The rule of life

10 Apr 2024

Jeff Brill.BBs.,BProp(Hons)

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SPV’s

SPV’s seem to be the buzz word around town which is intended to be the solution to all our growth issues when it comes to property, services and roads. All around the country you will read in the newspapers that the Councils governing the major NZ cities have run out of money to satisfy the required urban growth (1).

Personally, I heard directly from the Transport division of the Council, after I reported to them on a solution to seal the roads at a reduced cost. I introduced them to a product known as ‘dirt glue’ sourced and taking off in the USA. I was told by the Transport division that it costs more to maintain a sealed road than it does to maintain a dirt road. You might wonder why the sealing of roads in Auckland is going so slow, when ‘at the end of the road’ the Council will have to pay more funds when the cupboard is already bare.

A Government dept would act in a similar way, by increasing their spending for unnecessary items at the end of the financial year so they can get the same allocation of money for the upcoming financial year.

The two examples above are alike as they both operate with an anti-growth catalyst and it is only in the last few years that the Government is addressing these issues, at least with the local authorities.

(Incidentally, even though the Auckland Council turned the dirt glue product down, the person from NZ who had the franchise for the product has built the biggest dirt glue factory in the world in China, and sales are taking off.)

Councils with empty pockets

There have been many keen investors that salivated as they read the new ‘Future Urban’ zoning rules where high intensity housing was to be built. This of course increased the land values of the land encapsulated within this zoning area. Investors/developers/housing companies rushed to buy in this area with plans to substantially increase their equity.

What hadn’t been catered for by the makers of the plan was the cost of the infrastructure to cater for all this increased housing. With recent events the Council have drawn back on the deal by removing some of this new zoning due to ‘flood risk’ (2), the floods being a ‘whew’ moment to release the councils burden of what would be a huge cost blowout with Infrastructure.

Those that were on a hill away from the floods couldn’t giggle in the corner as if they did then they probably hadn’t read the caveat with the new zoning stating that the new zoning might not come into effect for 10 to 25 years, as is the case with Silverdale and parts of Warkworth (3).

A possible Solution - SPV

The Government watched on when Fulton Hogan scratched their head giving blank looks to the Council when they were told that building development can’t happen as the Council can’t afford the water/sewerage pipes. This left the developer in a quagmire as to fund all the infrastructure themselves would make the project untenable.

So, someone came up with an idea of a Special Purpose Vehicle (SPV). This would push the cost of the infrastructure off the Council Balance Sheet and into someone else’s. In this case it was ACC.

In 2019 ACC put forward $50 million and the Council put forward $33 million (which they would later claw back from the developers). Everyone was happy, well of course everyone except the Mum & Dad’s who purchased a section of that land holding. They had an extra fee to pay on top of the rates to pay back the loan money that ACC had invested (4).

As with most economic incentives, the increased costs burdened at a high level, always trickles down to those at the bottom. Higher tax or decreased incentives for landlords, will be felt by tenants, Higher road charges will be felt by consumers buying groceries, Increased management fees to the landlords will be paid for by the retailers, increased tax on petrol will be bounced on to people with driving cars and increased GST on anything will create increased process on everything, which will in turn increase inflation and then interest rates.

If companies are taxed higher they will start recruiting their admin staff from the Phillipines at $10/hr or even move their whole company to friendlier shores. This will create more unemployment, higher dole payments and negative growth.

The moral of the story is that the big guy never takes the heat, it will always get passed down to those least able to afford it. Unfortunate but seems to be a rule of life.

However, I digress, the success of the Milldale ‘trickle’ down’ to the land owners was successful and the Private Partnership SPV’s took off. The Government raised their eyebrows when something had finally worked to kick start urban growth.

Funding and Financing (IFF) Act

While Milldale was in operation, the Government was waiting to see how a similar operation with ACC at the helm was going to pan out. This was the Puhoi to Warkworth motorway extension which started in 2016 and finished in 2022. The road toll along this road will be paying back ACC in this case (5).

In 2019 the Government passed the Funding and Financing (IFF) Act which effectively took the burden of infrastructure off the Councils. With the debt of infrastructure off the Council balance sheet, the Council would be free to fund other well needed projects that to date had been sidelined (6).

With this Act the Government has widened the scope allowing much bigger projects to be undertaken. The results will remain to be seen as it detracts a little from ‘user pays’ but the net effect will see growth in the major cosmopolitan areas.

Whereas before the Puhoi/Warkworth motorway was paid by people using that stretch of road and the Milldale development was paid by people living in Milldale, the wider scope will have everyone and sundry paying back the investment company that put up the cash. If you live in the general area of the project, you will be receiving your portion of the bill to pay the cost of that infrastructure.

Tauranga is the first Council to kick this off, having raised $175M of private equity to undertake 13 transport projects that had previously been shelved due to the lack of Council funds to complete. This will start in July 2024.

As mentioned, this Act of Parliament will water down the ‘User pays’ system as it applies to these projects as only the people who own the houses will be paying for it with the extra levy being imposed on their rates. That being said, no doubt we will see the trickle down of an increase in rents throughout Tauranga, the total sum of the increase will very likely be equivalent to the total sum of the new levy that the landlords have to pay.

Conclusion

Before we get too carried away with the Financing and Funding Act, we need to look abroad to see where this has been tried before and how it all ended up. Cassie Collier from BSG in the States talks about the Government deals with private equity alongside sectors such as Aged Care for-profit hospices (7). The introduction of these private/public partnerships increased the number of hospices by 286% from 2011 to 2019 (7). The result was more suicides, increased rate of abuse, forced isolation, lower paid employees and a raft of other instances that didn’t increase revenue.

On the grand scale of this planet, New Zealand is a prime observer of the rule of life with the ‘trickle down’ effect. We saw the effects of Insulclad in a town in the USA (however the Building Industry Authority didn’t google it when they approved it, probably because google didn’t exist then) and we didn’t learn from it. We saw the effects of Covid overseas and points of view differ on whether we learnt or didn’t learn from it.

It would seem to me that the scope of the Financing and Funding Act could easily expand beyond roading and general infrastructure to government funded hospitals and the like where the Government are falling behind. Vital Healthcare have already made a bid to fill the void in the hospital market (8) and the government needs to look at what has happened overseas and act appropriately by installing some key caveats in any agreements.

The rule of life (trickle down) in Capital systems will default where the Investor will not take a hit and the ones who can least afford it will take the burden. The unpaid duties of extra care by taking aged people for walks, sitting down to talk to them and the like will be neglected as the extra hours to do this don’t provide a financial return.

We all know those in the industry of ‘caring’ get rewarded the least. Teachers, vet nurses, hospital nurses, Aged care nurses, SPCA, Fireman, Police officers, Ambulance drivers all do their job to help their fellow man but get paid the least in society.

Somehow, somewhere, someone will think of a way to value the art of ‘caring’. The more care/help one gives, the higher they get paid. Everyone will be falling over each other to help those in need, the social welfare spend will drop significantly, western kids will look after their parents (and paid to do so) so less demand on public retirement homes, street dwellers would disappear, suicide rates will dramatically decrease, the strained mental health institution in NZ would cease, Our education/skill set per person would increase dramatically as would the follow-on productivity and so many more examples that you can probably come up with.

The hardline approach of the National Govt does not have top be compromised, the lazy will still not be rewarded.

NZ was the first country to give women the vote and in 2012 the first country in the world to recognize animals as sentient beings, so why shouldn’t we be the first to try this new version of ‘value’.

It’s a whole new way of looking at the wider economic system of how we create ‘value’. It hasn’t happened yet, because no-one has thought of it.

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