Auckland Council received the reports of the 2 consultancies investigating alternative funding & financing yesterday, and councillors went into a workshop on them today. Both reports, both about 130 pages, work in a low-key way through many small possibilities and a few big ones, without a magic solution jumping out.
Asset sales are considered – mainly all or part of the council’s Auckland International Airport stake, and possibly leasing Ports of Auckland Ltd’s operations to earn more than the present dividend flow.
But the asset sale – or ground-lease increase – most likely to be attractive to non-golfers and anyone living outside Remuera was the potentially huge increase in returns from the Remuera Golf Club, which Ernst & Young’s team gave as an example of sports clubs privatising public land for private benefit.
Of course, before everybody from outside Remuera leaps with joy at this prospect, they must also recognise that the same measure might be applied to facilities in their own community.
I’ve worked through the reports of Cameron Partners (first) and Ernst & Young below, with links to the reports on the council website at the foot. Each was prepared independently of the other and, although some comparisons between ideas might be made, they’re not directly comparable.
First up, Cameron Partners provided definitions of the 2 central words in this exercise:
- Funding is how the project will ultimately be paid for
- Financing is the way in which the money is raised to undertake the project.
Cameron Partners said the council’s debt headroom – the capacity to take on further debt – was about $1 billion over current debt. Cameron Partners said after discussions with council management headroom of $500 million-1 billion was being maintained.
Cameron also noted that Watercare Services Ltd & Ports of Auckland Ltd were excluded from the Local Government Funding Agency Ltd covenant.
Cameron Partners said: “Our intention is to provide the council with a set of broad options with considerations & examples for each. This approach will allow the council to review and (if appropriate) prioritise certain identified areas for deeper investigation. All analysis is necessarily high level. In particular, valuations should be regarded as broadly indicative only.”
First, the caveat:
- Auckland Council’s core business is to ensure delivery of certain key services & outcomes. We consider that it owns & controls certain assets to facilitate this and does not own assets for purely financial returns.
Then, what did they look at as possible earners:
- Community assets, parks & reserves, golfcourses.
Potential market value of community assets is potentially much higher than current book value, but there’s no summary or analysis of the potential value in alternative use. However, parks & reserves were valued at $15-20/m² for a total $4.5 billion, whereas surround housing land was valued at up to $1000/m²: “Releasing as little as 5% of this land could potentially equate to $2.25 billion.”
Leases might prevent immediate monetisation of golfcourses, which could otherwise reap large sums. The council owns 13 courses valued at up to $61 million. “If the top 4 by market value – Remuera, Chamberlain Park, Pupuke & Takapuna – were made available for housing at the values of surrounding land, with 30% reserved for public spaces etc, the estimated value obtainable is $1.4 billion.”
Areas where Cameron Partners looked at divestment were if the council had no ownership or control imperative – simply a commercial investment earning a market return, and where a higher-value use was almost certainly available.
Cameron Partners saw opportunity for divestment of the Auckland International Airport Ltd stake (reducing it from 22.4% to a full takeover blocking stake of 10%), commercial parking (the council doesn’t use its $153 million of carparks as a policy tool, and earnings from non-cbd carparks are low), its $328 million diversified asset portfolio, housing for the elderly (the council could contract directly with the private sector to deliver) and marinas (no market failure apparent). There were numerous to contract with Ports of Auckland Ltd without owning 100%, as now, but Cameron Partners noted it was a key region asset with environmental, health & safety and cruise as important factors.
Whereas many will argue that the council should retain its assets, Cameron Partners argues that ratepayers deserve a better return from the $7 billion of the council’s total $42 billion of assets that are debt-funded.
Using the council’s borrowing rate as the hurdle rate unjustifiably favoured retaining higher yielding assets.
2 other factors made ownership preferred over alternatives. One was a focus on capital solutions rather than those that would increase expenses (eg, ownership versus leasing) because expenses were scrutinised more closely and no cost of capital ruler was applied. The other was the strong incentive not to sell assets at ward level – because proceeds typically went into the general council coffers.
On PPPs (public-private partnerships), Cameron Partners said they weren’t a funding solution: “A project without external cashflows will require public sector funding; a project with external cashflows may be capable of attracting funding from other sources.”
While PPPs don’t create financing capacity, they have the potential to offer financing flexibility: The council could lock in payment streams to provide budget certainty, it could access very long-term financing, and cashflows could be manipulated to best suit its requirements.
Cameron Partners said council outsourcing was low, and general market experience suggested potential for more. One of the reasons the council gave this year for an increase in staff numbers was that it took a number of services inhouse – reducing outsourcing.
Infrastructure makes up $26 billion of the council’s $42 billion of assets, and Cameron Partners said such assets typically didn’t attract an external revenue source that supported their value. Major infrastructure asset projects were well suited for partnership arrangements such as PPPs, but the major benefits were in procurement, not financing capacity.
