Archive | Forward thinking

Council funding inquiry terms released, and Selwood questions their constraints

The Government released the terms of reference yesterday for a Productivity Commission inquiry into local government Funding & financing arrangements, and Infrastructure NZ said they’d constrain an objective assessment of all options.

Finance Minister Grant Robertson.

Finance Minister Grant Robertson announced the inquiry at the Local Government NZ annual conference on 15 July, saying it would investigate the drivers of local authority cost pressures and provide recommendations for how councils can maintain & deliver services & infrastructure in cost-effective ways.

In the terms of reference, Mr Robertson & Local Government Minister Nanaia Mahuta said local government cost pressures had grown significantly since the Shand inquiry report was issued in 2007, and that rates & payment increases had outpaced increases in the local government cost index.

They said some high-growth councils – Auckland is the most notable – were coming close to covenanted debt limits, constraining their ability to finance further infrastructure investment, while other councils took on very little debt.

Broad scope, but….

The scope of the inquiry seems wide: “Where shortcomings in the current system are identified, the inquiry is to examine options & approaches for improving the system of local authority funding & financing.”

Among other approaches, the Productivity Commission is asked to “bring new & innovative thinking to these issues”, investigate cost pressures, examine funding & financing models and how to manage transition to new models, and consider regulatory changes.

The ministers ruled out of scope some aspects of council finance which had already been well canvassed – mechanisms for rating Maori freehold land & Crown land, the valuation system & practices, and substantial privatisation.

The final report is due by 30 November 2019.

Inquiry director Steven Bailey said: “The commission has previously completed inquiries into local government regulation, better urban planning, using land for housing & housing affordability and is looking forward to assessing & analysing this sector further.”

He said the commission would publish an issues paper in October, outlining its proposed approach, the context for the inquiry and a list of key questions to be addressed.

So, what’s missing?

Stephen Selwood.

Infrastructure NZ chief executive Stephen Selwood saw ruling privatisation out of scope as precluding an inquiry into asset recycling, which had been a big success in New South Wales and has been started on a smaller scale by Auckland Council through its property agency, Panuku Development Auckland.

Mr Selwood also questioned leaving rating Maori freehold land & Crown land out of the inquiry.

Mr Selwood said: “It is particularly disappointing that ‘asset recycling’ – the process of selling down public shareholding in one public asset in order to invest in another more valuable asset – has been precluded from the terms of reference.

“Asset recycling is enabling Australia to respond faster & much more effectively to their growth challenge than New Zealand.

“New South Wales alone will spend $A14.7 billion on transport improvements this year compared to around $3 billion across New Zealand – twice what we are on a per capita basis. It has been able to do this by selling down nearly $A50 billion of underperforming assets in the last 5 years and using the proceeds to deliver heavy rail, light rail & roading, as well as urban redevelopment, schools & health investment.

“With better services and fewer public funding constraints on development, the Aussies are addressing homelessness & deprivation whilst investing tens of billions in road & rail transport infrastructure.

“Research has shown the asset recycling programme in New South Wales has very high public support – 61%, with only 9% opposed – when people understand why the programme is in place and where the money is going.

“High growth councils around New Zealand would provide a much better public service by selling down shareholdings in ports, airports or low-performing assets and ‘recycling’ the proceeds to invest in core transport & water.

“In Auckland, partial or full sale of Watercare would enable the council to release billions in capital to invest in stormwater, floodwater & transport infrastructure and would allow the company to leverage its balance sheet to invest in water infrastructure to support growth.

“The opportunity cost of having public money tied up in non-essential services is worse congestion & a prolonged housing crisis.

“If, for some reason, New Zealand is different than Australia and if advice from the OECD, World Economic Forum & others on good capital management is misplaced, the Productivity Commission is best placed to make that call.”

Rating exclusions

“The same can be said for the rating of Crown & Maori land. It is extraordinary that the Crown considers councils to be core infrastructure providers, but will not pay them to deliver services to Government assets like schools, nor even take advice on the issue.

