Paul Callow: Show me the money: what role can private capital play

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Photo / Simon Baker
Photo / Simon Baker

Delivering the Christchurch plan is going to be a major undertaking and one of the first issues is how it will be funded

The plan for central Christchurch was unveiled recently to great enthusiasm and excitement, and captures the vision for the city's future.

A great deal of effort and thought has gone into the plan but at the end of the day it remains just that, a plan.

Delivering the plan is going to be a major undertaking and one of the first questions to answer is how it will be funded.

Clearly funding from rates and from debt taken on by the council will need to be a major part of the story. There is only so much that can be drawn on from these sources, however, before the council runs into affordability problems or the ratepayers start to dig in their heels.

Obviously, the sensible thing to do in this situation is to try to spread the cost, and the usual approach would be to delay projects and take longer to deliver a project or programme so rate increases and debt levels are able to remain sensible.

However, an undertaking of the scale of the Christchurch rebuild is a different kettle of fish. If we try to deliver something of this size, with such a weight of public expectation, while staying within normal rate and debt levels, the rebuild is going to take a long time - far too long for a population which has already had to put up with often makeshift accommodation and infrastructure for 18 months with little obvious progress beyond the continuing demolition of the city centre.

So what role can private sector capital play in filling the funding gap and speeding up the delivery of the new Christchurch?

Christchurch City, like many councils, has a substantial portfolio of commercial assets which tie up significant amounts of capital. Asset sales are an emotive topic and have already generated some heated and highly polarised debate both locally in Christchurch and nationally with the partial float of the electricity SOEs.

The question remains, however: are these commercial assets the right place to have this much council capital committed right now? The substitution of some private capital is eminently feasible via a partial float without council relinquishing control of its commercial assets, and needs to be considered as at least part of the funding solution for the rebuild. The flow-on benefits to capital markets, and access to further capital for these assets in the future, are also important considerations.

Vector is a good example, where control remains firmly with the communities' elected representatives but listing has provided access to capital for the company to expand. At the end of the day what has been floated can always be bought back.

An obvious role for private capital is in the normal commercial developments for which it has always been used. Commercial property developers are sitting on insurance proceeds which are available to invest in new, safe commercial buildings the Christchurch economy desperately needs. The confidence of these investors has taken a severe knock though, and local and central government need to create an environment into which the investors can commit capital with confidence. The plan is certainly helpful in this regard but the proof of the pudding will be in seeing Government delivering on it, and it is here private capital can be most helpful. Where Government leads, the private sector will follow, and using its capital to help Government lead is vital.

Private capital can be used directly to deliver infrastructure for local and central government. It can help relieve the immediate financial burden and spread the cost of the rebuild through public private partnership developments. PPPs are not some magic cure-all, but for certain projects like the convention centre they can substitute private capital for public. At the same time they can provide useful risk transfer and better value for money than traditional procurement. Melbourne has adopted exactly this model for its convention centre with considerable success. PPPs have also been used to deliver other public infrastructure including police stations, court houses, social housing and health facilities.

By spreading the cost and expanding the pool of capital immediately available, partnership projects have an important role to play in accelerating the rebuild.

Central Government also has a part to play and needs to see its involvement as an investment which can leverage further private capital rather than simply handing out taxpayers' money and hoping it is spent wisely.

Transport infrastructure is a good example, and though transport is more an Auckland issue than a Christchurch one, the principles remain the same. Transport, like many other investments with an element of "user pays", usually require a significant capital outlay in the face of very uncertain demand. Without clear commercial returns, these investments struggle to attract private capital.

Traditionally, governments faced with this problem have simply funded the projects directly. Over time demand levels rise and the projects develop into commercial operations that can support private capital.

A smarter way to use government capital is to partner with private sector operators and progressively substitute private capital for public as demand is proven. This is the model used in the roll-out of the national broadband network and could equally be used in other infrastructure with similar demand characteristics - transport, social housing and water reticulation spring to mind.

The rebuild plan is bold and creative and needs an equally bold and creative approach to its funding if it is to be delivered in a satisfactory timeframe.

The debate needs to move beyond rates, debt and taxpayer money and encompass more creative and innovative funding solutions than we have seen in local government in the past. It needs to harness the capital available, and the skills to deploy it efficiently, from the private sector in order to drive real value for the city, its ratepayers and the taxpayer.

The rebuild is not just an opportunity to deliver a whole new vision for Christchurch, it is an opportunity to rethink the way we pay for and deliver public infrastructure in New Zealand.

* Paul Callow is corporate finance partner and energy and infrastructure sector leader at Deloitte

- NZ Herald

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