property + asset management

Cash flows as rebuild moves into construction

May 22, 2014

OPINION: Steve Wakefield, of the accountancy and financial services firm Deloitte, surveys the progress of the Christchurch rebuild.
Regional economic growth in Canterbury, underpinned by very strong employment figures, is robust and is one of the main drivers behind New Zealand’s growth story.
It’s against this backdrop that last week’s Budget was announced, providing an additional $50 million of operating funding over the next two years for the Canterbury Earthquake Recovery Authority and bringing the Government’s spending and commitments to rebuilding greater Christchurch to $15.4 billion.
The Budget also included targeted spending that makes sense, such as further support of the Earthquake Co-ordination Service and the “$3k to Christchurch” initiative to encourage beneficiaries to take a job in Canterbury.
With the Budget announcement now behind us, what’s the current “state of the rebuild”, and more importantly, how can some of the existing challenges be resolved to ensure a vibrant Christchurch and a long-term sustainable economy in the region?
The rebuild is progressing into a period of accelerating spending, moving from planning and design into the construction phase.
The greater Christchurch area pre-earthquake construction spending rate of around $350m per quarter has now almost tripled to around $950m per quarter. Estimates indicate a prolonged economic boost to Christchurch and New Zealand given the amount of the rebuild investment actually spent.
Low-value repairs under the EQC cap are well advanced, but some of the most complex home repairs and rebuilds over the EQC cap are not well progressed, with some having stalled, causing frustrations for those involved.
New home/replacement home building is not yet well advanced. Fewer than 1000 houses have been built out of the 12,000 to 15,000 needed, but home builders are ramping up, including some using newer technologies to speed construction.
Hopefully these building firms are well enough capitalised and governed to cope with the stresses of fast growth, lumpy work patterns, gearing up to higher work levels, and the inevitable failures of a few poorly-run firms that can’t survive those challenges. Robust cash flow management and risk management are essential in this environment.
The commercial rebuild is well under way outside the four Avenues and is getting under way inside the central city. Reports indicate more than 200 building consents have been issued in the CBD, with numerous office buildings now coming out of the ground, particularly on the west side of the river.
Don’t believe those that say nothing’s happening in the central city. Drive along the Durham St/ Cambridge Tce corridor and you will see numerous projects under way. Retail and hospitality will follow.
The anchor projects are the largest and most complex. Some have started, such as the Justice Precinct, but some key catalyst anchor projects are either stalled or behind schedule, including the Convention Centre. Clear action is needed on this now. Renewed focus on the Convention Centre is needed as a catalyst to long-term hotel development.
Only 1800 hotel beds are available in Christchurch now, compared with around 4200 before the earthquakes. New hotels will also provide hubs of activity for retail and hospitality sectors, and support for the important but struggling tourism industry.
Big challenges remain, including housing shortages, insurance company disputes, Christchurch City Council (CCC) finances, development contribution disincentives, transportation blockages, revisions to the Christchurch District Plan, failures of construction firms, future land use, drainage and flooding problems and more.
However, that is to be expected so soon after New Zealand’s worst- ever natural disaster.
Experts have warned of the risks of cost over-runs, and the need for strong disciplines around procurement, programme management, and world class value delivery, to ensure that the limited funds being spent are used in the most optimal way.
The independent report on the Christchurch City Council finances has been released, recognising a potential $534m shortfall.
This is widely expected to grow considerably, possibly close to $1b, once insurance negotiations crystallise and full costs of projects are known.
Sale of non-core assets is a necessary next step for the council, and focused attention must be applied to rationalising land, buildings and trading assets.
Like any government or business enterprise, the council must recognise its financial realities, and ensure all the assets on the balance sheet are working as hard as possible for the ratepayers.
Further ongoing change is needed, and the environment calls for innovation. Potential solutions to these challenges include:
Intensification of land use and increased use of modular housing.
Reducing council dependence on developer fees and waiving local authority development contributions for developments where infrastructure is already there.
Master transport planning, especially key corridors (especially northern access).
CCC refocusing on citizen/ customer service, financial restructuring and asset optimisation.
Using innovative and collaborative new models between government, NGO’s and the private sector to solve social and affordable housing investment needs.
Planning the longer term transition from CERA to CCC.
Boldly stating an inspirational vision for a world class future. This could include, for instance, turning the red zone around the Avon River into a park in the city that includes an international rowing course, multi-sport facilities, wetland development areas and an integrated flood protection management lake system, like the Penrith Lakes development outside Sydney.
Investment in the future beyond the earthquake recovery. The University of Canterbury Science and Engineering buildings are now getting under way, but the Lincoln University rebuild and the proposed Agri-tech hub need certainty from Government commitment.
Details of the Innovation Precinct need to be developed and communicated to attract and retain the small innovative firms that are currently part of the thriving sector of around 500 hi- tech businesses in the city.
Overall, Christchurch and New Zealand can be pleased with how the Government has supported the disaster response, earthquake recovery, and the early stages of the rebuild.
Continued commitment and further high-quality public and private investment are needed to secure the best long-term outcomes.
Steve Wakefield is a partner at Deloitte New Zealand

– The Press