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Finance and
Performance Committee
11 August 2020
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Emergency
Budget 2020/2021 - Update August 2020
File No.: CP2020/10407
Te take mō te
pūrongo
Purpose of the report
1. To provide the committee with financial update information since the
Emergency Budget was adopted, including the monitoring of emergency budget
savings.
Whakarāpopototanga matua
Executive summary
2. The
Emergency Budget 2020/2021 was adopted by the Governing Body on 30 July 2020.
3. As
the COVID-19 situation is still evolving, its financial impacts on council
remain uncertain. As the 2020/2021 year progresses, Finance staff will monitor
the financial performance of the council and its CCOs to ensure the group can
respond to any material changes to the Emergency Budget. Staff will report to
the Finance and Performance Committee on a monthly basis.
4. This
month the key budget updates are:
· Providing
a verbal update on progress for 2020/2021 and proposing an approach to address
any material variations from funding and budget capacity.
· Updating
the committee on the shovel-ready process, and approving additional
shovel-ready expenditure not initially included in the Emergency Budget
Proposed approach to improvement in funding and budget capacity
5. A
verbal update on the Emergency Budget progress, and council parent savings,
will be provided at the meeting.
6. Staff
advice is that the prudent response for any improvement in funding capacity
would be to reduce debt for the first half of the financial year. This approach
would leave a stronger buffer against future shocks and would reserve capacity
for Long-term Plan priorities.
7. It
would be appropriate to review this approach after the first half of the
financial year finishes on 31 December 2020. This would allow for a full
reassessment of council and CCO financial performance, as well as group targets
such as asset recycling.
Update on the shovel-ready process
8. In
April 2020, the council submitted a list of 73 projects for consideration of
government shovel-ready funding. Approximately $350 million of central
government funding has now been confirmed as follows:
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Project name
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Council Entity
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Funding status before shovel ready
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Total agreed shovel-ready funding
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Emergency Budget 2020/2021 funding assumption
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Te Whau Pathway
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Auckland Council
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Unfunded
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$35.3 million
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$5 million
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Auckland Resource Recovery Network*
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Auckland Council
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Unfunded
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$10.7 million
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-
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Ferry Basin Redevelopment - Stage 1
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Auckland Transport
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Funded
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$42.0 million
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$30 million
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Puhinui bus-rail interchange
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Auckland Transport
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Funded
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$22.1 million
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North-western bus improvements
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Auckland Transport
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Unfunded
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$50.0 million
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$10 million
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Auckland Housing Programme
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Various
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Unfunded
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$188 million
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-
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Total
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$348.1 million
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$45 million
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*This is only the shovel ready component. The council’s $3.4
million contribution towards the $14.1 million total project cost is allowed
for in the Emergency Budget.
9. The
funding is subject to a number of terms and conditions primarily around meeting
agreed milestones, covering any cost overruns and achieving the benefits
represented when submitting the project, for example achieving the stated
employment numbers.
10. The funding
agreements for the two Auckland Council projects were signed by the
council’s Acting Chief Executive on 6 August 2020. The agreements operate
by requiring Crown Infrastructure Partners (CIP), the government agency
designated as responsible for funding these projects, to pay the relevant
council entity on the completion of milestones.
11. The council
has worked with CIP to set realistic milestones, which maximise the amount of
funding that can be recovered in each financial year, to minimise any impacts
on the council’s debt.
12. Due to the
proximity of the funding confirmation to the adoption of the Emergency Budget,
a number of assumptions were made about shovel-ready funding and expenditure.
Currently there is no budget for the shovel-ready portion of the funded
expenditure (and associated funding) for the Resource Recovery Network project.
$5.2 million of additional capital expenditure in 2020/2021 needs to be
approved to ensure the project can proceed as agreed with CIP.
13. At this stage
work is still progressing with central government and Kāinga
Ora on the details of the funding arrangements for the $188 million of
infrastructure to support the Auckland Housing Programme. An update on this will be brought to a future meeting of this committee.
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Ngā tūtohunga
Recommendation/s
That the Finance and
Performance Committee:
a) receive
the verbal budget update on progress for financial year 2020/2021
b) agree
that it is prudent to reduce debt for the first half of the financial year in
the event of any material improvement in funding and budget capacity in
2020/2021
c) endorse
the Acting Chief Executive agreeing to both the Te Whau Pathway and the
Resource Recovery Network funding agreements, which enables the council to
receive shovel-ready funding on the completion of project milestones subject
to appropriate terms and conditions
d) approve
$5.2 million of additional capital expenditure, and associated shovel-ready
funding, in 2020/2021 for the Resource Recovery Network project.
