

“Applied well, these funding models can properly value the real benefits of development. It could also potentially unlock swathes of inert real estate capital across the country.”

Simpson Grierson says that versions of these models have existed overseas for many years with good success – creating stable long-term investments and tax benefits for investors, and allowing communities to spread capital expenditure over a more extended period of time.

However, the law firm has identified adjustments to legislation that are required in order to apply these models to the NZ market.

One model that has been discussed by local commentators is Municipal Utility Districts (or MUDs) - which are popular in parts the Southern United States for funding the three waters (drinking, storm and waste). It creates separate statutory bodies that have the power to tax residents for infrastructure within their defined MUD areas.

“For that reason they are viewed by some as tending towards the extreme, but because they’re empowered to tax residents, MUDs can provide certainty for local authorities of spreading upfront costs of building infrastructure over time,” says Cairns.

“Tax increment financing or ‘TIF’ is another example of a model used by states in the US to fund capital expenditure in particular districts. Put simply, as development increases the value of properties in a district, it in turn increases the property tax revenue due on those properties, and the extra tax revenue is then redirected to repay bonds or loans that financed the development.”

However Cairns says that a traditional, US-style ‘TIF’ model would be tough to implement in New Zealand due to the difficulty under current legislation in separately rating the value uplift from a project, and insulating the balance of the value for other general rating purposes.

While it is possible in New Zealand to set a “targeted rate”, applied to land situated in the TIF area to recover infrastructure financing and associated project costs, it’s not possible to target the value uplift under the current legislative framework.

He says that with appropriate changes to the rating regime, including to mitigate inherent valuation difficulties, targeted rates may still be a good source of cash flow to finance project costs. Such rates have low additional administrative costs for Councils and are difficult to avoid, given Councils ultimately have the power to sell property to recover any unpaid rates.

“There will be challenges when applying funding models to a new market and these models also have limited application for infrastructure projects where value uplift doesn’t occur e.g. wastewater and stormwater infrastructure,” says Cairns.

“However, even if value capture financing is not able to fund all projects fully, it still has the potential to reduce recourse to general rates and to share costs more equitably for major projects that are urgently in need of funding.”

ENDS

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