The Christchurch City Council needs to think about selling assets to help pay for rebuilding the quake-hit city, the government says.
And councils around the country are being urged to look at funding options other than raising debt or rates.
Local Government Minister David Carter said on Sunday that while the decision to sell assets to pay for infrastructure and council services was for councils to make, not central government, he would support the Christchurch City Council doing so.
Prime Minister John Key said on Monday morning that councils needed to consider alternatives to ever-lasting rates rises. They might therefore want to consider changing the balance of the assets they owned, he said.
The government is now pressuring councils to raise rates in line with inflation and population growth after general annual rates rises across the country over 6% during the last decade.
It is introducing legislation to make councils only provide what they consider are core services, like infrastructure, and leave non-core services, like improving their region's NCEA results, to central government.
Strong balance sheet
Speaking on TV ONE's Q&A programme on Sunday, Carter, who took over the local government role from Nick Smith earlier this year, said the Christchurch City Council faced an extraordinary situation in terms of rebuilding costs. The council's balance sheet was strong with a number of assets.
"But from a ratepayer point of view, from a ministerial point of view, I think the Christchurch City Council needs to think carefully about rationalising some of those assets to help it meet its huge challenge with the rebuild of the city," Carter said.
"I think they’re in a very similar position to central government. If they find a way where they can sell down some of their assets to maintain the funding, to deliver some other infrastructure required within in their communities, in principle, I would support that. But having said that, it would still be a decision for local councils to make," he said.
"I think if you take a museum, for example, [a council] may decide that that is a fundamental asset that they need to keep for the benefits of their community. But if they had shares in an airport or shares in a port company, they may well decide they could sell down some of those shares to help them provide the infrastructure which their community’s demanding of them."
On TVNZ's Breakfast programme on Monday morning, Key said councils needed to look to alternatives to increasing debt or raising rates. Christchurch was a good example of where this could be done.
"They're in a very unusual situation of course, but they are going to be rebuilding that city. There'll be a huge number of significant assets they may want to completely own, or fund in a slightly different way. They might want to consider that balance of those assets," Key said.
"That doesn't mean they should change it, it just means they should have that conversation and be open to that," he said.
"I don't think it bothers the government so much. What it is, is a matter for the ratepayers. They need to decide whether they want to fully fund everything through debt. From our point of view - the government's point of view - we've got the mixed ownership model. We're wanting to sell down to a 51% majority stake from the government across those five assets because we don't want to raise a lot more debt."
'Ludicrous'
Labour Party SOE spokesman and Christchurch-based MP Clayton Cosgrove said Carter's comments on Sunday "proved beyond doubt central government’s intention to see Canterbury’s assets sold off."
“This issue was raised over a year ago when the CERA legislation was before Parliament. This was not a part of the deal. The Minister’s rationale - that councils should sell down infrastructure to survive - is ludicrous," Cosgrove said.
“These are revenue generating assets which have sizable returns for the whole community. Selling these off to fulfil National’s agenda is foolish," he said.
"This is a nationwide issue. Selling revenue generating highly profitable assets which are providing a solid rate of return at a local level is about as logical as National’s plan to sell our revenue generating state-owned assets.
“Canterbury’s profitable assets have kept local rates in check. To hear the Minister say that he would rather give up that revenue stream to pay for the disaster that has befallen our City makes a mockery of the Government’s commitment to Canterbury’s recovery," Cosgrove said.
34 Comments
"I think if you take a museum, for example, [a council] may decide that that is a fundamental asset that they need to keep for the benefits of their community. But if they had shares in an airport or shares in a port company, they may well decide they could sell down some of those shares to help them provide the infrastructure which their community’s demanding of them."
In other words, you can keep the things that don't make money. Boy, they're certainly revealing the agenda now.
Aotearoa – owned by foreigners.
Ohh yeah – I can see that right here in Kaikoura - megalomania – delusions of grandeur.
We are now building a 4.4 million (!!!) Museum/ library/ council complex. The few thousand ratepayers are probably not able to support it, so a Chinese Food chain will help us out in 2014 – great! By 2020 we see the renaming of the museum to “Mao-Tse-Tung Museum” and a Chinese restaurant will replace the use of the council complex.
Stop megalomaniac economic ambitions by the government.
Passivity is fatal to us. Our goal is to make the enemy passive.
