How much is the Government really spending to fix Christchurch?
The Government says it is spending $16.5 billion on the Canterbury earthquake recovery. But a lot of that turns out to be promises and provisions and EQC cash. So what story does the balance sheet for the past four years tell? JOHN McCRONE reports.
At the beginning, there was an understanding. The Government said it needed total charge. The Canterbury earthquakes were that overwhelming – a systemic risk to the economy.
But in exchange for taking over political control of the city for five years with the Canterbury Earthquake Recovery Authority (Cera), it was vowing its full financial support. Whatever it took to get Christchurch back on its feet, as soon as possible. Four years later and a judgment can be made.
How much has the Government actually been spending on Christchurch once you examine its books? Indeed with the insurance flowing though the city, will it earn about as much as it ultimately spends because of the tax take on the resulting construction boom? Earthquake Recovery Minister Gerry Brownlee frequently mentions the headline figure of a $16.5 billion Crown contribution to Canterbury, although half of that is insurance payouts from the Earthquake Commission (EQC). And with the Government now playing hardball over the cost of fixing Christchurch's horizontal infrastructure and the timelines on its central city anchor projects are stretching out, a closer look is being taken at precisely what it has ended up committing to the rebuild.
One recovery critic, Cam Preston – a chartered accountant who after the earthquakes had contract jobs with both the EQC and Housing New Zealand – says he was surprised when he started to comb the Treasury figures. Boil it down, says Preston, and the Government is provisioning to spend a total of $6.7b on "core Crown" contributions like the anchor projects, the fixing of roads and sewers, the repairs to (mainly insured) Crown-owned schools and hospitals. Which no doubt is a fair sum of money to be promising. But what his accountant's eye has noticed is the fact that the Government's accounts up to 2014 show only $2b of this $6.7b has been cash actually spent –operational expenditure.
And as any accountant knows, it is dollars out the door rather than provisions on balance sheets that give the true picture. "You just need to take a walk around the CBD or cycle around the suburbs to witness the reality of this low Government cash investment in Canterbury to date. There's lots of talk, but not much cash. Perhaps not much more than it would spend on schools, roads and hospitals in any normal year," Preston says.
The numbers confirm for him the widely voiced suspicion the Government has been driving with the handbrake on throughout the recovery because of its election promise of "returning to surplus". Preston says of course the Canterbury earthquakes could not have happened at a more cash-strapped time. New Zealand was still working its way out of the global financial crisis (GFC). "Remember the Government had only just done a $1.6b bail-out of South Canterbury Finance's investors about a week before the first September 2010 quake."
So the earthquake recovery had a context. The Government had decided to deal with the GFC by letting the gross national debt balloon. The logic was the country would borrow large so as to invest in economy-growing activities. It would promote irrigation schemes, build better roads – expand rather than contract.
And Preston agrees the strategy made a certain sense because the Government knew international lending rates were going to be rock-bottom for quite a while. It was a risk but also a cheap time to go for growth. As a result New Zealand's gross debt has soared from $30b to $80b. Then cleverly, says Preston, to make this borrowing electorally palatable, the public's attention has been diverted to the separate goal of returning to surplus. Or to use plain language that any credit card owner will understand, getting the country back into the black at least in terms of earning enough to stay a step ahead of its mounting interest charges in any particular year.
As a national financial plan, it is its own debate, says Preston. However, what matters for the earthquake recovery is that it has left the Government permanently short of ready cash because every dollar spent is going to hammer that year's surplus target.
Preston believes this is why he can see all sorts of accounting games being played when he looks at the Crown books.
Yet while the Government is being careful with its own money, Christchurch City Council (CCC) and Christchurch ratepayers are being pressed to spend every cent that can be scraped up on the recovery. Rates are being pushed to unheard of levels. Council debt is being stretched to its legal limit. The pressure is on to sell off the port, the airport, and every other asset the city owns.
CCC finance spokesman Cr Raf Manji broadly agrees with Preston's analysis, saying the council's recovery spending will be around $6.5b in the end – but off a tiny revenue basis compared to the Crown. The pips are being squeaked. Manji says the Government made the mistake of over-promising in the immediate aftermath of the quakes when morale needed boosting and has since been having to reel expectations back in. "I'm sure the intentions were good and they started off with a hiss and a roar. But over time they began to think, 'Well, how much is this going to cost us?', and started putting in some boundaries and constraints."
