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The NZ Initiative's Roger Partridge makes the case for Auckland Council cashing up many of its risky commercial enterprises and investing in growth-supporting infrastructure

The NZ Initiative's Roger Partridge makes the case for Auckland Council cashing up many of its risky commercial enterprises and investing in growth-supporting infrastructure

By Roger Partridge* 

In New York City, a bottle placed on the curbside for recycling can find its way back into a convenience store, relabeled and refilled, within thirty days.

In Auckland city, a bottle’s destiny is not so enduring. Rather than being refilled it is liable to be reincarnated, and not just as a new bottle. Many of the bottles we put in our blue bins are also used to make glass, wool and, even less nobly, to make base course for footpaths (which means thousands of Aucklanders each day are quite literally walking over broken glass).

In any case, whether it is New York or Auckland, the principle remains the same. When we no longer need the bottle it is recycled to its next best use. And as a result both we and society benefit.

There are lessons in this when we think about our council’s capital assets. Could they benefit from recycling too?

Local and central governments through the ages have collected rates from property owners to provide a mix of social services and social infrastructure. Roads, rail, ports, airports, parks, libraries, and so on have mostly come about in New Zealand through the deployment of ratepayers’ capital that private markets were either not permitted or not able to deliver.

But do we still need our councils to own these assets? Or are there now private funders who could step up off the bench to allow our councils to recycle some of their ratepayers’ capital into more needy areas?

These questions might not matter if there were no other use for the councils’ capital tied up in them – but clearly there is.

National policy statement on urban development at best a half measure

Last week’s national policy statement from the Government will provide something of a spur to Auckland Council to free up more land for the new housing Auckland desperately needs. But it will do nothing to help the Council meet the costs of the new roads and other horizontal infrastructure needed to service the newly built suburbs. Recent estimates put this cost as high as $17 billion.

Auckland Council’s current approach of pre-loading as much of the infrastructure costs as possible onto the developers only contributes to Auckland’s unprecedented affordability crisis. It is part of the problem, not the solution.

The Council also faces constraints with its other usual tools: rates and debt. Auckland’s ratepayers feel bruised enough with the rates hikes that have followed the formation of the Super City. They can be forgiven for this. The amalgamation has hardly delivered the promised savings. It may be super-sized, but it is also super-expensive.

Nor is borrowing an available option. Like many councils, Auckland City is pressing up against the debt ceiling imposed by a combination of the Local Government Funding Authority, Treasury’s Management Policy, and (in Auckland’s case) the Council’s desire to retain an A+ S&P long-term credit-rating.

The recent study commissioned for Auckland Council by accounting firm EY and investment bankers Cameron Partners concluded that the Council has headroom of only about $1 billion under its debt ceiling. Unfortunately, this is no more than the Council needs to give it the financial flexibility to manage unexpected financial events. It provides no solution to funding the infrastructure deficit.

It is no wonder therefore that Labour’s Housing spokesman, the Hon. Phil Twyford, along with The New Zealand Initiative’s Executive Director Dr Oliver Hartwich, have described the new national policy statement on urban development as ‘firing blanks’. Nothing will be built on the new land released if the infrastructure is not there to support it.

It is for this reason that The New Zealand Initiative proposed the use of infrastructure bonds in its 2015 report, Free to Build: Restoring New Zealand’s Housing Affordability. Infrastructure bonds are a mechanism that enables either a council or developers themselves to issue debt instruments (i.e. bonds) to pre-fund the infrastructure costs.  The bonds are then serviced by a special rate on targeted residents over a long term – usually 30 years. This funding technique is used in Houston, which has some of the most affordable housing in the world.

Labour’s Phil Twyford has become a convert to this approach to urban development funding. The government should follow his lead.

Time for some recycling ...

But Auckland Council also has other funding options, and this is where the recycling comes in. As the EY/Cameron Partners study reveals, Auckland City has an enormous balance sheet. The estimated value of those assets is $42 billion, split into three buckets: infrastructure assets ($23.6 billion), Community Assets ($7.6 billion) and Commercial and other Assets ($6 billion).

Many of these assets are legacy assets, and comprise social infrastructure originally developed by the Council’s predecessors – or by central government - at a time when private funding was not available to do this. These include the Auckland port, Watercare, and the Council’s investment in Auckland Airport.

The capital Auckland Council has tied up in these assets could easily be released by selling them to new owners.  Private KiwiSaver funds and the New Zealand Super Fund are just some of the institutions likely to be keen purchasers.

No need for the Council to own risky commercial assets

Nor is there any compelling reason why Auckland Council should retain these assets. Indeed, there are real risks for Auckland’s ratepayers if the Council does. As we have seen with Solid Energy, commercial assets are risky. And even a quick review of the Council’s holdings reveals they are nothing like the diversified portfolio of investment assets a long term investor should want. Why should our council expose its ratepayers to this risk?