Mao Tse-Tung
The smartest thing that councils should do is put these assets beyond the reach of our greedy manipulating politicians and their shady friends. A structure such as the Auckland Regional Services Trust and Vector would release some capital, preserve the asset in public hands and return the income stream to the public owners. It even confers the the claimed benefits of mixed ownership so how could National object?
Prime Minister John Key said on Monday morning that councils needed to consider alternatives to ever-lasting rates rises. They might therefore want to consider changing the balance of the assets they owned, he said.
The government is now pressuring councils to raise rates in line with inflation and population growth after general annual rates rises across the country over 6% during the last decade.
It is introducing legislation to make councils only provide what they consider are core services, like infrastructure, and leave non-core services, like improving their region's NCEA results, to central government.
This boils down to getting rid of over qualified and hence overpaid middle class professionals spending scare capital to defend their percieved entitlement when the national income to support such utopian aspirations is absent.
Do I feel a MFAT moment in the making? - I sure do - the middle classes will fight this to the end. Both left and right.
Doesn't it seem ironic that Key's government voices such concern for the higher taxes being imposed on us by local government - while at the same time they raised GST by a factor of 20%; charges on prescriptions by 66%; repayment on student loans by 20% ....
This has nothing to do with the rates and all to do with;
http://en.wikipedia.org/wiki/Accumulation_by_dispossession
This government is getting more and more controlling of everything - itis almost that they don't believe anyone else could do as well as them, so they have to take over.
Has anyone ever produced figures on assett sales - showing what the income stream is and how many years it takes to be worse off after the initial cash injection verses the reduced income in the following years?
7.5% is harsh now, but less now and more in the future is no better either.
I disagree , Coucils should cut their cloth like the rest of us in New Zealander, and live within thieir means . There is a huge amount of wasteful expenditure by councils, and I pay for this through my rates .
Some coucnil decisions make no sound business sense at all and are just dumb, such as bringing soccer teams here .
Its a multi dimensional question , however ,
Assets should not be sold to meet Current expense deficits ,
BUT for Capital expenditure it could make sense, to sell the Port Company and build new infrastructure with the proceeds.
I dont really understand why a City Coucil in running the Port , given that local and national Governments seem incapable of running businesses without losses being subsidised by the rest of us .
While I support council asset sales (there are inherent conflicts of interest involved in council ownership of businesses and they tend to do a poor job of it) I am concerned by the implication that this is a way for the councils to fund their ballooning budgets.
As Hugh P has said time and again, councils across the country have lost control of their costs. Selling assets is only a stop-gap measure; what happens once they're all sold?
They will have only three options: cut expenditure (I think I just saw a pig fly past the window); raise rates/fees (see Olly's piece on council building charges); or borrow by the bucketload (which the LGFA was created to facilitate).
For this reason I am supportive of some sort of legislated limit on council spending increases, as it seems unfair that they can tighten the screws on already struggling businesses and households to cover their own profligacy.
...there are inherent conflicts of interest involved in council ownership of businesses..
Well there are definitely conflicts of interest where the central government push to see council's privatise their assets are concerned - see;
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10633963&pnum=0
And here note the current council owned businesses exempt from such central government tax;
http://en.wikipedia.org/wiki/Council-controlled_organisation
Council-controlled organisations pay tax to central government, unlike the internal activities of councils which are tax-free
And compare the exemptions list with the council-owned businesses which central government is now targeting it's "sell" comments toward.
A case of Peter (CG) robbing Paul (LG)?
Thanks for pointing that out Kate, looks like there are some ulterior motives in this from central government (surprise, surprise).
What I meant by conflicts of interest with regards to council-owned businesses (this applies to state-owned enterprises as well) is that the business goal of profit maximisation often conflicts with the political goals of the council.
This is why New Zealand has about a zillion ports too many - they're mostly owned and heavily subsidised by councils. Globally, airports and airlines also tend to have this problem.
Even though the central government stands to benefit financially from this, that shouldn't overshadow the fact that getting these companies out of council hands would benefit the New Zealand economy.
However, it should not be seen as a way for profligate councils to pay their bills.
...the fact that getting these companies out of council hands would benefit the New Zealand economy.
But I still don't understand what you see those benefits to be?
Is it just a fundamental ideological benefit (i.e. they will perform better under private ownership?) or are you talking about debt retirement being more fiscally advantageous than the dividend stream? or something else?