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Horopaki
Context
14. The Emergency
Budget 2020/2021 was adopted by the Governing Body on 30 July 2020.
15. The financial
implications of COVID-19 were highly uncertain at the time when the Emergency
Budget was prepared. Therefore, the adopted budget was developed based on a set
of forecasting assumptions for a “most likely scenario”. Key
assumptions included government decisions on alert levels and the economic
outlook.
16. The final
budget included a projected reduction in cash operating revenue of around $450
million for 2020/2021 as a result of COVID-19 and a range of measures including
reductions in discretionary expenditure, temporarily elevated debt levels,
capital expenditure deferrals, temporary reductions in operating service levels
and asset recycling to mitigate the impact of this revenue shortfall as well as
the unprecedented drought situation.
17. As the
COVID-19 situation is still evolving, its financial impacts on council remain
uncertain. As the 2020/2021 year progresses, Finance staff will monitor the
financial performance of the council and its CCOs to ensure the group can
respond to any material variations from the Emergency Budget. Staff will report
to the Finance and Performance on a monthly basis.
Tātaritanga me ngā
tohutohu
Analysis and advice
Proposed approach to improvement in funding and budget capacity
18. The COVID-19 situation
is still evolving and financial projections for 2020/2021 are likely to change.
Elected members have requested advice on how to address any improvement in
funding and budget capacity in the 2020/2021 financial year. In response to
this request, staff advice is that it would be prudent to reduce debt for the
first half of the financial year, for the following key reasons:
· Leaving
a buffer against future shocks
· Providing
a strong signal to credit rating agencies about the council’s commitment
to financial prudence
· Ensuring
better access to debt markets when needed
· Reserving
capacity for Long-term Plan priorities (which may need to have a strong focus
on actions to support recovery)
19. Staff also
advise that an appropriate time to review this approach would be after the
half-year finishes on 31 December 2020. At that point the overall financial
picture can be reassessed based on the six-monthly operating and capital
financial performance as well as progress with asset recycling, updated debt levels
and a revised economic outlook.
Update on shovel-ready project funding
20. In April
2020, as part of its response to COVID-19, the government announced that it was
looking to fund “shovel-ready” projects to help stimulate the
economy and create a pipeline of work for the construction industry. The
government created a $3 billion provision for these projects, with $500 million
set-aside for the Auckland region.
21. The council
worked collaboratively with councillors, local boards, and council departments
across the group to create and submit a list of 73 projects before the deadline
of 14 April 2020.
22. The
government recently confirmed funding for the following Auckland Council
projects:
· Te Whau
Pathway (agreed shovel-ready funding: $35.3 million): a shared path that will link
the Waitematā and Manukau harbours. The main alignment is approximately
11.8km with 3.2km of connecting paths, a total length of 15km. The pathway will
largely follow the western side of the Whau River and will be designed to
accommodate pedestrians and cyclists.
· Auckland Resource Recovery Network (agreed shovel-ready funding:
$10.7 million): includes
infrastructure investment in eight sites across the Auckland region. This
project will fast track the effectiveness of the Resource Recovery Network
through developing fit for purpose infrastructure to support resource recovery
activity and a shift to a circular economy. The total cost of this project is
$14.1 million, with Auckland Council agreeing to fund the remaining $3.4
million. This co-funding was allowed for in the Emergency Budget.
23. Three
Auckland Transport projects also had shovel-ready funding confirmed:
· Ferry
basin redevelopment - Stage 1 (shovel-ready funding: $42 million)
· Puhinui
bus-rail interchange (shovel-ready funding: $22.1 million)
· North-western
bus improvements (shovel-ready funding: $50 million, plus $50 million of NZTA
funding)
24. The
Emergency Budget conservatively assumed $30 million of funding for the Ferry
basin redevelopment – Stage 1 and Puhinui bus-rail interchange in
2020/2021. The initial cashflow projections since funding was confirmed
suggests this may be higher, which may provide some additional funding capacity
in 2020/2021. Finance staff and Auckland Transport will continue to develop
these cashflow forecasts and update the committee at a future meeting.
