SPVs are hailed as a way of funding infrastructure for housing – but will they be open to public scrutiny?

Readers who haven’t encountered the concept should brace to hear more about the use of Special Purpose Vehicles (SPV).

An SPV is a legal entity created for a specific purpose, such as raising capital – the SPV then can be a funding structure, through which all investors (or investors under a given investment threshold) are pooled together into a single entity.

The NZ Productivity Commission last year said SPVs could help debt-burdened councils to supply the infrastructure needed to support housing development.

The idea is supported by the Auckland Business Chamber. 

Just before Christmas, the government introduced legislation to give effect to it.  The Infrastructure Funding and Financing Bill establishes a framework for the establishment of SPVs to  fund infrastructure such as roads and sewers in “high-growth” councils.

Eric Crampton, chief economist at the New Zealand Initiative, described it as a linchpin of Phil Twyford’s vision for better-functioning housing markets.

That legislation will let infrastructure keep up after the current political push for greater infrastructure spending has passed.

Ultimately, councils set restrictive rules on urban growth when urban growth is costly for councils, Crampton pointed out.

Central government enjoys the boost in income tax, company tax, and GST when cities grow. But local councils wear the cost of the infrastructure necessary for that growth. And the bigger ratings base that growth provides is not enough to defray those costs – or at least not quickly enough in places where council’s debt limit binds.

Core water and transport infrastructure can last for decades. It makes sense to spread the costs of that infrastructure over the life of the infrastructure rather than loading it all up front, just as it makes sense to take out a mortgage when buying a house. But councils at their debt limits can have a hard time doing that. Issuing bonds to spread the cost of new infrastructure would make sense but would trigger covenants on existing debt that would increase the cost of council’s existing debt. So councils are reluctant to do it.

Part of Labour’s announcement (the bit that attracted most media attention) was that central government was willing to take on a bit more debt to fund infrastructure.

But growing cities do not just need a surge to remedy past infrastructure deficits.  That’s where the Infrastructure Funding and Financing Bill  plays a role, proposing a new way of financing infrastructure that spreads the burden of paying for it over time among those who benefit from it.

This would shift the burden of paying for infrastructure from councils and ratepayers at large to those who benefit more directly from the infrastructure.

The special purpose vehicles issuing debt, setting levies, and commissioning new infrastructure would be separate from councils. Because there would be no recourse to council if the new development failed, the debt would not count toward council debt limits. Council would have one fewer reason to say no to new housing.

The Bill was not proceeding under urgency and the Select Committee would have time to weigh things, Crampton observed..

But maybe SPV means Secret Purpose Vehicle and it’s this aspect of the bill that bothers the No Right Turn blogger.

He picked up on what was happening and noted:  

SPVs will collect and spend public money in the form of an “infrastructure levy” collected through the local rating system, and will exercise local government powers in their specific areas to enable construction. But they will not be subject to the Official Information Act or LGOIMA, instead having minimal “bespoke disclosure and reporting obligations” which basicly amount to publishing an annual report.

(There’s also a statutory Monitor to keep an eye on such entities, but as they must be a government agency, they should be covered).

Local bodies collecting rates and exercising statutory powers to acquire land and construct infrastructure are rightly subject to the transparency provisions of the LGOIMA. The same should apply to these “special purpose vehicles”. Otherwise we’re effectively seeing a transfer of local government powers into some secret, unaccountable netherworld. And that should not be acceptable to anyone.

No Right Turn revisited the secrecy issue last week, reiterating that the Bill establishes a new class of public entity, “special purpose vehicles”, which collect and spend public money and enjoy statutory powers.

But they will not be subject to the Official Information Act or LGOIMA.

With that sort of divergance from normal NZ constitutional practice, you’d expect there to be some advice for it, making a case for secrecy. So I asked for it. But according to the Department of Internal Affairs’ response, the only advice on the transparency regime is in the Bill’s Regulatory Impact Assessment, which says:

No Official Information Act requirements (unless they already exist (i.e. if SPV is Crown/local authority)) as the Monitor will most likely be subject to the OIA.

Which is an awfully casual attitude to what the government is proclaiming in its new Public Service Legislation Bill to be a core public service value. Again, these entities will collect and spend public money and enjoy statutory powers. The DIA admit in their RIS concern about “abuse of the delegated charging right and misappropriation of funds”. Arms-length transparency through a statutory Monitor is simply not good enough.

If the Taxpayers’ Union has expressed an opinion, we missed it.  But they are zealous monitors of public spending and are unlikely to approve legislation that might make it harder for them to check on what the government and/or local body authorities are doing with our money.