Each asset is different. Personally, I'm quite happy to live within a council boundary where the water reticulation assets are currently not in a CCO - as the community in essence gets their water services delivered (central government) tax free.
The benefit is we won't be pouring so much capital down the drain on loss-making projects.
In private hands when a company/investment is losing money they pull the pin pretty quickly. However, governments (and councils in this case) can continue to extort money from profitable sectors of the economy to prop up these loss-making entities ad infinitum.
This has got nothing to do with debt retirement/dividend streams or anything like that, nor has it got anything to do with the performance of individual entities. It is a more fundamental issue, one that you can only grasp when you understand the different incentives involved in state v private ownership.
Quite apart from that, there is the moral argument: why is it ok to steal people's money to spend it on companies they have no interest in investing in?
So you're more talking about loss-making 'public good' assets - such as libraries, swimming pools/complexes, art galleries and museums and sports stadiums - that sort of thing ... as opposed to profit-making assets, such a power companies and ports.
And the point being - no one wants to investr in these sorts of non/poor performing assets - hence the 'public good' distinction.
The debate shouldn't be on what assets should/should not be owned by a local authority, but rather what citizens consider to be a necessary 'public good'.
our local council owns a rugby stadium as well as countless club rugby grounds,soccer grounds etc.plus shares in the ownership of a hotel,entertainment centre and who knows what else
Time to get back to basics
rental return on a 52 million dollar stadium is approx 520k.
I agree with you Andy. To the tosser who came around to my parents' house unannounced and forced my mum to cut down the beautiful vine on the pool fence because "a child could use it to climb the fence": you deserve to be on the dole, and the country would be a better place for it. Actually, the dole is too good for you.
generally, I am 90% against assets sale but having worked in the old Manukau Council , now all part of Auckland Council. They used to own a large number of commericial properties and leased out to everything from local fish and chip shop to major office block.
Is that core council business to serve the community as landlord??? They were smart enough to split it to a seperate CCO to avoid community backlash but still 100% controlled by the council.. may be some assets sale is a good idea to get back to its main objective.
Democracy has failed councils, the land owner should be the one who votes for local councilors not the residents or it should be like the UK, the tenant actually pays the rates.
It would lead to much better control over spending and the halting of white elephants, grand flower shows and other waste. As people would be more attached to the spending.
Dunedin has managed to put a nouse around itself so bye bye to the 150 sections the DCC purchased at Jacks Point to bail out friends on the council - truely criminal investment
It seems like an odd fight for Key to buy into when he has his own battles with asset sales but he is probably right. Just because something is in public ownership does not mean it has to stay there forevever.
If councils own assets of value but not integral to their core activities ( such as ports , airports commercial property and land ) and they want to purchase more assets ( such as drains ) it might be economic to flick off the existing stuff to pay for the new stuff rather than taking on more debt or raising rates. No doubt 7% compounding rate increases are creating hardship.
Probably not as sexy for the councillors to gaze at their new and underground sewers as a big flash airport but the ratepayers might be better off. The airport will still be there and raw sewage wont be bubbling up into the streets anymore. Depends if the return on the existing assets is higher than the cost of servicing debt.
Incidentally, I dont think the Government is mandating rates go up in line with inflation and population growth. They are trying to stop them going up any higher.
The new bridge maintenance cost shoud be paying out of their incomes i.e. rates.
In the scenario, where they want to keep $10m in port share and still going to build the bridge. They will have to borrow $10m and then paying loan interest + bridge maintenance out of rates income and profit/loss on the port shares
So dear chairmen you are saying that they will sell port shares AND rates will increase. I guess my point is that this sort of thinking is still not within the relms of reality. Simply we can't afford the damn bridge, port sale or not.
Of cause this is central governments current thinking with its own selldown and is simply going to require increased tax or borrowing so nothing new really.
I am saying if they keep the port shares, the rates will increase more. Rates increase is reality regardless.
The main point here is what is the purpose of the council? Are they there to provide basic services such as Library, collecting rubbish, water, parks etc... or are they there to buy and sell shares, build up assets and provide basic servies on the side line?
Libraries aren't a "core" infrastructure service - that's the three-Ws (water, wastewater and solid waste (rubbish)) - so this is where the 'public good' argument comes in. With the advent of the internet - free access to information online - the question of libraries as a necessary public good perhaps needs a re-look.
