The NZ Super Fund, eyeing Auckland’s proposed light rail network, wants a nationally significant infrastructure regime to ‘level the playing field’ for mobile international capital

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By Gareth Vaughan

The New Zealand Superannuation Fund, which has put its hand up to design, build and operate Auckland’s light rail network with a Canadian partner, wants the Government to introduce a nationally significant infrastructure regime offering tax concessions to “level the playing field” for mobile international capital, CEO Matt Whineray says.

In a submission to the Tax Working Group, the Super Fund says such a regime should offer a tax rate of half or less the current 28% corporate tax rate for a meaningful part of the life of the asset. Additionally there should be no further tax impost on profit distribution to either domestic or foreign investors, and full deductibility of third party non-recourse funding should be included.

Should a capital gains tax be introduced, the Super Fund says nationally significant infrastructure should be eligible for an exemption on exit. Additionally the Super Fund wants the ability to fast track required regulatory approvals such as Resource Management Act approvals, and for foreign skilled labour to be allowed to be used to help with rapid construction.

“Other jurisdictions, most notably Australia given its proximity to New Zealand and therefore competition for capital and resources, have dedicated tax regimes to support and incentivise nationally significant infrastructure projects. These jurisdictions provide long-term certainty for investors and tax settings to encourage investors, which ensure that the tax environment does not act as a barrier to investment,” the Super Fund says in its submission.

In a Double Shot interview Whineray told that rather than make these ideas up itself, the Super Fund has learnt from other countries.

“And what we’re really saying with this is we as a country have a significant amount of infrastructure build in front of us, that has got to be paid for somehow, and it can’t all be done necessarily by central and local government.”

“We’re not different from other countries around the world – you look at Australia, the US, various others. So in a sense we’re competing with those jurisdictions for capital to come in and build that infrastructure for us and provide the efficiency benefits that infrastructure brings,” says Whineray.

 “If you look at those other jurisdictions they have provided for these types of things. And really they’re focused not on brownfields stuff that exists, so not on giving someone a concession to own something that someone else has already built, this is about large, nationally significant Greenfield [projects]. You’re bringing new money in, you’re bringing new technology in, and you’re building new stuff. Not just buying some old stuff,” Whineray says.

“This is about saying ‘can we level the playing field for that capital’ because this capital is very mobile. It will go to where it gets some certainty. And that’s a big issue, having some clarity for the life of what are very long projects. Because one of the biggest issues for infrastructure investors is finding that the rules of the game have changed after you’ve started playing it. You go in there you build this thing, you’ve got, it might be a 30 year life, it might be a 50 year life, it might be a 100 year life, and suddenly something changes and someone says ‘oh no we’ve got new tax provisions for this type of thing,’ and the whole value changes.”

“Or there’s a regulatory change, and we’ve seen that in developed market jurisdictions around the world – like Australia and Norway. These are developed countries that you would say are pretty low risk, low politically risk countries,” Whineray adds.

“So what this is trying to do is say ‘hey let’s try and present ourselves in New Zealand in a light that’s comparable to these other places because we want to attract skilled and deep pocketed investors to come and help us solve our infrastructure problem’.” 

‘A public investment approach’

In May the Super Fund made an unsolicited approach to the Government on the proposed Auckland light rail project. The Super Fund has partnered with Canada’s Caisse de depot et placement du Quebec (CDPQ), which has US$238 billion under management and is developing and building the Montreal light rail network. Transport Minister Phil Twyford estimates the Auckland project will cost about $6 billion, making it the biggest transport project in New Zealand history.

Currently Whineray says the New Zealand Transport Agency (NZTA) is running a process to decide which form of procurement it will choose. The Super Fund has proposed what Whineray calls a public investment, as opposed to a public-private partnership (PPP).

“That’s where we would partner with whichever the government body is, it could be NZTA, it could be another ministry, and really develop the project. We would provide the equity – us plus CDPQ, we’d bring in technology and new ways of doing the construction to assist it, and we would own it over the really long-term. So it’s a different model from the traditional PPP,” says Whineray.

This public investment concept is competing against a PPP approach, he says.

“NZTA at the moment, rolling through to Christmas, is trying to decide which of these procurement roads it goes down. We’re participating in that process, we’ll see what the outcome is,” Whineray says.

If the Super Fund and CDPQ are ultimately successful, Whineray says they would be long-term owners, looking at the life of the asset.

“That [the Montreal light rail network], is a 100 year asset. They [CDPQ] expect to own it through that. We think in that same way,” says Whineray.

In terms of the return the Super Fund would expect to earn from designing, building and operating the light rail network, Whineray says it’s a long way from determining this.

“We’re still in this decision of which procurement model we go down before we get into ‘well let’s really define what the project looks like.’ But for us the return needs to compensate us for the risk that we take. So we look at what will we sell to fund this, we’ll sell some combination of equities and bonds. So what do we think we’ll earn on those, and is there any concentration as a result of investing more in New Zealand that we think we ought to be compensated for? So we’re still a long way from picking a number and saying ‘this is what it is.’ We’ve got a whole discussion to go with the Crown on how to do that.”

‘It’s an acronym to have us be taxed’

In another submission to the Tax Working Group the Super Fund argues that ideally it should be tax exempt, pointing out it’s the only sovereign wealth fund taxed in its home jurisdiction. (This is an issue discussed with Whineray’s predecessor Adrian Orr in 2015).

Whineray says the Super Fund will be meeting with the Tax Working Group, which is chaired by its political father Michael Cullen, to discuss its submissions next month.

“We think it’s an acronym to have us be taxed. And it really highlights the issue of it when a government stops contributions. Because what that leads to is continuous withdrawals from the fund, and that has not ever really been the concept of the fund. The Fund is a savings fund, it’s a buffer fund, it’s putting money aside,” says Whineray.

“What we experienced over the last nine years is a significant outflow from the fund. That’s not saving, that’s using it as a withdrawal mechanism.”

When contributions are being made it matters not so much that tax is being paid. However there’s really no good reason to have us be taxed. There’ll be rationales proposed at the time, but ultimately it’s taking money out of one pocket for the government and putting it in the other pocket,” Whineray says.

“ACC [the Accident Compensation Commission] doesn’t pay tax. [I’m] not really sure what the rationale of that distinction is. I don’t think I’ve ever had anyone explain that to me.”

“We’re looking forward to having a chat to the Tax Working Group and putting that position, and hopefully we can stop talking about this. I’d love to,” Whineray says.

The Super Fund’s annual report notes that since its inception, the Government has contributed $15.38 billion while the Fund has paid the Government $6.42 billion in tax. In effect this means 42% of what the Government has contributed to the Fund has been returned in tax.

Government contributions to the Super Fund were suspended by the National Party-led Government between 2009 and 2017. In December last year contributions resumed, with the Super Fund receiving an initial $500 million in its 2018 financial year. Contributions will increase over the next four years, with $1 billion planned for 2019, $1.5 billion in 2020 and $2.2 billion in 2021. 

*This is part 2 of a two part interview. Part one is here.

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