City region deals – new forms of financing, value capture and capital recycling
As local government becomes increasingly squeezed financially, there is increasing discussion of city region deals as a new way of funding infrastructure. However, while a city region deal may well include new funding streams from central to local government, there will undoubtedly be an expectation that investments will not be solely financed by central government, and – further – that new and innovative financing models will be used.
Many city region deals see local government sourcing finance directly as part of their contribution to the deal – for example, one option could be the use of bundled finance arrangements across the local authorities who are jointly party to the city region deal. But this is only the start-point of what is possible in the way of innovative financing, made possible through the “deal” mechanism[1].
The Minister of Transport, Hon. Simeon Brown, has been clear in the draft Government Policy Statement on land transport 2024 (GPS 2024) that central government expects local government to contribute more to transport funding through increased third-party revenue and higher public transport fare box recovery.[2] Such revenues could then be used to support new financing arrangements.
Where infrastructure investments are likely to create value for owners of private land or Māori-owned land with proximity to the investment, there are various mechanisms that can allow a share of this value uplift to be captured and built into the deal financing. City region deals make this more feasible by including iwi and private industry as collaborators in the design of the deal from the outset.
Land owners may be willing to directly invest – at no/minimal cost to rate/tax payers – in public infrastructure where there is a commitment within the deal to wider investment. For example, a land owner may pay for a transit station as part of a wider commercial development. This form of financing, from entirely non-public sources, acts to reduce the cost of the infrastructure investment.
Another interesting opportunity arising from city region deals is the concept of capital or asset recycling. This arises where a city region deal is intended to have a longevity beyond at least 10 years. Capital recycling is a financing strategy that involves the sale or lease of existing government-owned assets to fund new infrastructure projects.
Building the concept of capital recycling into a deal from the outset reduces the likelihood that the future sell-down of asset ownership will become politicised. Capital recycling is uncommon in New Zealand, but the Australian government has been at the forefront of adopting asset recycling as a mechanism to boost infrastructure development while optimising the use of public resources.
The Asset Recycling Initiative (ARI) was introduced in 2014 by the Australian federal government to incentivise states and territories to sell or lease existing assets and invest the proceeds into new infrastructure projects. Under this initiative, the government offered financial rewards – by way of a 15% bonus payment on the proceeds generated from the sale or lease of assets - to jurisdictions that successfully recycled the funds from asset sales. It aimed to encourage States to unlock the value of underutilized assets and redirect the funds toward critical infrastructure needs.
Capital (or asset) recycling is well aligned with the overall objective of city region deals to stimulate economic growth. By injecting funds from asset sales into projects such as roads, public transport, and social infrastructure, the aim is to create jobs, enhance productivity, and improve community well-being. This approach contrasts with the situation in New Zealand where revenue-generating assets such as ports and airports - or other metered infrastructure such as electricity, gas, water and toll roads – are typically retained in public ownership on the basis of future dividend flows and (unrealised) capital gains.
Another reason to consider asset recycling within a city region deal is that collaboration with the private sector is often embedded into a city region deal as a means to accessing expertise, innovation and efficiency to enhance the performance of the infrastructure – and in the longer term, improving economic productivity. Public-private partnerships (PPPs) are one way of structuring these collaborations, but by no means the only way. In the case of New Zealand, collaboration with iwi would be equally important.
Transparency and accountability are crucial aspects of any capital asset recycling strategy. Parties to the city region deals should clearly communicate their plans, ensuring that the community is aware of the likely future asset sales and understands how the proceeds will be reinvested in new infrastructure. Once the community understands how they will benefit from asset recycling – through additional, otherwise unaffordable, new infrastructure – political ‘heat’ is removed from the decision-making process.
Asset recycling has been viewed as a successful strategy in Australia, allowing the government to address infrastructure gaps while minimising the impact on public finances. However, like any approach, it is not without its challenges and considerations, including the need for careful asset selection, community engagement, and effective governance to ensure long-term success. Helpfully, these are all critical elements to the success of city region deals too.
[1] An important caveat here is that a “deal” must genuinely be a deal. In other words, there can not be a situation where any of the parties are able to back out at a later date without compensating the other parties for genuine loss.
[2] Draft Government Policy Statement on land transport 2024 – 20234, p21 https://www.transport.govt.nz/assets/Uploads/GPS-on-land-transport-2024-Consultation-4-March-2023-.pdf