Did anyone see that clown from Auckland's "Heart of the City" on Breakfast this morning commenting on council asset sales. He obviously was against it and any idea that councils should be fiscally prudent.
"Austerity is so yesterday". He actually said that, pointing to the G8 meetings and the proposed solution for Europe as a mdel for Auckland. Spend, spend, spend. Tax, tax, tax. His mantra was that Auckland super city needs to look at new sources of income such as road tolls and local service taxes as a means to paying for all the stuff they want to build. No thgought to the fact the same people who pay these extra taxes are largely the same people who pay the rates already.
I use a household analogy when I think of the Auckland supercity plans. The household earns $100k and fairly grumpy employers (ratepayers). They have a $400k mortgage, share in a couple of companies worth $30k. They want to buy a new car (rail system), boat (superyacht terminal), extension to the house and new kitchen but also they need some fairly major repairs and renovations done to the house. Do they:
a) ask their boss for a pay rise when he is pretty unhappy with their work anyway, b) slap it all on the mortgage on the assumption the payrises will always keep on coming in ever-increasing amounts c) sell their shares d) get a second hand runaround, and do the repairs that need doing but scrap the idea of a boat and extensions cause they realise that would put them finincially at risk.
I'm pretty sure the boss and the bank manager will be getting the call. I hope the boss fires them.
If a council had 10 million dollars and needed a new bridge costing 10 million dollars, how would the ratepayers feel if the council borrowed 10 million to build the bridge and put the cash into an investment of some sort?
I bet there would be a new council almost immediately but it is actually the same decision as to whether to retain an investment already held. Councils tend to have these sorts of investments because they were originally instrumental in getting the port or airport built in the first place . They felt quite rightly at the time that their town or city would be better off with a port and no one else was going to build one. Having got it established it could be argued there is no longer a need to own it.
A corporation mght be better to borrow for the bridge bcause they would get a tax deduction for the interest expense but a local body doesn't. Neither can they use the franking credits for tax paid by the business they invest in if it is a company ( such as Auckland Airport )
Horses for courses but there is often an assumtion made that investments councils hold in trading activities are risk free , and not many will be.
A vexed question, asset sales.
But as a grumpy old ex County Treasurer, and an MBA, I'd have a careful look at which assets, their present cash flows, and their futures.
It's not beyond the realms of possibility that airports will have a thinner future with $200/bbl oil, so selling them off to Infratil now might not be such a bad thought. And less international travellers won't do wonders for convention centres. Ports OTOH should be just fine as long as they allow for sailing ships or if NZ lets in the nuc-u-lar fleets, if one takes a James Howard Kunstler view of the coming times.
But to expect Councils to come up with somefink as sofistercated as a net-present-value analysis, is shurely asking a bit much of their cardigan and white-sock brigade, no?
And there's the awful variable of discount rate, in a world bifurcated between ZIRP and Spanish Bonds....
Yes WayMad you have a point, beware who knocking at the door. The Oz example with local flavour is when the Councils were sold those fine CDO products (fine names at least).
Grange went round, got mandates to advise councils on fixed interest portfolio mgt. Then advisedoffered them opportunity to go the CDO way.
Grange Securities in 2007 was sold to Lehman Bros, as they were Lehman Bros manufactured product..
Note to self: The Oz councils are still in court looking for their (ratepayers) money back. The cardigans had no chance......
Google Search where are they now:
-
Mark Grant - Whyte & Coaches
www.whyteco.com.au/mark_grant.html
Mark co-founded the bond trading house, Grange Securities, which was acquired by an American investment ... CEO Melbourne Fay, Richwhite Australia Ltd ...
-
Moss Capital - Senior Management
www.mosscapital.com.au/index.php?option=com_content...
Prior to Moss Capital, Glenn co-founded Grange Securities and led the team in ... Interest at Fay Richwhite and Head of Securities Trading at Challenge Bank.
-
Michael Clout - Australia | LinkedIn
au.linkedin.com/pub/michael-clout/6/968/245
Sydney Area, Australia - Head Trainer at Michael Clout Racing
Divisional Director Fixed Income and Equities at Grange Securities; Senior Manager Fixed Income ... Senior Salesman Fixed Income at Fay Richwhite Securities ...
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.