Part 3: Public sector funding for the recovery in Canterbury

3.1
For the public sector, the cost of the recovery is high. The Treasury has estimated that the Canterbury earthquakes caused $20 billion in damage.³⁷ Public entities are expected to pay for much of this cost. The Government notes that it may be some time before the final costs are known.

3.2
In this Part, we look at:

• the total public sector funding required as a result of the Canterbury earthquakes (including funding of the immediate emergency response and for the recovery);
• CERF;
• the funding of EQC;
• the current estimated costs of the recovery to the Canterbury local authorities;
• other sources of public funding for the recovery; and
• risks to the cost and funding estimates.

Total public sector funding

3.3
Figure 3 shows that gross direct costs for public entities arising from the Canterbury earthquakes are estimated to be at least $14 billion (excluding recoveries from reinsurance and insurance).

Figure 3
Total estimated gross direct costs for public entities (excluding anticipated recoveries)

3.4
The most recent estimate of the total cost of the Canterbury earthquakes to the Crown, as outlined in the 2012 Budget, is $13 billion.³⁸ Most of this cost is expected to fall between 1 July 2011 and 30 June 2014. This amount includes the $5.5 billion for CERF, which was set up in the 2011 Budget and $6 billion from the Natural Disaster Fund, which was built up over years through the payment of levies by insured residential property owners.

3.5
The CERF costs are the Crown's share of local government infrastructure, roads, insurance excesses on schools and hospitals, temporary housing, and other policy responses.

3.6
EQC, Southern Response (see paragraph 3.32), and other State-owned entities, and Crown entities are expected to incur the remaining Crown costs.

3.7
CCC estimates its financial contribution to the recovery to be about $1 billion (excluding insurance recoveries and other contributions).³⁹ Waimakariri District Council, Selwyn District Council, and Environment Canterbury will incur millions of dollars of expenditure for the recovery of infrastructure and other assets.

3.8
All of the above excludes many indirect costs of the earthquakes to many public entities. For example, many organisations suffered interruptions to their business and damage to premises, and had temporary accommodation and relocation costs. We have not tried to quantify these costs.

Canterbury Earthquake Recovery Fund

3.9
The purpose of CERF is to provide a mechanism to track the costs associated with the earthquakes in a transparent manner. The fund will be wound up several years after the final costs of the earthquake-related work are realised.⁴⁰

3.10
The Treasury is responsible for monitoring and managing CERF. Individual agencies, such as CERA are accountable for delivering outcomes within any allocations from CERF.

3.11
The funds for CERF come from a combination of reprioritisation from existing public entity budgets and new government funding, which is largely funded through borrowing.

3.12
CERF includes response costs as well as the recovery costs. The fund has not been split between response and recovery, and we have not attempted to separate these expenses.

3.13
Figure 4 shows that, at the time of the 2012 Budget, the two largest allocated costs that CERF covered were local infrastructure and land zoning.

Figure 4
Allocation of Canterbury Earthquake Recovery Fund funding

Source: The Treasury (2012), Budget Economic and Fiscal Update 2012, Wellington, page 38.

Local infrastructure

3.14
The costs allocated for local infrastructure relate to the Government's potential commitment to contribute 60% of the cost of repairing essential local infrastructure. Local infrastructure means freshwater, stormwater, wastewater, sewerage systems, and stop banks. The costs also reflect the Crown's contribution to repairing local roads.

Water, stormwater, and sewerage

3.15
The Guide⁴¹ says that central government will pay 60% of restoration costs for essential local infrastructure after a natural disaster, as long as the local authority can meet the remaining 40%.

3.16
Local authorities have forecast that they will receive about $560 million, 60% of the $940 million of the estimated damage to water, stormwater, and sewerage assets.

3.17
In 1993, local authorities created a mutual fund called the Local Authority Protection Programme (LAPP) fund, so that they could meet their 40% share of restoration costs. LAPP covers 40% of the material damage losses to essential infrastructural assets caused by a natural disaster.

3.18
Only local authorities can be members of LAPP, and they pay annual membership contributions. The contributions, set each year, are assessed using a risk-based formula, taking into account the replacement value of each member's infrastructure assets adjusted to recognise exposure to risk (such as floods and earthquakes).

3.19
The total amount payable by LAPP to Canterbury local authorities is limited by the reinsurance that LAPP had. CCC has disclosed in its annual plan that there could be a shortfall of $196 million from LAPP. This amount is included in the Council's estimated earthquake response and recovery costs.

Roads

3.20
The primary government mechanism for contributing to the repair of local roads and state highways is the National Land Transport Fund, administered by NZTA.

Land zoning costs

3.21
Land zoning costs result from the Government's red zone offer to insured property owners (see Case Study 3 in Part 5).

