Auckland's rapid population growth is posing challenges over paying for upgrading and upsizing infrastructure to support the growing city.

At first blush, it seems daft to question "What's not to like about Auckland's population growth which is forecast to increase from 1.65m currently to 1.95m by 2028?'

More people will lead to greater diversity. A more vibrant city; even (finally) an 'international-style city'. It will also spur economic growth. But along with greater population comes growth pangs as the Auckland Council seeks to fund an infrastructure gap.

Funding gap

The figures tell the story. Auckland Council's revenue from operating sources is forecast to grow from $3.6b to $5.7b over the 2018-2028 period in which Auckland is predicted to add another 300,000 people. Much of this lift will come from rates and water charges earned from the 120,000 new dwellings forecast to be built over the next 10 years. That's a clear financial upside. But as can be seen from council's revenue forecasts, there is a financial challenge to be overcome.

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This challenge is seen in the gap between council's budgeted levels of capital expenditure and its forecast net operating cash surplus (or funds from operations).

Total capital expenditure is budgeted at $25.6b over the next 10 years while total funds from operations is forecast at $12.4b.

This funding gap is concentrating minds in council and central government.

Auckland Council's Matthew Walker says Council recently signed off on a $26b capital programme for the city over the next 10 years.

"But we know that many more capital projects are not currently funded through that programme," says Walker, who is acting group chief financial officer at Auckland Council.

He points to Auckland Transport's Regional Land Transport Plan which includes a a list of over $6b in projects which are currently unfunded.

"If council, working with central government, can identify and agree on new structures to support the funding of infrastructure projects that don't require council to take a central role in financing or underwriting, we have an opportunity to respond to the city's infrastructure needs with more pace and certainty," he says.

Debt Squeeze

Though funding from central government through NZTA and developers through development contribution charges helps to close the $6b funding gap, much of it must be funded by borrowings which add to council debt. Current outstanding debt for council is $8.6b. Through the period to 2028, debt is forecast to grow by $4.4b to $13b.

The value of council's total asset base in 2028 is projected to be $77b.

But from 2019-2024, Auckland Council has limited ability to take on debt beyond these forecasts and remain within the prudential targets it has set to maintain its AA credit rating.

A key challenge for council is how to continue to support the infrastructure investment levels needed in the city while still maintaining prudent financial settings.

The council has been in discussion on this challenge with government officials for several years, talking about new ways for central and local government to partner to support infrastructure investment in Auckland and other high growth cities where debt levels within those councils are already high.

Special Purpose Vehicles (SPVs)

The solutions being explored draw on project financing disciplines, especially around the identification of specific revenue streams (Funding) and connecting these to the providers of capital, including institutional investors, bankers and the wider capital markets (Financing) by using innovative contracting models and structures, such as SPVs, while understanding how legislation can support these initiatives (Facilitating).

An early example is evident in the Crown Infrastructure Partners (CIP) model, where progress is being made within greenfield housing sites.

The key elements that enable accelerated investment through this model include:
A. Opportunity for CIP and developers to contract in a way so up-front cost of bulk infrastructure investment is recovered from new home buyers through an annual charge over a long time, 25 years plus.

B. The level of this annual charge being affordable to the market so developers, who are entering into larger-scale commitments through the CIP model, have a commercial proposition.

Other larger infrastructure projects outside greenfield housing sites are also being considered. A key challenge to consider in these scenarios is how to secure the project revenue stream. Council and its CCOs are currently able to use their statutory charging powers to recover the costs of building and maintaining public infrastructure. With some of the larger, more complex projects it is evident legislative changes may be necessary to help resolve the revenue stream challenge.

Walker says the specifics of SPV structures as a response to the infrastructure funding gap are still being worked on.

"We know with most projects that the growth profile of the underlying project revenue source as well as construction risk represent two of the key risks successful SPV structures need to resolve.

"The objective is to identify how other significant participants can credibly own these risks; it's about drawing on well-understood project finance disciplines and applying these in a NZ setting.

"We know that long term investors in superannuation, pension and insurance markets are keen to invest directly into infrastructure projects and understand the underlying revenue profile.

"Depending on the nature of the project, we think there may also be an important role for central government in helping to support key elements of project risk."