“It is encouraging that the Government has launched this inquiry, but given the constrained terms of reference that the Productivity Commission has been given, the potential outcomes of the study have been compromised at the outset.”

Terms of reference, local government funding & financing.pdf
2007 Shand Report – local government rates inquiry documents
Department of Internal Affairs: Local government funding project

Earlier story:
16 July 2018: Finance minister calls Productivity Commission in to examine local body funding

Attribution: Ministerial & Infrastructure NZ releases.

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Putting change in context

Over the last 3 days the Government has provided context for change.

Finance Minister Grant Robertson made the change in direction from the previous National-led government distinct yesterday in a speech to the Local Government Association’s annual conference in Christchurch.

His central point is to move away from the purely economic measure of gross domestic product (gdp): “We are taking a broader view of success, by looking at how we improve the living standards & wellbeing of all New Zealanders.”

He also wants to replace the broken local council funding system, but that at the moment is a more complicated story.

Housing & Urban Development Minister Phil Twyford’s aims & preferred methods are distinctly different from those of predecessor Nick Smith, as he made clear in a visit to Mangere on Friday for the start of the programme to regenerate Housing NZ stock: “This is a first for a total joined-up approach for transitioning infrastructure & regeneration.”

And in tertiary education, Education Minister Chris Hipkins advanced his thinking on Friday on appointing a commissioner to replace the board at Unitec. From what I can see in board documents, Unitec’s problems were more about national governance than what Unitec itself was trying to achieve, but the outcome ought to be a vast improvement in handling education for trades, particularly those related to construction. The aim: to prioritise vocational education & training after a period when funding clearly didn’t match that aim.

I’ve posted separate articles on Mr Robertson’s speech and Mr Twyford’s visit to Mangere. You can also check the links below to Mr Robertson’s speech and Mr Hipkins’ brief statements on Unitec (no story on that one at the moment).

My own view:

I haven’t analysed the wellbeing & living standards framework methods of calculation, but I know gross domestic product is a poor measurement which was being misused. For some time I’ve preferred to calculate GDP per capita to see if New Zealand’s economy was actually strengthening, given that 4 years of high migration inflows ought to lift overall production, but not (at least immediately) raise growth/head.

Related stories, 16 July 2018:
Putting change in context
Robertson outlines focus shift from GDP measure to wellbeing
Demolition starts on Mangere regeneration project
Finance minister calls Productivity Commission in to examine local body funding

Attribution: Government announcements.

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Robertson outlines focus shift from GDP measure to wellbeing

Finance Minister Grant Robertson outlined yesterday how the Government intended to revert to the 2002 version of wealth as a target for the nation – wellbeing, instead of gross domestic product.

In a speech to Local Government NZ’s annual conference in Christchurch, Mr Robertson said the coalition government elected last year recognised that it faced major challenges, and couldn’t tackle them alone. He outlined how central & local government could work together to achieve better outcomes for all New Zealanders.

The central focus of Mr Robertson’s address:

“For us in central government, this means doing things differently and measuring success differently.

“Previous governments have measured success in terms of economic growth – simple measures such as GDP (gross domestic product). But while measures like GDP remain important indicators of economic activity, they do not paint a full picture of people’s wellbeing or living standards.

“Many of our international peers have been envious of the GDP growth New Zealand experienced in recent years. But we’ve also seen increases in statistics that suggest that growth did not result in real tangible improvements to many people’s lives.

“For example, our levels of homelessness have been described as the worst in the OECD; the number of children living in poverty is not something we can be proud about, and tens of thousands of our young people are not in employment, education or training. This is not success.

“We believe that economic growth is a means to an end, not an end in itself. We are taking a broader view of success, by looking at how we improve the living standards & wellbeing of all New Zealanders.

“By placing wellbeing at the heart of what we do, we will be able to measure the extent to which our policies & investments are making real improvements to people’s lives.”

The living standards framework

Enter the living standards framework (LSF), which Treasury is developing: “The LSF uses a set of indicators for the current wellbeing of New Zealanders, and for their future wellbeing, based on the stock of the 4 capitals which determine intergenerational wellbeing: financial/physical, natural, human and social.

