The role of debt in funding community infrastructure

By Anne Tolley, Tauranga Commission Chair

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There has been much discussion in recent months about the debt issues the local government sector is experiencing and the need to find new ways of funding vital community infrastructure, particularly in fast-growth centres like Tauranga.

The need for investment is driven by community growth (Tauranga’s population has grown by around 30% in the last 10 years); having to catch-up on an underinvestment in infrastructure over the last decade and beyond; AND to provide for future growth in the face of significant increases in construction costs, with the price of many infrastructure project components increasing 20% or more in the last couple of years alone.

As a result, councils like ours are having to take on more debt to build the new infrastructure needed to cater for their growing populations and renew existing, aging infrastructure, such as the water, wastewater and stormwater systems we must have, and the roads we get around on.

Here it’s worth noting Standard and Poors’ February commentary that local government debt in New Zealand is “very high on a global scale and is rising more than our previous expectations”. One of the key reasons for that is that there is a greater reliance on local government here to deliver and fund infrastructure, compared to other countries.

So what’s the solution? It’s a complex mix of prudent, but timely investment; managing costs; balancing rates, fees and charges; selling some assets to invest in new assets for the city; and leveraging debt as a significant component of local government infrastructure financing. That’s because debt allows councils to spread the financing cost of community assets over 20-plus years, which helps make them affordable. Just as importantly, it means repayments are funded in an intergenerational way by the people who are using and benefitting from those assets, not just those who were ratepayers when the asset was constructed.

Most infrastructure assets have lifespans ranging between 30 and 100 years, so debt allows the financing period to be more aligned with the period the assets will be in use for.

Debt needs to be serviced by appropriate revenue streams and the way that revenue is gathered also needs to be equitable. TCC goes to significant lengths to ensure that, as far as possible, ‘growth pays for growth’, through development contributions, and we also work hard to identify and access any available external contributions, such as Government grants.

And of course, debt has to be ‘prudent’, both for the council and for those whose rates and other contributions (like parking charges, for example) are needed to fund debt repayments. TCC’s primary lender is the Local Government Funding Agency (LGFA), which is jointly owned by all of the councils which borrow through it. The prudent debt limit applied by the LGFA for TCC’s total borrowing (in the 2024/25 financial year) is that debt cannot be more than 2.9 times our revenue (reducing to 2.8 times in future years). Our expected debt for 2024/25 will be well within that limit, but with a number of large and costly infrastructure projects on the horizon over the coming years, the council will be closely managing debt and revenue to ensure these streams are aligned and that debt funding remains affordable. One of our key actions we will be investigating a future structure for three waters service delivery which will maintain ratepayer ownership, but allow the debt related to water, wastewater and stormwater infrastructure to be held off the Council’s balance sheet.

So in summary, debt is needed to allow essential infrastructure investment; increased debt can raise affordability concerns; but not increasing debt will also have negative economic and social impacts.

As commissioner Stephen Selwood says, the bottom line is that the community pays either way. “It’s a choice between raising debt to fund needed investment, while working within prudent debt levels and considering the impact of borrowing on rates affordability, or deferring investment and suffering lost productivity and increased costs through inflation, congestion, rising house prices and a lack of the amenities a growing city

Which says that while it’s a complicated equation, debt is not a dirty word – it’s a necessity of sensible local government.

Related: Long-term plan our key focus

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Anne Tolley
Anne Tolley
Tauranga Commission Chair

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