Friday, 22 September 2017

Who pays?

On Tuesday evening Harshal Chitale, senior economist in Auckland's Chief Economist Unit, spoke at the latest LEANZ seminar on 'Funding Auckland’s greenfield infrastructure: 'Efficiency, incentives, risk and fairness'. Tell you what - the chair for the evening, Richard Meade, didn't have to do much to encourage debate: this was one fired up audience. In a  nice way: our infrastructure deficit, especially in Auckland, is one of the hottest current issues for the economy, and gets at least a best supporting role nomination in the national slow productivity debate. Plus Harshal's talk raised knotty back-pocket and equity issues on who pays for what.

Harshal's paper will go up on the Auckland Council website in the near future* - probably here - and I should add (as he said) that the talk reflected Harshal's views and not necessarily those of the Council.

The key points I took away (and from here it's as much me as Harshal talking) were that there's a massive $20 billion infrastructural bill coming up to service greenfield development, of which the Council's share for the likes of water, waste, local roads and community spaces is some $13 billion (NZTA road funding pays for a lot of the rest). But Auckland Council's own ability to pay for this greenfield infrastructure is severely constrained. Putting the bill on the rates faces a political commitment not to raise rates more than 2.5% a year. Borrowing faces a credit rating limit: debt beyond some 270% of revenue (and it's currently 255%-ish) jeopardises the Council's AA/Aa credit ratings.

The political constraint may reflect electoral reality: my suggestion that rates should be a fixed proportion (0.25% a year?) of the market value of a house, which has the pleasant property that those who've benefited most from the housing shortage will pay most to relieve it, was not met with universal delight. So we're lumbered with inadequate rates revenue: if the Council's costs are mostly wages (I'd guess they are), 2.5% rates increases will struggle to keep capex spending constant in real terms let alone boost it. And we're lumbered with the debt ceiling, too, as the ratings agencies are unlikely to buy the argument (though it's correct) that the spend today will boost the debt servicing tomorrow, plus it's not silly for the Council to stay a highly rated borrower.

So Harshal's talk looked at what other options there might be - the big ones being developer 'contributions', targeted rates, and off-balance-sheet vehicles - and how they stack up on various criteria including efficiency, having the beneficiaries pay their full whack, and incentivising development rather than land banking. Of that lot, targeted rates maybe scrubbed up best, but it's not an easy area. Apportioning the benefits created and costs incurred, for example, is not straightforward. If new Suburb A gets developed alongside existing Suburb B, for example, it may make it feasible for a new bus route to service both A and B. Who is credited with the benefit? Who ought to pay? And who actually pays in the end: will developers simply pass on all 'their' costs to the housebuyer? And are finely calibrated but expensive and complex attributions any better at the end of the day than cheap and cheerful approximations?

Personally I was left with the impression that local resourcing won't cut it, and some central government funding may be required beyond the Housing Infrastructure Fund (announced here, updated here), which while helpful doesn't get past the debt ceiling problem, since it counts against councils' debt. Relatively limited-scope entities like territorial authorities may not be well equipped to handle step-change demands like these. And Auckland's issues are an outcome in substantial part of the country's national immigration policy (a policy which I don't have an issue with, just to be clear).

Here, and everywhere else where we're short of infrastructure, the government ought to use its considerable leeway to borrow internationally on once in a lifetime cheap terms. Take a look at the chart below: at a wild guess, would you say this looks a good time to tank up? And not just on an interest rate basis, either: we could ease the capital repayments, too, by borrowing for a longer maturity. Last week Austria, a country rated similarly to us (AA+/Aa1 with S&P/Moody's, while we're AA/Aaa), issued 100-year debt. We're getting a bit better at getting longer stuff away than we used to be, but our longest current maturity is 23 years (the September 2040 issue).

Which, by the way, is also what the latest (June) OECD report on the New Zealand economy said:
The government is aiming to reduce net core Crown debt as a share of GDP from 24% in 2016-17 to 10-15% by 2025 to help cope with future periodic global shocks and natural disasters. Nevertheless, it should be possible to finance some high-priority tax reductions or expenditure increases without compromising its fiscal strategy.
So full marks to Harshal for a thoughtful presentation, to Richard for organising, and especially to David Walker of PriceWaterhouseCoopers who generously provided the venue and hosted the drinks and nibbles. Keep an eye out for future meetings: if you've got an interest in the intersection of law and economics, there's bound to be something that'll interest you.

*Update - Harshal's paper was indeed published online, on September 27

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