“This work will underpin our world-first Wellbeing Budget in 2019. This budget will be the first major step for the Government in applying a wellbeing framework to strategic decisions.

“Wellbeing is not only driven by central government actions. We recognise the crucial role local government plays in maintaining & enhancing New Zealanders’ wellbeing through the services, infrastructure, regulations & placemaking you provide to your communities.

“This was factored into the original Local Government Act 2002, by requiring local government to focus on promoting the social, economic, environmental & cultural wellbeing of communities, in the present & for the future. However, in 2012 the previous government removed these 4 wellbeings from the act, arguing that local government needed to be ‘streamlined’.”

Wellbeing bill before select committee

The Local Government (Community Wellbeing) Amendment Bill, which is before a select committee, is intended “to restore the wellbeing needs of communities to their rightful place as a central focus of local government decisionmaking, recognising the important role local government plays in ensuring people’s wellbeing.

“There is an obvious overlap with the 4 capitals of the Treasury’s LSF, meaning that both local & central government will soon be working with a closely aligned core focus on improving the wellbeing of our people.”

The power game

The Robertson line also shifts the use of power, which was firmly at the centre under the previous government, until long negotiations wrought change in the Auckland transport alignment project (ATAP) between the Government & Auckland Council.

That revised project was in sharp contrast to the approach of former housing minister Nick Smith over Auckland Council’s questioning of aspects of the government-council housing accord & special housing areas, where the minister told the council that, if it didn’t act quickly, the government would take over the housing area approval process.

Mr Robertson: “The relationship cannot be Wellington telling you what to do. Rather, we want to work with you to help deliver local solutions to local issues.

“For example, with our Provincial Growth Fund we aren’t taking a top-down approach. We aren’t interested in coming to tell you what you’re good at and what you should invest in.

“The ideas are better generated from the ground up. We want you to tell us what would benefit your region. That’s the only way such an initiative will work.

Funding solution required

“But we understand that for local government to be in a position to provide local solutions, you need the ability to finance them.

“We know there has been a huge increase in demand for investment in infrastructure all across the country.

“The previous government did not recognise the scale of development, maintenance & replacement of infrastructure needed to support a rapidly growing population and a surge in international visitor numbers.

“Infrastructure investment plays an important role in increasing housing affordability, by allowing for new developments to take place and catering for increasing demand on existing systems.

“We recognise there are some constraints that are preventing local authorities from effectively funding their obligations and from financing community expectations. Some of these can be described as ‘hard’ constraints, while others may be ‘soft’:

  • Hard constraints could be regulatory or legislative barriers that prevent local authorities being able to fund or finance infrastructure;
  • Soft constraints could be factors that influence the behaviour & practice of local authorities.

“Addressing the challenges of infrastructure funding & financing (IFF) is a key pillar of the urban growth agenda (the UGA). The UGA is an ambitious & far-reaching programme designed to improve housing affordability for New Zealanders by addressing the fundamentals of land supply, development capacity & infrastructure provision.

“IFF is specifically about reforming the existing system to provide a broader range of funding tools & mechanisms, as well as creating alternative financing models. The underlying question is whether there are funding or financing constraints hindering the timely rollout of infrastructure.

“Efficient construction of infrastructure in support of urban developments is, of course, a key determinant of the rate of land supply & therefore housing affordability.

“Different councils face different issues, yet affordability, availability of funding streams & appropriate pricing are key to any solution. We acknowledge that some high growth councils are up against their debt limits, so financing is the key constraint. That’s why we are also exploring the potential for diversifying the available sources of project financing.

“Project financing requires a dedicated revenue stream to service that capital; a revenue stream derived from charges for the provision of the infrastructure.

“The ability to identify & charge beneficiaries influences the viability of those projects, and so provides an important signal as to which projects should proceed & when. So, there is an efficiency element to this work as well.

“Central government will be exploring ways to get past funding & financing barriers. Yet we cannot do this in isolation. This is about partnering with local councils to ensure that you have the tools to provide the much needed infrastructure for your communities.”

