The price tag on Auckland’s underground rail link has increased to between $2.8 and $3.4 billion, up from a previous forecast of $2.5 billion.
The government today signed the heads of agreement, under which it will fund 50% of the City Rail Link (CRL) project.
The heads of agreement outlines arrangements for establishing an independent Special Purpose Entity to deliver the CRL, working with Auckland Transport, KiwiRail and others as necessary.
There is no mention in the government's announcement on whether it will pay half of the $400 million enabling works. The council last year introduced a ratepayer and business transport levy to help pay for the works. There is also no indication how the $100 million a year operating costs for the CRL will be paid for. The council has been keen to introduce motorway toll charges or a congestion tax.
The technical and operational aspects of project delivery are to be carried out by Auckland Transport working to the City Rail Link company.
Auckland accounts for about a third of the Local Government Funding Agency's $6.6 billion in loans, below the 40 percent limit. The city can also raise debt internationally and has a retail bond programme on the NZX debt market.
Despite the announcement, the chances of the cost of the project blowing out were almost a given, as reported by NBR in April.
Research on 44 international rail developments shows the average cost escalation of each project was 45%.
CRL project director Chris Meale told the council’s governing body in March that "conversations on this issue are just starting with the government.
“There is always a risk of a budget blowout, but one of the keys to the project’s four work packages is how we manage, in a construction sense, the risks associated with the project.
“We have tried to structure the project in the best way possible to avoid the known hazards. The real test of the cost will be when the constructors put their cards on the line as they tender for the work packages.”
Mr Meale says the team is itself working out the best assessment it can of construction costs before tenders go out by continually reviewing the project’s designs.
In 2013, the government agreed to jointly fund the CRL 50:50 with Auckland Council but to not provide its share until 2020.
But in January, Prime Minster John Key announced the government was to accelerate the delivery of the CRL by pitching in half the funding two years early.
In June this year, however, he admitted the CRL will “almost certainly cost more than they [had originally] thought.”
A more detailed sponsors’ agreement will be developed in the coming months to give effect to the Crown’s and council’s commitments. The government will start to make the Crown funding available once this is in place – which may be as early as 2017.
Associate Finance Minster Steven Joyce says the agreement between the government and the Auckland City Council is an “important milestone” in the CRL project, a 3.4-kilometre underground tunnel between Britomart and Mt Eden.
“The heads of agreement sets out in-principle commitments from the government and Auckland Council and contains broader funding, governance and risk management arrangements,” he says.
“It also outlines arrangements for establishing an independent Special Purpose Entity to deliver the CRL, working with Auckland Transport, KiwiRail and others as necessary.”
Auckland Mayor Len Brown described the signing of the agreement as an "unprecedented and historic milestone."
Meanwhile, Auckland council member Cameron Brewer says the escalation in the price tag is "exactly what we feared."
"We now know the revised funding envelope, but no one still has any idea of the full and final costs. That will remain the worry for some years."
He says another big funding hole that still needs to be addressed is the $100m plus shortfall that’s required to be found each and every year once the project is complete to keep the 3.4km CRL operational.
Deal to ease pressure on council's balance sheet
The city rail link deal with central government "will take some pressure off Auckland Council's balance sheet," chairman Craig Stobo told a Local Government New Zealand (LGNZ) briefing in Wellington. "We think we've got some capacity for them."
LGFA's lending to 51 councils was 24% higher than in August 2015, though the amount of debt local bodies had taken on was smaller than projected in their long-term plans with some capital expenditure projects deferred for a year.
Stobo said the agency was focused on the fastest growing councils and didn't have any concerns about LGFA's ability to fund capital expenditure programmes.
LGNZ president, and Hastings district mayor, Lawrence Yule says capital spending intentions were typically scaled back from those projected in the long-term plans as councils contend with tensions over rates increases and spending priorities.
"There's an argument that some councils aren't spending enough on capex to repair infrastructure - I think that's a strong argument," Yule says.
"That same view is shared by the Office of the Auditor General - it's not just worrying about councils that borrow too much, it's actually (that) some councils aren't borrowing enough to fund infrastructure planning."
Last December, the Auditor General's report on 2015-25 local authority long-term plans found common weaknesses undermining infrastructure strategies were unclear on the effects of an aging society, lacked analysis to show the financial sustainability and affordability of projects, didn't make clear the long-term impacts of projects, and didn't take a deep enough view of long-term economic activities.
(With reporting from BusinessDesk)
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