Costs yet to be allocated

3.22
Reflecting the uncertainty of the cost of future policy options, the second-largest part of CERF are funds that have not been allocated but may be needed. There are several areas of uncertainty, such as the risk of rock falls in the Port Hills (see Case Study 5 in Part 5) and contributing to specific projects in the CBD rebuilding (see Case Study 2 in Part 5).

3.23
Since we began writing this report, decisions about how to allocate most of these funds have been made.

Earthquake Commission funding

3.24
EQC says that liability for paying for damage from the Canterbury earthquakes is uncertain and sensitive to assumptions (such as reinsurance recoveries and apportionment to specific events). The liability will be provided from $6 billion from the Natural Disaster Fund, $4.7 billion from secured reinsurance and a contribution from the Crown in line with its obligation under section 16 of the Earthquake Commission Act to ensure that the Commission can meet all its liabilities.⁴²

3.25
Support from the Crown is necessary because EQC's liabilities are larger than its assets (see paragraph 2.88).

Estimated costs of the recovery for the Canterbury local authorities

3.26
Figure 5 shows that the Canterbury local authorities face an estimated collective $3.5 billion cost associated with the earthquakes. Excluding emergency and response costs, the total cost of the recovery to the affected local authorities is an estimated $2.9 billion.

Figure 5
Summary of costs for the Canterbury local authorities

3.27
Insurance or other contributions (such as the Crown's contribution to local infrastructure) will meet some of these costs.

3.28
Figure 6 shows that the Canterbury local authorities expect to fund $1.013 billion of the cost from deferred works programmes, rates, and borrowing. It is forecast that CCC ratepayers will be liable for almost $1 billion of that amount.

Figure 6
Canterbury local authorities' sources of funding for the recovery

Other sources of funding

The Canterbury Earthquake Appeal Trust

3.29
The Government set up the Canterbury Earthquake Appeal Trust (the Trust) to be the official global fundraiser for the recovery effort of Christchurch and Canterbury.⁴³ DIA is responsible for administering the Trust.

3.30
Trust funds are to be allocated to economic revitalisation, education, environment, alleviating hardship, heritage and culture, spirituality and faith, and sport and recreation projects. The focus is on funding projects that are not already provided for or would take a long time to raise funds for.

Risks to the cost and funding estimates

3.31
By far the largest exposure that the Crown has to costs from the Canterbury earthquakes is through insurance claims. The Crown has exposure through EQC and Southern Response Earthquake Services Limited (Southern Response), the part of AMI Insurance Limited that is now owned by the Government.

3.32
In April 2011, the Government stepped in to support AMI Insurance. In December 2011, IAG New Zealand Limited (part of Insurance Australia Group) successfully bid for parts of AMI Insurance, excluding earthquake-related claims and certain other claims for which a reinsurance claim had been made. In April 2012, this transaction was completed and the Crown took ownership of AMI Insurance. At the same time, AMI Insurance was renamed Southern Response Earthquake Services Limited.

3.33
The net cost to the Crown of settling the AMI claims is uncertain. The Budget Economic and Fiscal Update in May 2012, estimated that $148 million would be required from CERF.⁴⁴

3.34
Southern Response is responsible for:

• settling an estimated $2 billion of claims; and
• that part of a $850 million contribution from EQC for rebuilds and repairs that Southern Response carries out.⁴⁵

3.35
If necessary, the Government will provide further funds to ensure that claims are settled.⁴⁶

3.36
Local authorities have used assumptions to calculate the cost of the rebuilding. The Crown has also used assumptions to estimate costs. These assumptions include land zoning decisions (see Case Study 3 in Part 5), rock falls (see Case Study 5 in Part 5), and damage to infrastructure (see Case Study 1 in Part 5). There is a risk that the estimates are understated and the costs could be greater. We will continue to monitor this.

37 The Treasury (2012), Budget Economic and Fiscal Update 2012, Wellington, page 51.

38: The Treasury (2012), Budget Economic and Fiscal Update 2012, Wellington, page 38.

39: Christchurch City Council (2012), Annual plan 2012–13, page 18.

40: The Treasury (2011), Fiscal Strategy Report, Wellington, page 41.

41: Guide to the National Civil Defence Emergency Plan, available at www.civildefence.govt.nz.

42: Earthquake Commission (2010), Annual Report 2010/11, page 29 (see Note 1, Notes to the Financial Statements).

43: See www.christchurchappealtrust.org.nz.

44: The Treasury (2012), Budget Economic and Fiscal Update 2012, Wellington, page 38.

45: The rest of the $850 million is money that Southern Response does not use for rebuilding or repairing a house. That money goes directly from EQC to homeowners who are not rebuilding or repairing their house but are buying one elsewhere.

46: See the Southern Response website, www.southernresponse.co.nz.