Finance Minister Grant Robertson, 15 July 2018: Full speech to Local Government NZ conference

Related stories, 16 July 2018:
Putting change in context
Robertson outlines focus shift from GDP measure to wellbeing
Demolition starts on Mangere regeneration project
Finance minister calls Productivity Commission in to examine local body funding

Attribution: Robertson speech.

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Finance minister calls Productivity Commission in to examine local body funding

Finance Minister Grant Robertson.

Finance Minister Grant Robertson said yesterday the Productivity Commission would hold an inquiry into local government funding & financing.

The inquiry will investigate the drivers of local authority cost pressures and provide recommendations for how councils can maintain & deliver services & infrastructure in cost-effective ways.

Addressing the Local Government NZ annual conference in Christchurch, Mr Robertson said: “The Coalition Government has highlighted right from the outset our determination to help local government address the varied increasing cost pressures they have faced in recent years.

“The Coalition Agreement between Labour & NZ First stated that we will hold a public inquiry ‘a decade after Shand’ to investigate the drivers of local government costs & its revenue base.

“Cabinet has agreed the terms of reference for the Productivity Commission inquiry. The commission will be able to build on its previous inquiries into urban planning, housing affordability & local government regulation.”

Mr Robertson said the terms of reference would be released shortly. They require the commission to investigate cost pressures, funding & financing models & the regulatory system for local government.

These include investigation into:

  • Cost & price escalation for services & investment, including whether this is a result of policy &/or regulatory settings
  • Current frameworks for capital expenditure decisionmaking, including cost:benefit analysis, incentives & oversight of decisionmaking
  • The ability of the current funding & financing model to deliver on community expectations & local authority obligations, now & into the future
  • Rates affordability now & into the future
  • Options for new funding & financing tools to serve demand for investment & services. This will appraise current & new or improved approaches for considering efficiency, equity, affordability & effectiveness, and how the transition to any new funding & financing models could be managed, and
  • Constitutional and regulatory issues that may underpin new project financing entities with broader funding powers, and
  • Whether changes are needed to the regulatory arrangements overseeing local authority funding & financing.

Mr Robertson said: “Since the Shand report into local government rates in 2007, local government cost pressures have grown significantly and by more than other costs faced by ratepayers.

“The pressures faced by local councils vary significantly, whether it’s the provision of infrastructure due to growing resident populations, or provision of tourism infrastructure against decreasing rating bases.

“The scale of this issue means an in-depth look is needed into whether our current structures are fit for purpose, and to identify how central government can help by cutting red tape, improving regulation and taking pressure off local government.”

The Shand Report

The Funding local government report resulted from the local government rates inquiry conducted by chair David Shand, Ernst & Young national real estate group head Graeme Horsley & Massey University associate professor Christine Cheyne. They made 96 recommendations in their 2007 report.

2007 Shand Report – local government rates inquiry documents
Department of Internal Affairs: Local government funding project

Related stories, 16 July 2018:
Putting change in context
Robertson outlines focus shift from GDP measure to wellbeing
Demolition starts on Mangere regeneration project
Finance minister calls Productivity Commission in to examine local body funding

Attribution: Ministerial release.

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MBIE publishes guide for managing buildings in emergency

The Ministry of Business, Innovation & Employment (MBIE) has published a guide to help territorial authorities manage buildings in an emergency.

The guide describes the roles & responsibilities of central & local government and of other agencies for managing buildings in an emergency using the 4Rs framework – Readiness, Response, Recovery & Reduction.

It explains what is required for managing buildings in an emergency and provides detailed steps & checklists to help territorial authorities plan for & carry out rapid building assessments.

The guide is in 3 parts:

Part A: How buildings are managed in an emergency and who is responsible
Part B: Preparing for and managing buildings in an emergency
Part C: Appendices – references and resources for managing buildings in an emergency, including readiness and response checklists.

Managing buildings in an emergency – guidance for decision makers and territorial authorities

Attribution: MBIE release.

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Auckland Council reappoints chief executive

Auckland Council approved the reappointment of chief executive Stephen Town for 2 more years on Wednesday. Mr Town’s initial 5-year term as chief executive expires on 31 December. To go beyond 7 years, the council must advertise the position.