25. Funding
of $188 million of mostly three waters (water supply, wastewater and
stormwater) projects relating to delivering housing in the AHP (Auckland Housing
Programme) areas - Tamaki, Mt Roskill, Northcote and Mangere – has also
been announced. At this stage it is expected that Kāinga Ora will receive
the funding, while project delivery is expected to be in collaboration with the
council group.
26. The
council is still discussing with Kāinga Ora and central government the
implications of this funding in the short-term and on the entire AHP programme.
As such, this item is out of scope of this budget update and will be brought to
a future meeting of this committee.
27. The
AHP projects are not included in the council’s 2020/2021 budgets. As any
funding that comes to council will be offset by additional expenditure, it is
unlikely any debt capacity will be created in the short-term.
28. The total
funding to be provided from shovel-ready is around $350 million as follows:
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Project name
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Council Entity
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Funding status before shovel ready
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Total agreed shovel-ready funding
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Emergency Budget 2020/2021 funding
assumption
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Te Whau Pathway
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Auckland Council
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Unfunded
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$35.3 million
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$5 million
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Auckland Resource Recovery Network*
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Auckland Council
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Unfunded
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$10.7 million
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-
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Ferry Basin Redevelopment - Stage 1
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Auckland Transport
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Funded
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$42.0 million
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$30 million
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Puhinui bus-rail interchange
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Auckland Transport
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Funded
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$22.1 million
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North-western bus improvements
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Auckland Transport
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Unfunded
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$50.0 million
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$10 million
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Auckland Housing Programme
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Various
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Unfunded
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$188 million
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-
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Total
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$348.1 million
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$45 million
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*This is only the shovel
ready component. The council’s $3.4 million contribution towards the
$14.1 million total project cost is allowed for in the Emergency Budget.
Funding agreements
29. After the
funding was confirmed, both Auckland Council and Auckland Transport have worked
with Crown Infrastructure Partners (CIP), the government’s responsible
agency for funding these projects, to finalise the required funding agreements.
30. The funding
agreements operate by requiring CIP to provide funding to the relevant council
entity on the completion of agreed milestones.
31. The funding
agreements for the Auckland Transport projects are between Auckland Transport
and CIP and were signed by the Auckland Transport Chief Executive on 7 August
2020 and sent to the relevant Minister to co-sign.
32. The funding
agreements for the two Auckland Council projects were signed by the
council’s Acting Chief Executive on 6 August 2020 and sent to the
relevant Minister to co-sign.
33. The funding
for the two Auckland Council projects is subject to a number of terms and
conditions; the most critical being:
· The site works
must commence within 12 months and the project must meet agreed milestones at
the specified times. Failure to meet the projected project milestones on
time, is cause for CIP to withhold funding and terminate the Agreement if the
delay becomes unreasonable.
· The projects must
achieve the benefits (i.e. job creation numbers, number of full-time jobs,
social benefits, economic benefits, apprenticeships created, etc.) that council
represented in the application and in the Agreement. CIP can terminate
the Agreement if the benefits information is materially incorrect or misleading
(whether intentionally or not), and/or if material information was omitted from
council’s application/Agreement.
· Auckland Council
must fund any cost overruns.
· The project scope
must remain as described in the funding agreement. There can be no material
reduction to scope without CIP’s prior written consent. Further, there
can be no material increase to scope without first satisfying CIP that the
recipient can fund or finance such additional scope.
Shovel-ready budget update
34. Due to the
proximity of the shovel-ready announcements to the adoption of the final
Emergency Budget, a number of assumptions about what to include in budgets were
made on the basis of publicly available information at the time. These
assumptions will need to be updated throughout the year to match the latest
forecasts.
35. While the
Emergency Budget did include provision for the council’s $3.4 million
contribution for the Resource Recovery Network, it did not include budget for
shovel-ready funded expenditure (and the associated funding) for the Resource
Recovery Network project.
36. It is
recommended that additional capital expenditure of $5.2 million for this
project for 2020/2021 be approved by this committee, aligning to the current
forecasts of the project plan.
37. Budgets
beyond 2020/2021 for all five shovel-ready projects will be considered as part
of the 10-year Budget 2021-2031 (LTP) process.
