Christchurch's debt problem

Credit Crunch

A 'sneeze away' from trouble

The tsar of Christchurch, minister Gerry Brownlee

the Press,

5 July, 2013

Did mayor Bob Parker negotiate a good or bad deal on behalf of the city for funding of the new stadium, convention centre and the city's other "anchor projects". JOHN McCRONE analyses the agreement with central government and what it means for the city's finances.

Did Christchurch ratepayers get a good deal? A week ago, the split on the nearly $5 billion tab for the central city and horizontal infrastructure rebuilding costs was announced amid such confusion that it was hard to tell.

Councillors met on Friday afternoon to vote on a three-year recovery budget that mayors and ministers had released to the public at lunchtime the day before.

The bottom line seemed to be that the Christchurch City Council will pay $1.9b and the Government $2.9b of the general recovery costs, but so much was stitched together at the last minute that basic information was missing.

Surprises, such as the Government's high-end estimate of $500 million for the new rugby stadium, popped out only after the event. A $400m saving on road and sewer repairs snuck into the calculations at the eleventh hour, with no-one able to explain how.

In a cramped media briefing, Canterbury Earthquake Recovery Minister Gerry Brownlee was calling it a milestone accord, creating certainty going forward and all that.

But others, such as councillor Yani Johanson, were seeing it as a millstone decision, the council having been forced to the limit of what it can borrow to pay for bigger-than-wanted central-city projects.

Look at how Christchurch is now tied to servicing the cost of a largely commercial inner-city vision for the next 20 or 30 years, Johanson says. The council's credit card has been well and truly maxed out.

The council's debt levels are about to soar from 60 per cent of revenue to 247 per cent by 2017, just a few percent shy of its 250 per cent limit on total borrowings. They will start to taper down after that, but will still remain high for decades.

Christchurch will also need to set aside about 20 per cent of each year's rates income just to pay the interest charges on these massive loans.

Add on the repayment of principal and you can see why a general rate increase of nearly 7 per cent has already been struck for the coming year.

Johanson worries that this long-term level of indebtedness leaves Christchurch only a sneeze away from real trouble. What if interest rates rise beyond current low levels? What if building costs escalate or more damage is discovered? What if the council suddenly needs money to pay for facilities in the suburbs?

With only a few per cent headroom, the council will have to start selling assets such as the port and the airport if it busts the borrowing limits, or there will have to be truly crippling rate rises to make up the shortfall out of direct income, he says.

"It's not sustainable. I feel sorry for whoever inherits this financial mess. And if you read the public submissions on the Three Year Plan, they were telling us that our priorities were wrong.

"The big projects should have been put on hold. The most important priorities were around community and social wellbeing, around housing and local facilities," Johanson says.

But other councillors are saying be grateful. Barry Corbett, retiring at October's elections, says the level of spending is alarming, but much of it had to happen. The Government has at least been nailed down to promises over exactly what proportions it will pay.

Corbett says almost his first thought after the February 22, 2011, earthquake was about the repair bill.

"After I picked myself off the floor, I was immediately thinking, 'Heck, what are our rate rises going to be?' I was thinking they would have to be in the double digits long term." So a 7 per cent rates rise and maxed-out credit card seem a triumph in that light, he says.

The debt story is more about Christchurch historically having low borrowings compared with most other New Zealand cities, Corbett says.

Christchurch had the advantage of a credit card it had barely used and so has had the fortunate capacity to underwrite an ambitious rebuild.

Turning it around, would the Government have felt it could have invested so heavily in the future of Christchurch if the city did not have such a strong balance sheet? Corbett asks.

The Government has come to the table, he says. A 60-40 split on all sewer and drain repairs has been confirmed, with the Government paying the larger share. Likewise, there is an 83-17 per cent split on road repairs.

The Government could have said, "No, fix it up yourself", says Corbett, but instead it has gone further than might have been expected in agreeing to float the bills, so the splits remain the same, even if the underground damage turns out to be worse than predicted, and in agreeing to share the cost of any betterment, paying for upgraded infrastructure where that makes sense.

So the infrastructure deal looks generous. "We shouldn't be looking a gift horse in the mouth."

There have been some wins with the central-city projects too, such as the $284m convention centre precinct which is now the Government's responsibility to finance, says Corbett.

Councillor Tim Carter is another who sees the deal as fair.

"We're getting a large Government contribution towards the new Metro Sports Centre swimming pool. We're getting a large Government contribution towards the new central-city library.

