Karl Nicholson on connecting the city's infrastructure needs with the capital markets.
Using KiwiSaver funds to alleviate the infrastructure deficit would give New Zealanders the power to fund their own future.
Looking out from the ANZ Centre on Albert Street towards the North Shore on a sunny afternoon, past yachts cruising the glistening Waitematā, it's easy to believe Auckland is one of the world's most liveable cities.
However, battling your way down Lake Road only to find Takapuna Beach closed due to poor water quality, or dilapidated villas selling for several million dollars apiece, is the confronting reality.
Auckland is a victim of its own success. As New Zealand's fastest growing city, approximately 860 people and 830 more cars have been arriving here every week for the past few years. Couple this with an existing infrastructure deficit and a council already hard up against its borrowing limits, and the view is not so rosy.
Auckland's infrastructure deficit provides an opportunity to create structures and an environment that connects smart capital and expertise to the city's increasing infrastructure needs.
This can be achieved by leveraging best practice, plus developing infrastructure enabled with technology and smart features such as embedding sensing technologies in infrastructure assets, expanding the use of electronic ticketing, pay by mobile and 3D mapping to create visual networks of underground utilities. Used well, these technologies can revolutionise the approach to investment, design and construction, and increase operational efficiency.
Data from infrastructure can also be combined with data from other sources to inform investment decisions and increase community wellbeing.
When it comes to funding infrastructure, there is no shortage of appetite for investments.
The recent $91m financing of bulk housing infrastructure at Milldale, north of Auckland, is an excellent example of an innovative financing structure used to accelerate infrastructure construction. The Milldale scheme is a partnership between Fulton Hogan, Crown Infrastructure Partners, Auckland Council organisations and ACC.
Crown Infrastructure Partners established a "special purpose vehicle" to raise third-party debt from ACC to finance the transport and water infrastructure needed for the development of 3800 new sections. The loan will be repaid over 35 years from the proceeds of annual "infrastructure payments" made initially by Fulton Hogan, and later by Milldale residents. Infrastructure payments are secured by an encumbrance over each section and will be added to section owners' quarterly rates invoice and collected by Auckland Council.
The Milldale housing development is a pilot scheme and an important milestone in New Zealand infrastructure financing. The challenge is now to scale the Milldale model to new housing infrastructure sites and eventually to new asset types. The Milldale structure requires encumbrances to be registered over property titles so it is currently only workable on greenfield sites where the land is owned by the developer or other consenting owners. Imposing a targeted rate on existing sections will require a law change to give special purpose vehicles the power to levy a rate over a fixed funding term.
There are also questions of application and equity where the funded infrastructure benefits a wide swathe of the population or is part of a network asset. For example, would it be fair to impose a targeted rate on West Aucklanders to build a dam in the Waitakere Ranges if this facility also benefited North Shore residents by relieving pressure on other water sources? And what about other infrastructure? Could a proposed waterfront stadium also be financed through this model?
To access a deeper investment pool, the Milldale model should be used as a bridge to a capital markets solution. Once several projects have been financed, the "special purpose vehicle" could refinance its debt by issuing bonds. A liquid and transferable capital markets instrument could also open the door for KiwiSaver funds to invest in infrastructure.
Using KiwiSaver funds to alleviate the infrastructure deficit would give New Zealanders the power to fund their own future. For instance, there is currently around $50 billion invested in KiwiSaver schemes, with that figure forecast to increase to $200b by 2030.
This is looking for a home. A range of KiwiSaver providers have indicated their interest in infrastructure investment, including ANZ — New Zealand's biggest provider with more than $12.5b in funds under management. To date, there have been limited opportunities to do so.
To ensure the quality of infrastructure is fit for a 21st century smart city, we need the world's best technology, innovation and expertise. The market for financial and human resources is global and the tyranny of distance works against us. New Zealand will only be able to attract the world's best if we can provide pipeline and procurement processes that gives investors and contractors the confidence to move their resources to our remote islands.
The Government's recent proposal to create an independent infrastructure body is promising in this regard. If the iBody can drive best practice in project procurement and delivery, we are more likely to attract, and have access to, international design and technology expertise for future infrastructure projects.
For example, as electric cars become more widespread, the current fuel tax will no longer be effective in funding roads. New Zealand may need to look at other methods, such as the electronic road pricing system used in Singapore. To implement a system such as this, we would be wise to leverage international experience. But first, we need to ensure New Zealand is an attractive place to work and invest, which goes beyond best practice procurement methods.
Auckland's water assets, roads and housing are creaking under the weight of the burgeoning population. We need to use innovative financing structures to ensure building can begin now and is paid for by the generation who will reap the benefits. We also need to connect with international expertise to build a smart, truly global city that best leverages technology and data. If we can do that, the experience on the ground will match the promise of the view from above.
Karl Nicholson is Executive Director, ANZ Institutional NZ.