The June 2013 cost-sharing agreement that fixed the price of infrastructure repairs and anchor project investments was the clear turning point, Manji says. This deal was stitched together behind closed doors – even the council table locked out of the negotiations – and it took another year for it to become public knowledge that while the Government had trimmed its contribution, the council was going to have to find another $1b somehow.
"The Government knew from 2012 there was likely to be a large funding gap and the council was going to have to start looking for the extra cash from ratepayers, or from debt and selling assets. But as the new council, it took us a long time last year to work out that that funding gap did exist." So Manji says there is the impression being given of open-handed support for Christchurch, yet people can also see the puzzling slow-down of some of the anchor projects, the silence over what will happen to the residential red zone, and the likelihood of the city now being left with an expensive legacy of half mended roads and long-term land drainage problems.
With Cera planning its transition now that its five years are nearly up, its powers ending in next April, some sharper questions are being asked about exactly what the Government has committed to Christchurch's recovery.
The tax take
So how do the books look? First the thorny issue of the tax take.
As many have noted, the reality of Christchurch's situation is that it suffered a world-class disaster, however it was also incredibly well-insured. According to Reserve Bank estimates, some $35b of insurance payments will be injected into the Canterbury economy. Recovery money is being spent at the rate of $100m a week.
These are real dollars. Mostly reinsurance from overseas. And the Crown will be taking its share of the action not only in terms of taxation but also from a reduction in welfare payments – the halving of Canterbury unemployment rates – and other fringe benefits of what could be a decade long construction boom.
The council through its economic arm, the Canterbury Development Corporation (CDC), has attempted to quantify what the Crown might gain in taxes.
Working off a presumed total recovery spending of $40b – although $50b now looks closer to the final mark – CDC has calculated this ought to generate some $7b in Crown income.
It says taxes on wages and company profits should yield $4b. Then GST on capital spending would produce another $3b. And with the multiplier effect of rebuild dollars being respent, the total tax boost could wind up being as much as $11b.
While the CDC is talking the figures up, Treasury wants to talk them back down, saying its own estimate is nearer $3b.
It says a third of the $40b is "displaced activity" – spending which would have happened anyway – and another third results from imports, so has a negative impact on GDP. Then GST should be completely discounted as firms in the supply chain can claim it back as a business expense.
CDC chief executive Tom Hooper admits Treasury is correct about GST. "That was an error as we didn't realise insurers could claim that back even on cash settlements and opt-out payments." However he says its tighter definition of the other sums is a choice of view.
Manji adds that while the calculations are difficult, the numbers are still going to be big.
"When we look at the tax take, the fiscal impact of the earthquakes really may be not be as negative for the Crown as estimated, certainly in the long run. And I think ratepayers deserve some clarity around exactly what these financial flows are, because at the moment it is being presented as, aw, there is this huge gift coming from the taxpayer, and it may not actually be as large as thought."
Read more John McCrone stories on the rebuild
So there are billions to offset any taxpayer spending on Canterbury. Then the question is what is coming the other way?
Preston says the figures can be found in the Parliamentary appropriation records even if it takes some expert digging and the occasional official information request.
Again the Government's headline number, the one it always likes to quote, is that it is making a $16.5b investment in the Canterbury recovery. Yet the first thing to knock off that is the $8b which is simply EQC cash.
The EQC factor
The EQC is its own intricate story, says Preston.
It's total liability has been projected at $12b. Some $4b of this will be covered by its reinsurance treaties. Then the $8b showing up on the Crown's balance sheet is a combination of the EQC's $6b natural disaster fund – its pool of savings, which is now going to be completely drained – plus a further $2b shortfall that the Crown, as the EQC's ultimate backer, may have to pay once all the EQC's own money is gone.
Preston says he finds it a bit much to count the natural disaster fund as a Crown contribution – especially as there is no word on how that particular pot is going to be refilled to pay for future earthquakes. And then scrutiny of EQC's accounts reveals the $2b shortfall figure has been steadily shrinking.
Due to various savings being found – and he notes that the first line of the Minister's letter of expectations to EQC states: "Returning to surplus in 2014-2015 is a key priority for the Government." – the $2b has become $1b and now sits at around $500m.
Preston says the way it is going, the earthquakes may wipe out EQC rather precisely, yet relatively little Crown cash might be called upon in the final wash-up.
