The Central City Plan sets out an ambitious vision for the city redevelopment. There is an opportunity to start with an almost clean sheet of paper to redesign the CBD to maximise the long-term prosperity and benefits to the city and region.
Understanding the allocation of these benefits is key. Once understood, it will be easier to see that constraining infrastructure development to the current affordability envelope is nonsensical. The cost of infrastructure can be spread to match the economic and social benefit and this means private investment.
In most parts of the world, central and local governments have traditionally shouldered the lion’s share of infrastructure investment, handing out funding from their pool of tax and rates revenues. In a world of government budget deficits and poor economic growth forecasts this is not sustainable.
The coffers are empty. Central and local government must balance the cost of infrastructure against a host of other priorities. Add to this the rising cost of capital and it becomes clear that the government funding affordability envelope is packed very tightly.
Governments also acknowledge the significant difference between central taxation and local funding. As central funding is tight, Christchurch will need to look at localised revenue raised against the benefits that infrastructure delivers.
Delivery models such as Tax Increment Financing, where borrowing is secured against increases in future rates from economic growth, and the Earnback Model, where infrastructure borrowing is secured against future central tax gains, do just that.
Tapping the consumer purse
One important tool in the government funding drawer is to charge consumers for their use of infrastructure, rather than taking it from the tax base as a whole. Charging users directly for the use of infrastructure places all or some of the burden of financing on those that receive the most benefit from the asset over its lifecycle. It also removes the liability away from the government balance sheet.
From a political perspective, user fees may not be the ultimate panacea to infrastructure funding. For one, user charges tend to be disliked by voters. What’s more, many politicians see tax as a fairer mechanism than user charges, as taxation is essentially ‘means tested’. It ensures than a greater share of the cost is shouldered by high income earners and more profitable businesses rather than struggling families or nascent enterprises.
Of course, consumers have affordability constraints too. The individual’s affordability envelope must pay for income taxes, fuel bills, council rates and user charges – to name just a few.
Structuring an infrastructure project
Structuring infrastructure projects to meet the affordability envelope at central, local and consumer levels is required. This needs consideration of the willingness of each party to pay for access to the infrastructure over its life, not just based on initial cost.
The cost of infrastructure development is usually capital heavy. If the willingness of all parties to pay for infrastructure over time provides a return on investment that appropriately compensates for project risk, then a project is deliverable.
Private finance provides a mechanism for matching the cost of the infrastructure to the benefits and affordability envelope of beneficiaries, so that multi-generational benefits are not constrained by short-term affordability constraints. The skill is structuring a project such that the risk profile each private finance provider is exposed to matches the investment criteria of that type of finance.
Fueling private interest
If the infrastructure investment in Christchurch is be delivered, central and local government will need to take a role in the market to catalyse private sector capital. Particular focus will need to be placed on creating the enabling conditions for private sector investment, such as strong city planning and clear project signaling.
Positive steps are being taken.
By Gwyn Llewelyn, KPMG in NZ and James Stewart, OBE, KPMG Global