Of course, some might object that in recycling its capital out of these assets into new urban infrastructure, the Council would be losing the benefit of the future dividend stream the assets provide. There are three responses to this. The first is that on a sale the Council could expect to be paid the present value of those future income streams. Selling the assets would leave the Council financially neutral.

Secondly, the Council’s biggest commercial asset, Watercare, is prohibited from paying a dividend. So ratepayers get no return on the $8 billion of capital tied up in this business.

Third, the dividend stream is risky. In 2005, the Council earned a dividend of $34.2 million from its 80% holding in Ports of Auckland.  Move on to 2012, with the port 100% Council owned, and this dividend had fallen to just $20.1 million. While the Port’s recent performance has seen this rebound (and then some), the fact remains that commercial assets are risky. When there are private investors willing to take those risks, we do not need our council to expose ratepayers to them.

A sustainable city needs to innovate.  It also needs to recycle what it does not need. With some help from central government, Auckland City could be New Zealand’s first city to experiment with infrastructure bonds. 

But beyond that, it should recycle, and there should be no sacred cows.

Auckland city has no need for its council-owned commercial assets.  Let’s recycle the capital we have invested in them to sustain our city for future generations of Auckland ratepayers.


*Roger Partridge is the chairman of The New Zealand Initiative, which provides a fortnightly column for interest.co.nz.

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18 Comments

The Auckland council could get a huge windfall of money practically at the stroke of a pen. Houses that are freehold title are considered to be more valuable than cross-lease titles. Why not offer home owners the option of changing to freehold for a one off fee of 30K or something? Can anyone see why this would be a bad idea?
This could also result in more people investing in renovations and additions providing more employment etc.

Breaking the law is always the easiest way of making money, Roger.

You seem to be advocating Auckland Council selling all or part of its ownership of Watercare Services Ltd. This would directly contravene s 130 (3)(b) of the Local Government Act which explicitly forbids the sale of a local government organisation that provides water services.

But I keep wondering where this $17b comes from. It has turned into a real bogeyman recently. If that is the total estimate for all the pipes streets etc then remember at least half of that is put in by the developer and passed on in section costs and it has always been so. Another large chunk will be provided again by the developer (section buyer) in the form of development and financial contributions.

Another large chunk should come from central government in the form of extending their own motorway network. Remember that in the recent draft Regional Land Transport Plan the government's share of land transport costs in the Auckland region over the next 30 years was estimated to be 50% of the total required.

If there is a funding problem it is only what is left after you have taken all those other items out.

And, finally, before you get too excited about Infrastructure Bonds, debt is debt no matter what the label is. If AC issue infrastructure bonds they will still count towards the total debt burden. The other thing you have to consider is accounting practices. In NZ, councils comply with GAAP/IFRS and fully fund depreciation automatically creating capital reserves to fund future infrastructure projects. I suspect in Texas they don't. I don't have any problem with infrastructure bonds but in the NZ context they don't, by themselves, solve any problem we currently have.

Thing is, Donald, that the current system - Councils front-loading all infrastructure costs onto homeowners via DC's and other complusory contributions has two fatal flaws in GAAP terms.

  • It mis-matches the expected life of the supplied infrastructure - 50-100 years, typically - with the longest possible mortgage term - certainly not more than 30 years and possibly materially less.
  • It forces homeowners to borrow at current (yes, all right, mixture of fixed and float) rates which tend to have a risk premium compared to TLA borrowing (secured on certain revenue streams). This differential is likely not much less than 1.5-2%.

So the FHB is hit in two different ways at the get-go.

That's the real issue here.

I think the real issue is that there is little evidence of the $17B, nor its makeup. Say it long enough and people will believe it.

Not quite so fast, old friend. There is nothing new about front-loading. The costs of local infrastructure are included in the section price and probably have been since time immemorial. The only thing that is new is that we have invented a couple of mechanisms to add more.

Even that is not quite true either. What you hand over in advance is a capital contribution. You pay for using your infrastructure via rates and opex. Effectively you pay for wearing out the infrastructure (very very GAAP and matching payment and period perfectly) and that money is used to replace the clapped out stuff for the benefit of the next generation.

Of course if you made a capital contribution to a private business you would expect to be paid a dividend and get your capital back one day. When you make a capital contribution to a public entity it literally disappears into the ether within three years.