The council’s governing body also agreed to a 1.16% increase in his salary, from $690,000 to $698,000. The remuneration package consists of a base salary of $677,669.90 & a $20,330.10 employer’s KiwiSaver contribution.

Mayor Phil Goff said: “Stephen’s contract extension reflects the stable leadership he has provided over the last 5 years and the steps he has taken towards creating a more cost-effective & customer-focused council.

“Stephen’s leadership will help ensure stability & continuity in council as we deliver transformational infrastructure investment in Auckland and continue to find efficiencies.”

Attribution: Council release.

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Council bond issue fully subscribed

Auckland Council’s offer of $200 million of 5-year unsubordinated fixed-rate vanilla corporate green bonds opened last Monday and closed fully subscribed on Thursday. They’ll be issued on Wednesday with a maturity date of 27 June 2023.

The interest rate is 3.17%/year, reflecting a margin of 0.5%/year over the swap rate for the 5-year period.

The bonds will be quoted on the NZX debt market (NZDX).

Attribution: Council release.

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Foreign buyer screening law advances in Parliament

Overseas investors will still be able to invest in new housing under the new regime of the Overseas Investment Bill, which was reported back to Parliament yesterday.

The bill will still ban non-NZ citizens & residents, except for Australians & Singaporeans, from buying existing houses.

Associate Finance Minister David Parker said: “Other recommended changes will simplify the process for buying residential land for commercial purposes, such as hotels, supermarkets & businesses that create jobs and support our communities. This includes an exemption for utility companies, reflecting the importance of these services to all Kiwis.”

Changes have also been made to the forestry investment screening regime (see separate story).

Mr Parker said: “This law will ensure that the market for our homes is a New Zealand market not an international one.”

All permanent residents & resident visa holders who spend most of their time in New Zealand will be able to buy homes under the regime without obtaining consent.

Australian & Singapore citizens & residents will be treated the same as New Zealand citizens & permanent residents.

They will be able to buy apartments, new rentals & homes available to buy under rent-to-own or shared-equity arrangements.

Looking at the ban remaining on foreigners buying existing houses, Mr Parker said: “This will help first-homebuyers to get their foot on the property ladder.”

“It’s also a matter of values. We believe that, from the most expensive seaside & lakeside properties to the most modest homes in our towns & cities, New Zealanders should not be outbid by wealthier foreign buyers.”

Mr Parker said the bill, reported back to Parliament by the finance & expenditure select committee, would support the creation of new housing & the Government’s KiwiBuild policy by better harnessing foreign capital and directing it towards large residential developments.

If the current number of Singaporean buyers “materially” increases, the 2 countries have agreed to meet to discuss the cause of the increase and how to address it, if required.

More information can be found here:

Overseas Investment Amendment Bill, residential land changes
Screening of residential land: Questions & answers
Related story today: Minister optimistic about changes to foreigners’ forestry rights

Attribution: Ministerial release.

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Minister optimistic about changes to foreigners’ forestry rights

Shane Jones.

Forestry Minister Shane Jones said yesterday new legislation to bring forestry rights into the overseas investment screening regime would help promote high quality foreign investment that puts more emphasis on genuine benefits for New Zealanders.

The changes to the screening regime are included in the Overseas Investment Amendment Bill, which has been under the spotlight more for its impact on foreign residents’ & citizens’ ability to invest in New Zealand residential property.

Mr Jones said: “The bill recognises the importance of forestry to New Zealanders, and I’m confident it’s struck the right balance that will boost forestry investment while ensuring the regime cannot be bypassed.

“High quality overseas investment in forestry will be an important part of achieving the Government’s One Billion Trees planting programme and will also promote economic development opportunities in our regions.

“This Government wants to see a strong & flourishing forestry sector that will create & protect jobs across the country and contribute to our climate change targets.

“Following the select committee’s review & intensive consultation with stakeholders, some key changes have been made to the bill, including increasing investors’ flexibility in obtaining consent and removing unnecessary red tape.