Of course $500m, if that is where it lands, is not nothing, agrees Preston. And early on, the Government did underwrite some substantial commitments. Its most expensive recovery action was stumping up $1.5b to buy people out of the residential red zone suburbs.
Likewise it bailed-out AMI policy holders when the insurer could not meet its liabilities. Preston says Treasury accounts suggest AMI will eventually cost taxpayers about $1b.
Another large lump being counted as part of the Government's contribution to Canterbury is its $220m wage support package, the "no questions" grants it paid to small businesses so they could keep trading in the weeks following the September and February earthquakes.
When the quakes hit, there was good reason to fear they might trigger a wave of bankruptcies, a loss of jobs, a general de-population of Christchurch. Without immediate help, the city could have gone into a downward spiral that would have cost the country a whole lot more.
Preston says that then only highlights the change of gear once it became clear Christchurch would not only survive but was about to ride a wave of insurance settlements. As Manji says, with the situation secured, the game turned to reeling the expectations back in.
But the Government did seem to have one last rush of blood to the head with its central city Blueprint masterplan, says Preston. In line with its general strategy of investing for success, it took control of the Christchurch CBD and created a vision based on a collection of supercharged catalyst projects.
Some of these civic buildings were long-standing local ambitions, like a bigger central library or an expansion of the law courts. But others fitted national economic goals like building convention centres to exploit the international business tourism market.
However, Preston believes that when Treasury realised the full surplus-busting implications of the Blueprint – what it was really going to cost – and put that on top of the runaway repair bill for Christchurch's infrastructure, then the fun and games began.
Sharing costs, sort of
The surplus goal explains a lot, argues Preston. It was not just the amount of cash being spent, but the precise way any spending promises got booked, that became critical. So the cost sharing negotiation in 2013 was indeed a key event.
Preston says its first job was to put a lid on what the Government would spend on Christchurch's roads and underground services.
Cabinet guidelines drawn up in anticipation of a natural disaster already agreed in principle that horizontal infrastructure repairs would be borne broadly 60 per cent by the Government, 40 per cent by the council. So once a repair alliance, the Stronger Christchurch Infrastructure Rebuild Team (Scirt), was formed, it simply started mending every damaged pipe and street it came across.
But by late 2012, it was realised the bill was likely to be double the early estimates. The damage was always worse once the ground was dug. So the Government changed the rules.
Scirt was told to recost the repairs based on what it would take to get the infrastructure back to an average pre-quake level of service, not what it would require to fix completely. Brownlee said Christchurch shouldn't expect the Government to pay for betterment.
This allowed the Government to cap its infrastructure contribution at $1.8b – a sharp reduction on the $2.3b CCC had been expecting.
And Preston says from an accounting point of view, it also meant that rather than having a floating commitment sitting on its books – an auditor's question-mark hanging over the delicately-poised surplus projections – the Government could draw a line and plug a hard number into the national balance sheet.
Likewise, says Preston, the open-ended promise of the Blueprint anchor projects was cauterised by the cost share agreement. Again it pinned numbers to projects such as the convention centre and arts precinct, even though in 2013, most of the dollar sums were little more than best guesses.
The majority of the anchor projects did not even have a business case let alone a construction contract. So in retrospect, this locking in of contributions was premature. It has become part of the reason why some of the projects are struggling. Yet the push was on to have a signed piece of paper that established a figure for the sake of the annual budget accounts.
Preston says what also catches his accountant's eye is the way the Government used the cost share to capitalise as much of the Blueprint spending as possible.
That is, projects were treated not as operating expenditure – cash spending that would affect that year's surplus calculation – but instead as a capital investment, something that was being bought by the state to produce an eventual financial return.
Once capitalised like this, the provision could be entered in a different column – rolled into the general national debt, the $80b of borrowings, to which no one was paying much attention.
As an accounting trick, Preston says the corporate world does this all the time. An expense becomes an asset. But it has consequences. It builds in assumptions that later have to be realised.
Take the $400m the Government has spent on compulsorily acquiring land for the anchor projects. That is money going out the door in any particular year. But because the land has been booked as a capital asset, it doesn't come off the surplus figure. Rather it is something new the Crown owns as a positive investment.