Need of the hour is to control ever rising house price. For if it keeps going the way it is even council will not be able to do much. As it is the government has passed all the blame on council and running away from their reponsibilities. Not realizing the damage of their inaction. Rental have not yet started to move up but if it continues the way it is thanks to government then very soon 2 bedroom unit will be in the range of $600 to $700 and 3 bedroom house between $700 to $900+. Can you think how the wages of $16 an hour support this type of rent if house price is not controled. Asuming a milion doller unit will need atlease 3% return so rent of $700 is justify and as per current wages of $16 an hour average salary is appox $640.00 less tax appox $100 so nett $540.00 so the only alternate if not staying in a family is to either buy a car or may be a van and stay in that or if staying with partner than x 2 will be appox$1080 n than pay for rent $700 less electricity and water appox $50 and as working will be travelling appox $50 x 2 perweek that is $850.00.So in balance $230.00 perweekwill be for all luxert like food n whatever else u want. Imagine how comfortable we the Kiwi will be. Think redicluse but give it a thought as this will be a reality soon when 2 bedroom unit sells for a million and government does nothing. Just few years back no one could have imagine 2 bedroom unit for a million. It would have been rediclious at that time but very soon will be a reality. Thanks to inaction of governmen, who are only crying supply supply to pass the blame n delay. For them omly supply is important now that is redicluse n can vheck with any expert that supply though very important but by initself will serve no purpose.

The above comment is to say cycle or recycle but if the government has vested interest and for them housing buble is a sign of prosprity than nothing can save the nation. Need leader who have a visionand work for all section of the society and see away from their ivory tower.

Evita, how correct. Government is indirectly promoting poverty and in times to come will have many approaching WINZ for support and unfortunately that will be sign of prosperity for the government. Hope the government realizes and take some action ASAP. Fail to understand how come the so called experts are not able read and highlight or may be everyoune has their on agenda and no one is for the nation.

In latest news I see the Swiss have rejected the universal income proposal by an overwhelming 76%.

There was an economist on Q+A yesterday advocating for a cut back in immigration to address housing.
But it won't happen. The muppets in charge, whether or right, will keep pumping the migration ponzi, because it pumps economic growth, even if it is poor economic growth characterised by low productivity gains...

Like supply, reducing number of migrant is a good idea but need of the day is some tools to control speculation, which the govt is not interested and to delay n not interested in doing anything is playing supply card and runing away from its responsibility n passing the blame to council n than will blame RBNZ but themselves. If the do bot take any responsibility on themselves, why in the first place, fid we elrct them or why did they stood to be elected if want no responsibilities - may be for pers n to rule instead of serving the people of NZ.

Calling this idea "recycling" is a real stretch.
The Infrastructure bond coupon should be paid by targeted rates to make it fair to the ratepayers who are not involved in these new suburbs. In which case it would be little different to the council funding it and charging the same targeted rate.
If the council is coming up against its borrowing maximum, then it should cut back on its less economically useful pet projects.

I am not in favour of selling my assets to rich people who just want to make money from me.
Ports - Pam Corkery's call to charge to stop the sale of POAL
Airport - John Banks sold off a lot of the shares for less than half what they are now worth.
Watercare - keep the prices of water and sewage at the lowest level for the standards we want - no profit thanks Roger.
Risk - managed everyday by Councils.
Get lost!

"Secondly, the Council’s biggest commercial asset, Watercare, is prohibited from paying a dividend. So ratepayers get no return on the $8 billion of capital tied up in this business".

Wrong - the return ratepayers get is the reduced cost of water supply because Watercare doesn't have to return a dividend (profit). Selling off council assets built up with ratepayers money is a short-sighted, short term fix to rectify a problem not of the council's making which would add an extra cost burden on ratepayers.

The National Government could begin to fix the housing affordability issue if they:

1. Remove the tax anomalies around speculation in residential housing versus other investment.
2. Set immigration policy with a regard to what the country's existing infrastructure can support.
3. Implement capital inflow controls to ensure overseas capital is finding it's way into new-builds rather than speculating on existing housing stock.
4. Stop worshipping the ideology of the "market" believing the market is always right. The market will eventually fix the problem but it will be painful, destructive and this outcome is preventable.
5. Stop sitting on their hands and blaming everyone else for an outcome which is due to their policy setting.

To use this "crisis" to tout flogging off the family silver is cynical and opportunist. The long-term result would be a small percentage enriching themselves further at the expense of the rest.

So much hapening still the government believes that their is no housing crisis and still not only no action but also no talk of puting any measures in place to control ever rising house prices except cry of supply which will take few years and by that time, house price will be beyond, if not already.

God Save NZ.

An article like this would have more credibility, or at least some credibility, if it added some real world numbers. Selling the Port seems a favourite idea but with zero evidence. How much does it earn now? How much might it reasonably sell for as a port? What is that return as a percentage? Is that amount greater than the Council's cost of borrowing? Could the port be sold or managed as something else for a lot more and Auckland do without a downtown port? I strongly suspect that if all these questions were answered, the last thing you should do is sell the port as is. Unfortunately current Treasury and government policy makers seem to listen to this simplistic rubbish leading to bizarrely stupid outcomes like Transmission Gulley financing costing 3 billion instead of the tendered price of $850 million.

Current status is that government creditability is so low that hard to believe that they will ever do anyghjng right.

Wish that they prove us wrong though doubtful.

Karma will catch up.