"We're getting large Government contributions for community assets that councils normally have to fund solely by themselves."

There are many positives to celebrate, Carter says. However, the fact remains that the cost sharing negotiations and the finalisation of the council's three-year recovery budget have now set Christchurch on a particular course.

As Johanson argues, it has opted for an upscale, precinct-based, central city and so locked in a cost structure - indeed, locked in a shade of political philosophy - that for the next 30 years any future council is simply going to have to make work.

How is that bet looking? And how exactly is the council funding its side of the bargain?

The obvious fear is that being financially shackled to such a big mortgage on the central city could quickly look foolish.

Former three-term Christchurch mayor Vicki Buck, who is now standing again for the council in the Riccarton- Wigram ward, says this is going to be a century of great environmental and economic challenges. Flexibility may be what is most important for a city.

"You would want your finances to be resilient because it is so hard to predict what will be going on in the world. If a developed country like Greece can have 50 per cent youth unemployment, or New York is worrying about getting washed away by climate change, you want to have the feeling that you've got choices. So as a community, high levels of debt are quite a concern."

Buck also questions the balance of the spending. She says so much focus is going on the central city, but since the earthquakes, Christchurch has sprawled, with new fringe developments in Hornby, Belfast and Marshland. These will need libraries, pools, community halls and other civic facilities.

"My youngest son isn't even old enough to vote yet, but if we have these locked-in debts for 30 years, does this mean he will be 47 before he gets to decide about spending on anything else?"

John Walley, Christchurch-based chief executive of the New Zealand Manufacturers and Exporters Association, is another raising questions.

Walley says what strikes him is how much of the recovery seems to revolve around protecting property values.

From the red-zone residential payouts to the Government's $480m investment in a green frame to shore up central-city property prices, much of the recovery strategy looks devoted to maintaining residential and commercial equity, preventing a long-running property bubble from bursting.

Christchurch already had its locked- in cost structure - its over-valued, highly-mortgaged, land and buildings - which it was struggling to make work. Now, says Walley, it is doubling down on that long-term property gamble by going for an ambitious central-city building programme.

Clearly, the logic is that in creating a more attractive central city, Christchurch will grow economically and so be able to afford whatever it builds, he says. One day the current investments might look cheap.

"But the problem is that the costs impute a certain rating take which imputes a certain population, and the downside risk is if we see the rating base contract, we will end up with a big mismatch between the size of our facilities and our spending."

So Walley believes Christchurch now needs a population strategy and, more than that, a jobs strategy, as it is the prospect of work that actually brings newcomers to a city.

Immediately after the quakes, there was talk of radical action such as creating a free-trade zone in the central city - a liberal tax regime that might have brought in international businesses. The talk quickly died down because only a few businesses folded after the quakes, but that does not mean manufacturing and other large local employers are not struggling.

Walley says the Government needs to do more than just deliver a collection of buildings for Christchurch to develop in a way that will eventually produce a large enough rating base to pay for it all.

Yet while others agree the recovery debts make Christchurch now more reliant on strong job and population growth, they counter that as a city, it is almost unique in the extent to which this is already assured.

"Because we are so well insured, because there is so much insurance money coming in, what we've also got locked into our future, almost guaranteed, is the economic activity," says Canterbury Employers' Chamber of Commerce chief executive Peter Townsend.

The Canterbury region is looking at a 7.5 per cent rate of growth, Townsend says, and the rebuilding could see that continue for a decade. So in his mind there is no question Christchurch will expand to a city of 500,000 to 600,000.

"You might as well throw all the conservative population estimates out the window. If you look at what's happening on the jobs front, we are just starting to edge into skill shortages, and its not just in construction. Talk to the banks, the lawyers and accountants. This is starting to flow right through."

A key part of the central-city plan is the innovation and health precincts, which will be the job creators. The Government is promising to move about 20 government agencies and 2000 staff back into the city core.

Add in the irrigation projects, the agricultural growth in the Canterbury Plains, and the levels of debt the council is being forced to take on should not be considered a millstone.

Instead, it is a boldness that will pay off in the long run, says Townsend.

His criticism of the cost-sharing announcements is the lack of business cases for individual anchor projects and the continuing uncertainty around time lines.

"What I haven't seen yet is an analysis of where the greatest economic and social value is going to be created so we can prioritise things. I mean, can someone please tell me whether a health precinct or a convention centre will have more immediate benefit for our city?"