Tauākī
whakaaweawe āhuarangi
Climate impact statement
38. Ensuring the
council remains financially prudent enables the council to maintain the
confidence of the public and investors. This in turn enables the council to
retain access to financial markets and maintain the ability to use debt over
time to address the climate crisis. Using possible additional capacity to pay
down debt will help maintain confidence and creates additional capacity for the
10-year Budget 2021-2031 when considering climate priorities.
39. The climate
impacts of each shovel-ready project were considered when developing the
shovel-ready list for submission. There are no additional climate impacts in
endorsing funding agreements and agreeing additional expenditure.
Ngā whakaaweawe me
ngā tirohanga a te rōpū Kaunihera
Council group impacts and views
40. Progress
against the Emergency Budget will be monitored across the entire council group.
The approach to how additional funding capacity is used should be consistent
and co-ordinated across the various council entities, unless funding is
provided to a particular entity for a particular purpose.
41. The council
has authorised the Development Programme Office (DPO) to provide central
oversight over all shovel-ready projects where the council group is involved.
DPO will ensure that the programme remains coordinated and achieves the best
outcomes for the council group as a whole. There are no additional group
impacts in endorsing funding agreements and agreeing additional expenditure.
Ngā whakaaweawe
ā-rohe me ngā tirohanga a te poari ā-rohe
Local impacts and local board views
42. Local board
views and preferences were taken into account when the Emergency Budget was
adopted. The monitoring of progress against the Emergency Budget includes
local board budgets.
43. The local
impacts of each shovel-ready project were considered when developing the
shovel-ready list for submission. There are no additional local board impacts
in endorsing funding agreements and agreeing the additional expenditure. The
Development Programme Office will continue to engage with the relevant local
boards when monitoring the progress of the shovel-ready programme.
Tauākī whakaaweawe
Māori
Māori impact statement
44. Māori
impacts were a key consideration in the Emergency Budget process.
45. The
Māori impacts of each shovel-ready project were considered when developing
the shovel-ready list for submission.
46. There are no
additional Māori impacts in endorsing funding agreements and agreeing
additional expenditure.
Ngā ritenga
ā-pūtea
Financial implications
47. The implications
on the council’s budgets are discussed in the main body of the report
above. Approving the additional expenditure for the Resource Recovery Network
will not have any effect on council’s borrowings as this is fully offset
by additional funding.
Ngā raru tūpono me
ngā whakamaurutanga
Risks and mitigations
48. As the
financial year progresses and the COVID-19 situation develops, there is risk
that changes to the wider socio-economic environment will impact on the
council’s financial position compared to projections in the Emergency
Budget. This will require close monitoring to ensure council is able to best
respond to these changes.
49. The key risks
identified in this update on the shovel-ready programme are:
· The
council must pay for any cost overruns on the projects.
· Since
payment is received on the completion of milestones, by the terms of the
funding agreements, the council is effectively financing the projects in the
short-term. If there are delays in receiving funding, or the funding was not
provided at all, this would put pressure on the council’s borrowings.
50. To mitigate
both these risks, council staff have:
· completed due
diligence on the funding agreements to ensure the council can fulfil its
obligations
· worked with CIP to
agree milestones which, within reason, maximise cashflow to be received within
each financial year
· appointed
the council’s Development Programme Office to provide central oversight
over all shovel-ready projects where the council group is involved (including
AHP projects)
51. The council
will also continue to work collaboratively with CIP and other crown agencies to
jointly ensure funding and financing issues do not arise and hinder the desired
outcomes for Auckland and the flow-on benefits to New Zealand as a whole.
52. On this
basis, the council Chief Executive has signed the funding agreements. There are
no additional risks with the Finance and Performance Committee endorsing the
agreements.
Ngā koringa ā-muri
Next steps
53. Finance staff
will continue to monitor current and future cashflow projections and update
this committee when there are further developments.
54. The relevant
project teams will commence and continue to execute the shovel-ready project
plans for each project. The Development Programme Office will begin to monitor
the delivery of shovel-ready works. This monitoring will report back to council
management, relevant committees and Crown Infrastructure Partners as required.
Ngā tāpirihanga
Attachments
There are no attachments for this report.
Ngā kaihaina
Signatories
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Authors
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Nick Bird - Financial Analyst
Tracy Xu - Senior Analyst
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Authorisers
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Ross Tucker - General Manager, Financial Strategy and
Planning
Kevin Ramsay - Acting Group Chief Financial Officer
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