Minister of Housing and Infrastructure, the Hon. Chris Bishop, has announced that the new Government intends to introduce new tools for infrastructure funding and financing as part of its Going for Housing Growth policy. The policy points to a “broken planning and infrastructure system” as an underlying cause of the housing shortage and emphasises the need for new and “refreshed” tools to allow for the delivery of critical infrastructure.

The announcement echoes the sentiment detailed by various Ministries and government agencies in the briefings delivered to incoming ministers in December 2023 (BIMs) - the current approach to infrastructure funding and financing is unsustainable, and a change in approach is desperately needed. 

In this article, we discuss the need for change behind the Minister’s announcement and look ahead to consider possible funding and financing mechanisms. We will be providing additional insights on the Government’s approach as more information and updates are released.   

The need for change

The current problems with New Zealand’s infrastructure funding and financing model are multi-faceted. While local authorities hold a key role in the delivery of infrastructure projects, historic underinvestment and structural limits on local authority funding and financing have restricted the ability of councils to meet rapidly increasing demands for infrastructure. Councils are constrained by inflexible debt ceilings and limited revenue sources and must balance competing investment priorities and pressure from constituents on rates. Combined with uncertainty around major reforms and policy programmes, such as the now-scrapped Affordable Waters proposal, the result is a growing infrastructure deficit that cannot be adequately serviced without new tools. 

At a sector-level, the funding gaps are clear. For example, while an estimated $120-185 billion investment is required to upgrade New Zealand’s water systems over the next 30 years, local authorities are constrained from borrowing enough to fund this work and meet water quality standards. The combination of increased water investment requirements and deteriorating council balance sheets means that without new funding and financing tools, or significant central government intervention, local authorities will have little choice but to substantially increase rates to meet the costs of service provision. 

Similar problems face the transport sector, where the need for a new approach to funding and financing has been emphasised in the New Zealand Transport Agency’s BIM. The BIM highlights the inadequacy of the National Land Transport Fund to meet costs over the next 10 years, while the Ministry of Transport’s Strategic BIM notes that planned expenditure for the next 20 years outstrips the current annual investment and will likely result in cost overruns and delivery failures.

New tools

User / beneficiary pays 

The Minister has announced that he will be working closely with other Ministers on transport funding reform, including directing officials to explore tolling and other new ‘value-capture’ funding tools for transport projects. 

Value capture funding mechanisms can take many forms, but in general allow for a portion of the benefits delivered by public investments to be recovered by the delivering agency in order to offset the cost of the investment. An example of this is tax increment financing (TIF), where a charge is assessed on a group of beneficiaries (eg ratepayers near a new train station) by reference to the increase in their property values that is created by the delivery of the new infrastructure.

Value capture mechanisms are most suitable for use in connection with projects that directly create value for an identifiable class of beneficiaries (as in the local train station example). They are less suitable for infrastructure projects where value uplift doesn’t occur or is difficult to causally link (such as with wastewater and stormwater infrastructure), or where it is difficult to clearly identify beneficiaries.
 
Legislative changes would be needed in New Zealand to apply these models to the New Zealand market. For example, TIF could be applied through the existing targeted rates funding mechanism in the Local Government (Rating) Act 2002, but changes would be needed to allow a rate to be assessed by reference to a change in capital value over time, rather than total capital value. 
  
City Deals

The Government’s 100-day plan included a commitment to introduce City and Regional Deals to address New Zealand’s significant infrastructure deficit. The Prime Minister has urged local authorities to start identifying priority projects immediately. This echoes a key recommendation of the Review into the Future of Local Government (Review) to align central and local government in planning, funding and delivering infrastructure in a way that shines light on local priorities. 

City Deals (or “place-based agreements”) are long-term, bespoke packages of funding and decision-making powers negotiated between central and local government and other local bodies. Such agreements can be area-specific working to achieve a long-term vision for a city or region, or they can be sector-specific - eg an agreement focusing on conservation across multiple regions.  

City Deals offer an opportunity for collaboration between the tiers of government and enable local authorities to have greater autonomy, power and resources to deliver initiatives that realise the economic potential of that region. The Review highlighted that “effective place-based agreements will align priorities, responsibilities, and funding across different parties and ensure benefits are felt by communities at place.” 

Although the Government is yet to reveal more detail as to how City Deals will be implemented, existing City Deals in the UK and Australia provide useful lessons. We will be providing some further insight on the potential operation of City Deals in the New Zealand context separately. 

Greenfields housing

The new Government has also indicated that it will begin a new program of work around funding options for greenfield infrastructure. 

This is likely to lead to greater reliance on, and refinement of, the Infrastructure Funding and Financing Act 2020 (IFF Act) regime, which enables the charging of a levy to landowners benefitting from new or upgraded infrastructure by a special purpose vehicle. This allows eligible projects to be funded and financed without the need to rely on traditional local authority financing methods or by charging high upfront costs to developers. 

Two levies have already been successfully authorised under the IFF Act, and the Going for Housing Growth plan includes a commitment from the new Government to reform the IFF Act to “reduce red tape” for new developments and “remove the need for councils to fund greenfield infrastructure from their balance sheets.” 

Public-Private Partnerships

In a recent speech at the Infrastructure NZ Funding and Financing conference in Wellington, Minister Bishop also emphasised the importance of attracting private capital to help provide infrastructure in NZ.

Bishop said: “We want to send the message that NZ is open to business, we want more capital here, we want more investment, we want more players from a contracting and delivery point of view here in NZ.”

“And part of the message, and we’ll continue to shout it from the rooftops, is developing that story so that international investors and agencies look at NZ”.

Overall, while little detail has so far been provided in respect of any new tools to be introduced, the Minister has made it clear that: 

• in relation to infrastructure funding, there will be a move towards a more targeted user/beneficiary pays approach where possible; and 
• in relation to infrastructure financing, there will be a move away from “hand-outs from Central Government” and greater opportunity for private capital to play a role.  

Next steps

We can be certain that all eyes will be on the new Government as it continues to explore what tools may be utilised to combat infrastructure funding and financing constraints. We will continue to provide updates as more information becomes available. 

Please get in touch with your usual Simpson Grierson contact, or one of our experts below, if you wish to get a further understanding of how these matters may affect you. 

Special thanks to Katie Daly for her assistance in writing this article.