Unlocking the infrastructure funding barrier to urban development

Thursday 27 June 2019

Authors: Natasha Garvan, Andrew Beatson and Jill Gregory

​​​​​​Local government funding and financing of infrastructure is one of the key barriers to unlock growth and facilitate urban development. 

The Productivity Commission is currently undertaking an inquiry into local government funding and financing. There have been 10 similar reviews or inquiries over the past 10 years, which highlights the challenges with progressing this issue.

Development contributions

The traditional approach to funding infrastructure (that is not scheduled for supply by a council or privately funded) has been to recover the costs from developers through development contributions. These are meant to be a “fair, equitable, and proportionate portion of the total cost of capital expenditure necessary to service growth over the long term."

The problem has been development contributions have been ad hoc, are often not reflective of the true cost of infrastructure, and fail to provide councils with agility given the requirement for projects to be stipulated in long term plans.

From a developer's perspective there have also been issues with councils requiring contributions for infrastructure already paid for ('double dipping'), lack of transparency with calculations, concerns general city-wide charges are being used to make up shortfalls, and concerns about other developers 'free loading' once developer-funded infrastructure is in place, with no ability to claw back such expenses from new entrants.

The Government has recently passed the Local Government (Community Well-being) Amendment Act 2019 to expand the scope of development contributions by restoring district councils' power to collect contributions for any public amenities needed as a consequence of development such as sports grounds, swimming pools, and libraries. These contributions were removed from the regime by the previous Government.

If you have a development in mind, we can assist you to obtain your resource consents and ensure your development contributions reflect actual demand created. In many cases, developments will benefit from bespoke development agreements.

Case study: Reductions and objections

​Bell Gully has successfully acted for a number of developers in reducing the amount of development contributions payable. In many of these cases the councils involved have been effectively 'double dipping' with resource consent conditions. Most recently, we assisted an industrial developer in south Auckland to remove the stormwater component of their development contribution invoice, on the basis that mitigation required in the resource consent conditions meant there was no increase to peak stormwater flows and no additional demand on council infrastructure. This exact point had recently been the subject of a development contribution objection by Ryman Healthcare Limited (Ryman).

Ryman objected to Auckland Council's Development Contribution Notice (DC Notice) for the Possum Bourne Retirement Village in Pukekohe. Ryman sought a reduction in development contributions of approximately $1.75 million, because the stormwater mitigation on site was not increasing the peak stormwater flows, and the nature of the residents in the village meant demand on council social infrastructure was minimal.

The Commissioners agreed with Ryman that the contributions imposed failed to take into account characteristics of the development. Survey information obtained by Ryman indicated that its demand of social infrastructure was substantially reduced and should be reflected in the amount charged. In relation to stormwater, the council was found to be 'double dipping' with resource consent conditions and all charges were removed. The Commissioners granted the $1.75 million reduction in development contributions.

Of interest the commissioners made a number of critical observations about the Auckland Council Development Contribution Policy which are relevant elsewhere in NZ, including:

  • A lack of clear linkages between demand created and the projects that a development contribution is used for;

  • Lack of clarity identifying specific projects in the schedules and how refunds can therefore be calculated; and

  • Lack of communication between council's resource consent and development contribution teams.

Planning triggers

The failings of the development contribution and rating regimes has led some councils to utilise planning triggers to require developers to fund infrastructure.

This approach has enabled land to be rezoned in advance of infrastructure being constructed, but puts the onus on developers to either deliver the infrastructure themselves or enter into funding agreements with the local authorities to ensure the infrastructure will be provided. This approach carries risks if the council or Court responds to development pressure and approves development before funding is secured and infrastructure is delivered.

Case study: Redhills Precinct​​

​Bell Gully acted for Auckland Transport on appeals relating to the Redhills Precinct in the Auckland Unitary Plan. This Precinct includes objectives that subdivision and development does not occur in advance of the availability of reticulated public wastewater, water supply services, and transport infrastructure, including the wider transport network.

In order to achieve the objective there are standards identifying required infrastructure upgrades and related to the extent and timing of development. In particular, these standards specify dwelling numbers which are not meant to be exceeded until such time as the identified infrastructure upgrades are made. If a developer does not meet the standards or does not provide an alternative measure to achieve the required infrastructure upgrades then any resource consent applications are assessed as non-complying activities.​

Alternative funding mechanisms

The Government has announced it is considering new financing and funding models including legislative models, and improved targeted rate regimes.

In addition, the New Zealand Infrastructure Commission/Te Waihanga Bill has been introduced which proposes the main function of the Commission is to co-ordinate, develop, and promote an approach to infrastructure that encourages infrastructure and related services that improve the well-being of New Zealanders. It is proposed to have a range of strategy, planning, and support functions to support this.

Case study: Milldale​​

Bell Gully acted for Crown Infrastructure Partners (CIP) on an alternative financing model for the Milldale development. CIP established a Special Purpose Vehicle to raise funds for investment into the bulk housing infrastructure for the Milldale project.

The debt is repaid through “infrastructure payments" over a 30-year period. The infrastructure payments will be secured by an encumbrance on the individual land titles requiring the section owner to make annual infrastructure payments to CIP over a period of 30 years. The initial payment is $1,000 per annum for a residential home, or $650 per annum for an apartment or terraced home, with a 2.5% per annum compounding rate being applied over the 30-year lifetime.

The infrastructure payments will then be used by CIP to repay the money borrowed to fund the bulk housing infrastructure. This model enables the bulk infrastructure to be built now and be repaid over time, rather than through the traditional approach of having to pay the costs upfront (where the infrastructure is not funded by a council). This has brought forward housing developments by 8 to 10 years, and enabled 4,000 sections in the Milldale development.​

Key dates

  • The draft Productivity Commission report is due to be released on 4 July 2019.

  • The New Zealand Infrastructure Commission/Te Waihanga Bill has been referred to the Finance and Expenditure Committee, to be reported by 26 August 2019.  

If you or your business would like more information or advice on the matters discussed in this article, please get in touch with the contacts listed or your usual Bell Gully advisor. ​​​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Natasha Garvan

    Partner Auckland
  • Hugh Kettle

    Partner Wellington
  • Angela Harford

    Partner Wellington
  • Andrew Beatson

    Partner Wellington
Related areas of expertise
  • Environment and resource management
  • Infrastructure and projects
  • Project finance
  • Property finance
  • Property and real estate
  • Construction