Cameron Partners argued that the council should adopt an opportunity cost framework: “The decision to retain ownership of an asset should consider the alternative use of the capital involved.”
On Ports of Auckland, Cameron Partners said it was impractical to consider a sale or part-sale until the council review of the port was completed: “The uncertainty regarding business plan & valuation would likely see a material discount to value.”
Cameron Partners saw port consolidation as an issue which could be managed by retaining a share of the operations business or holding decision rights. A lease structure could be created so lese payments replaced dividend cashflows.
In its conclusion, Cameron Partners noted that the council was a large owner of office space, but said there was no strategic imperative for this: “The ownership decision appears to be based on using the council’s borrowing rate as a proxy for the cost of ownership. We believe this approach is incorrect and leads to poor asset decisions.”
Ernst & Young
Ernst & Young identified 18 general options, each with at least one Auckland Council example or case study. The first of these was to consider the golfcourses, starting with Remuera.
EY said council-provided land for sports & recreation often became the exclusive domain of the sports or community group “which creates property rights unscrutinised by the council”.
As one example, EY said: “Remuera golfcourse is a private club and the land it occupies could have a market value of about $275 million if used for other purposes. Rental from this course for the land only equates to $130,000/year. This represents a significant subsidisation to private interests and raises questions about whether at least parts of this asset – the land the golfcourse occupies – could be considered for higher value uses. A fair market ground rental for this property would likely be in excess of $16 million/year, with renewals on a 7-yearly cycle.
“We pass no judgment about whether this is the ‘right’ use of this land. However, we assert the Auckland public I likely to be unaware of the significance of this subsidy.”
EY suggested 2 other areas for investigation in the ‘asset health check’ part of its report:
Viewshafts: It asked if the opportunity costs of minor relaxation of these rules & requirements were well understood: “For example, Auckland Council recently noted the net cost of the Mt Eden viewshaft to be potentially $440 million.”
Community loans: It said there were numerous instances of sporting clubs defaulting on loans from the council: “Increased transparency would make these subsidies transparent and potentially improve consideration of how appropriate these loans & associated writeoffs are.”
EY suggested adopting Treasury’s better business case disciplines, or something similar.
It also suggested a contestable infrastructure acceleration fund, focused on investing in & financing priority infrastructure projects. It would ensure any asset optimisation programme proceeds are ring-fenced to allow benefits of asset recycling to be realised.
In its assessment of selldowns of major assets such as the port & airport stake, EY also considered council-controlled organisations (CCOs) because of their size & potential commercial value. “We have not done a full root-&-branch investigation of CCOs, but we think there is considerable value from rationalising some functions, a consistent focus on commercial disciplines and a proper alignment of incentives.”
On sale of the 22.4% airport stake, EY suggested the council “would better achieve the vision for Auckland by divesting its shareholding and reinvesting the funds in interests that better enable the achievement of the Auckland vision, including paying down debt, reducing rates or accelerating infrastructure investment”.
EY looked at the Auckland Energy Consumer Trust shareholding in Vector Ltd, now 75.4%, and suggested it could be sold down to 51%, retaining majority and providing the council with money to pay down debt, reduce rates or accelerate infrastructure. At $3.16/share, that could provide $768 million.
On Ports of Auckland, EY said if the council obtained a value of $2 billion for a lease, interest cost savings less foregone dividends were likely to be worth $414 million over the life of the long-term plan.
EY gave the Northcote shopping centre as an example of land that might be sold – leasehold, strata-titled, little ongoing investment due to the nature of the tenure. But the report also noted that the council already had rigorous processes in place for surplus land disposal.
On Watercare, EY said it was hard to assess whether the infrastructure company was truly efficient from the current operating model. To dispose of all or part of it, the council would need to benchmark and also discuss with the Government issues facing the sector.
EY considered 4 alternative funding tools & finance – sale & leaseback as a property portfolio transaction, self-funding PPPs, tax increment financing and alternative sources of funding.
Under the tax increment model, gains in future tax revenues (or fee/rate revenues) resulting from a project are pledged to cover the capital costs, typically funded through borrowings. EY used to British examples for this, the Northern underground line in London extended to support a 195ha development on the South Bank, and the Buchanan Quarter in Glasgow, where investment in transport, the public realm & cultural infrastructure were used as the catalysts for private development.
On alternatives, EY said naming rights & sponsorship agreements had some potential, the revenue potential from a bed tax was low, road tolls & rating on non-rateable land had potential, and it left the issue of a regional fuel tax to the newly formed government-council Auckland transport alignment project.
Cllr Penny Webster, who chairs the council’s finance & performance committee, said at a briefing yesterday (before she’d seen either report) she expected councillors & Independent Maori Statutory Board members would study the reports at workshops, first to consider non-internal options, then to look in the New Year at what the council could be doing differently. That exercise would be used to inform the next review of the long-term plan on how capital might be released.
Attribution: Consultants’ reports.