Of course the expense will have to be reconciled one day when the anchor project actually gets built. If the Crown simply gives an anchor to the city as a gift – as people seemed to be getting the impression would be the case with the metro sports facility, the convention centre, the green frame – then suddenly that land investment will have zero value. Its purchase price has to be recognised as a cash out-going.
Or even if the Government has to acknowledge a write-down of the booked land value – as it very well might with the East Frame being sold now for apartment blocks having been bought originally at commercial building land prices – then again, ouch, a direct hit on the budget surplus column.
Preston says this is where some of the delays and secrecy that surround the anchor projects start to make more sense. The cost share shuffled a large chunk of the promised core Crown spend – he calculates $3.6b of the $8b non-EQC money – safely out of the surplus spotlight. The question is then when can the Government afford to take the hits involved in parking the expense?
For instance, it was an open secret that Fletcher Living had won the East Frame tender earlier this year. However the official announcement was bafflingly delayed until just the other week – a few days after the June 30 close of the 2014/2015 financial year.
And even then the Government was opaque about any write-downs. Brownlee claimed the Crown would see no loss on the land value. It would get back what it paid, he says.
However Fletcher will be acquiring the land over a decade to do the apartments in stages. And there is a complicated profit sharing arrangement that will not be finalised until the end of this year. Preston says all this looks like a way to keep the land cost tucked away on the right side of the surplus ledger.
Look at everything in the cost share and you start to see these fish-hooks, he says. The convention centre is on the balance sheet on the basis that its eventual ownership will be private. The Government is talking as if it is spending $284m on an asset to sell and so can expect to get all its money back.
"It was a surprise to me – no one seems to have spotted it – but if you check the cost share document, there is a single line. Project ownership upon completion – private sector."
Yet right now the Government only has a consortium offering to build and run the convention centre for it. And it hasn't even got a firm deal on that. So if the timeline on the convention centre is suddenly jumping out past 2018, Preston says the way the Government is committed to limiting its financial involvement again looks a likely part of the explanation.
Preston says tally it up and this is why there feels to be such a distance between the spending promises and the spending reality.
First that headline $16.5b contribution figure has to halved because $8b of it is EQC insurance money. Take out the red zone and AMI bailout and that gives you the $6.7b core Crown spend. Then because cash is precious, there are the capitalisation tricks to park the costs and his figure of $2b for actual operating spending up to 2014, the last available audited year.
Dividing up the $2b, Preston says it amounts to $571m for sewers and drains, $293m for roads, $397m for Blueprint land, $393m for schools, hospitals, law courts and other Crown buildings, $220m for the business support package, plus a collection of sundry amounts like $28m for the AMI temporary rugby stadium.
So certainly not nothing, Preston concedes. But is it actually that generous in light of what the Government will have been earning in taxes on a largely insurance-fuelled rebuild? And has it been travelling with the handbrake on for the past few years because there has always been that election surplus goal hovering in the background?
The Government has plenty of defenders. Canterbury Employers' Chamber of Commerce chief executive Peter Townsend says no matter how you chop the numbers, the Government has still promised some $8b in support of Greater Christchurch.
"It's irrefutable that it's making a substantial contribution. And I'm not seeing any evidence that it is trying to back out of that."
Townsend says it is also dangerous to talk simplistically about the tax take. "That's tricky. Because on the same argument, Auckland could say a much greater share of Government spending ought to go towards it because proportionately it produces so much more of the country's tax revenues."
However he agrees that tensions are rising as CCC finds out exactly what the recovery will cost ratepayers over the next decade.
A line was always going to have to be drawn somewhere between the local and national contribution to the recovery, Townsend says. But perhaps the debate about exactly where that was going to fall could have been more open and public. Then at least there might have been less of an air of surprise about the eventual capping of spending.
Manji is philosophical, saying the situation is what it is. The Government's job was to restore confidence after the earthquakes, which it certainly did. And then naturally its own budgeting concerns came to the fore.
What matters is that the council has got its own finances in order having finalised its Long Term Plan in June. It has shown it can pay its estimated $6.5b share without requiring a firesale of assets and with some hope of avoiding the worst rate-rise predictions. The city's priority now is to persuade the Government to share power with the council and work more closely with it on the next five-year stage of the recovery.
Christchurch could always have done with more money, and fewer strings attached to what was given, says Manji. However, life moves on. And establishing a clear understanding of the financial picture – who has been paying for what – is no bad thing.
- The Press