“Investors can now choose from any of 3 different tests when seeking to acquire forestry land or rights. The bill also ensures that investors & landowners can make minor changes to their agreements without unnecessarily having to return to the Government to obtain consent.”

The Government will report to Parliament on the operation & effectiveness of these amendments 2 years after the new regime starts.

Overseas investment screening regime changes
Overseas Investment Amendment Bill

Attribution: Ministerial release.

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Parker uses wrong conclusion on statistics to justify ban on foreign homebuyers

Associate Finance Minister David Parker.

Associate Finance Minister David Parker said on Friday: “New figures showing a high level of overseas house buying in New Zealand’s least affordable areas vindicates the Government’s move to ban foreign buyers of existing homes.”

The aim of Mr Parker’s new law to stem the flow of home ownership overseas, the Overseas Investment Amendment Bill, is “to ensure that investments made by overseas persons in New Zealand will have genuine benefits for the country”.

Mr Parker introduced the bill to Parliament on 14 December and the finance & expenditure committee is due to report on it by Thursday next week, 21 June. He said it was on track to become law next month.

He was using the first release new Statistics NZ research to support a conclusion he’d already reached.

But he made one wrong assumption – that the concentration of buying is in the areas of worst affordability. The research showed foreign buyers (holding neither NZ citizenship nor a resident visa) accounted for 18.7% of residential purchases in Auckland’s central city Waitemata ward in the March quarter.

As I noted in my story on Friday: “There’s no differentiation in the statistics between purchases of apartments & houses in the Waitemata ward, which is material to the value of the statistics. Auckland’s (and New Zealand’s) apartment market has been led by sales through overseas campaigns, particularly through Singapore, Malaysia & Hong Kong. Without those overseas campaigns, most of the city’s big apartment developments would not have got out of the ground.”

Secondly, a high proportion of purchases by full foreigners (neither citizenship nor resident visa) & partial foreigners (where one half of a couple might have citizenship or a visa, for instance) have been in expensive suburbs such as Remuera and some of the bays on the North Shore.

They are areas which are expensive, where only wealthy people will buy. Some of their purchases have raised the overall price level and, I’ve argued, that has flowed through to the overall spiralling increase in house prices nationally. But to consider those areas to be in the realm of “affordable”, as in first-homebuyer affordable, would be irrational.

The foreign purchase of apartments off the plans – enabling development, followed in due course by selldown, not part of the proposed ban on buying existing homes but included in the statistics – is not a steal from locals. In some cases, the secondary sale has been made at a loss.

And purchases in expensive suburbs shouldn’t be used for an affordability argument. The Government is entering a programme to get construction of cheaper homes underway, KiwiBuild, and it’s not going to do that by buying land in the most expensive suburbs.

The first target for KiwiBuild is land the Government has bought from Unitec at Mt Albert, and you can expect the Government to look for similar suburban sites to continue the programme.

Back to Mr Parker’s Friday statement, in which he noted 3.3% of purchases nationally were by foreigners, rising to 18.7% in central Auckland & almost 10% in Queenstown.

“That shows the concentration of buying is in the areas of worst affordability and where price rises have been the highest,” he said.

“Kiwis were right to be concerned, and that is why we are passing the foreign buyers law.”

He said the data measured the flow of properties into overseas hands, not the proportion of the stock that was held by overseas owners, and with more foreign buyers than sellers the number of homes in foreign hands was increasing.

“We want the prices of New Zealand homes, whether it be a lakeside station, the best houses in the Bay of Islands or the most modest homes in our towns & cities, to be set by local buyers, not on the international market.”

He said it wasn’t just about the raw numbers of houses being sold overseas: “It’s also a matter of values. We believe New Zealand homes should not be traded on an international market and New Zealanders should not be outbid by wealthier foreign buyers.”

Earlier stories:
8 June 2018: 3.3% of March quarter home buyers were foreigners – but 18.7% in central Auckland
25 March 2018: Unitec land transfer kicks off KiwiBuild
15 December 2017: Twyford launches the KiwiBuild plan

Attribution: Ministerial release, Statistics NZ research.

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