Texas-style Infrastructure Funding and Financing Act gets the Kiwi go-slow treatment

Tuesday, 5 April 2022

A consensus has formed around the Infrastructure Funding and Financing Act in the quest to build more houses.

OPINION Picture this: a couple of developers walk into a bar, and over three or four beers vote themselves a new city filled with houses.

All of it financed by bondholders and paid for by future residents through a targeted rate.

Can’t imagine it? Well, I don’t blame you, it is not really how we do things around here.

But it is how they do them in Texas, which is the king of the municipal utility district (MUD) bond, a tool which allows developers in the United States to build city-type developments where no infrastructure has been planned.

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Megan Woods says she is expecting three special project vehicle initiatives to come across her desk this year.

Over the last 10 years this model began to look desirable to people on both ends of the political spectrum.

Governments of both stripes were struggling to get councils to zone enough land to build enough houses and, predictably, these Governments were also not so willing to finance this infrastructure themselves.

What started out as an idea on the Right of the political spectrum, ended up getting adopted right across it.

Some organisations even sent staff to Houston to watch the system at work, and a pilot of it effectively took place in Auckland with Fulton Hogan and its Milldale project.

What came out of all this broad political consensus was a new piece of legislation: the Infrastructure Funding and Financing (IFF) Act, which allows councils to set up Texas-style Special Purpose Vehicles (SPVs).

Homes there have sections, and they're still reasonably priced.

It passed in 2020 with the support of every political party in Parliament, showing just how broad the surrounding consensus had grown.

In the Houston Business Journal, Urban Reform Institute fellow Tory Gattis said: “if all goes well, there should be a tremendous increase in New Zealand housing supply in coming years which will help to ease prices.”

“Texans and Houstonians should be proud to serve as a model to the world for market-based approaches to affordable homeownership.”

Nearly two years on, Minister of Housing and Urban Development Megan Woods is still waiting for a project proposal to be pushed across her desk, so she can sign it.

“Infrastructure projects are complex and require significant upfront work prior to IFF Finance being committed,” she says in a statement.

“This upfront work includes things like planning, design, consenting and land acquisition which can take between 12-24 months to complete, so this does take some time.”

Woods says she is expecting three SPV proposals this year from Wellington and Tauranga: a wastewater project, a transport network project, and a greenfield housing project.

The slow pace of home building over the years has been seen as a key cause of the housing crisis.

Auckland Council has no Single Purpose Vehicle projects planned. Wellington City Council’s project is a sludge plant.

Christchurch City Council was given two days to figure out what SPVs it might be interested in, and seemed to need a third day to figure it all out.

Hamilton City Council (HCC) plans to use its SPV to replace an existing Housing Infrastructure Fund loan for its Peacocke subdivision, and free up money for other developments.

HCC Growth funding and analytics manager Greg Carstens says the most important thing for them is that the IFF helps them take debt off their balance sheet.

Hugh Pavletich is the former co-author of the Demographia housing report, which measures New Zealand’s housing affordability against increasingly embarrassing multiples of income. He is a big advocate for MUDs, and summarises the IFF’s problems this way:

“There was unanimous support, but … the general consensus was that the Act was far too complex.”

The MUD process is a fast-moving Texas brawl, but the IFF is more intense, and requires sign-off from the Minister before an SPV can raise money.

Woods doesn’t seem too concerned at how long it is taking, but ask a few questions around the big-end of town, and you hear some interesting reasons why developers have been a little slow to embrace it.

In the United States developers can make whopping profits off these schemes because they hunt around for inexpensive rural land, upzone it by voting themselves the right to borrow to build infrastructure, and then reap major windfall profits once they sell all the houses on it.

In New Zealand, SPVs are using land already zoned for housing. Which means the land values have already risen to the value of residential land and the council has already promised to eventually build infrastructure on those pieces of land.

So, as a developer, why should you want to speed up the process of converting this land to housing by taking on an SPV?

These SPVs will just add costs to your future residents, because people who buy from you will be on the hook to pay higher rates, while people in the next suburb over will not.

Instead, you might as well just hold onto your land and wait till the council gets around to building all the pipes and roads for the usual developer contribution.

Take all of this in combination, and it feels like we’ve been lumped with a “yeah, nah” version of the Texas municipal bond system.

Yeah, it can be used to fund housing infrastructure on a good day, but nah, it doesn’t really seem to be worth anyone’s while going through it.