Auckland Assets, Selling, Swapping and Reinvestment. The #Auckland2016 Question

Time to stop being closed on Council Assets?

Bill English weighs in on the debate

 

The question on assets and whether to sell the ones Auckland Council hold is come back up as Mayoral candidates and the current incumbent make noises about the issue. Traditionally under Mayor Len Brown South and West Auckland have usually been against any notion of asset sales (airport and port shares, as well as Watercare) while it is more of a held view that the Isthmus and North would be more inclined to sell the assets off.

Ironically the former Auckland City Council and Manukau City Council elected to hold a minority holding of Airport shares when Auckland International Airport was floated by the then National Government in 1998. Waitakere, North Shore and Rodney elected to sell theirs off on the get go. Further irony would have it when the Councils all merged to create Auckland Council back in 2010 Manukau and Auckland came in with the better Balance Sheets.

 

In any case the Assets question on whether to sell down entirely (or part) the Airport and Port shares is back up as we get closer to the elections.

Usually those in favour of a sale will state the that the money earned from the sell would:

  • Retire debt (which is what you use the dividends from the Shares for)
  • Invest in new assets (something Panuku Development Auckland is doing with Manukau (see further down)
  • Fund OPEX expenditure (not the wisest idea)

 

Mayoral Candidate Mark Thomas has floated the idea of selling off the Airport shares to invest the proceeds in transport and water/wastewater infrastructure to help cope with Auckland’s growth. It is something the Finance Minister Bill English have given warm but cautious support as seen in this Newshub article:

 

Mayoral candidate proposes asset ‘swap’

By . Monday 18 Apr 2016 7:59 a.m.

An Auckland mayoral candidate’s plan to sell most of the council’s shares in the airport has the Government’s cautious approval.

Mark Thomas, businessman and member of the Orakei Local Board, wants to reduce Auckland Council’s share of Auckland International Airport down to 10 percent, and use the proceeds to invest in housing and transport.

The council’s 10-year plan is to spend about $2.3 billion a year on transport, which Mr Thomas says needs to be $300 million higher.

“We’ve looked at debt, we’ve looked at rates increases. Aucklanders don’t favour those, I don’t favour them either,” Mr Thomas told Paul Henry this morning.

“But what the reports show is we’ve got these assets that I think we could look at swapping into other investments.”

Cutting the council’s share in the airport will bring in up to $800 million, says Mr Thomas. While he admits this will see the council lose out on dividends, improvements in transport infrastructure will see congestion costs drop.

…..

Finance Minister Bill English, acting as Prime Minister while John Key is in China, said Auckland Council should be “pushing pretty hard” to fund its own growth.

“Auckland is asking for money from the Government — that is from the rest of the country — to build its rail link, and we’re in negotiation with them about that,” says Mr English.

“Auckland has to show, just as Christchurch City Council has, they have to show that they are pushing their own balance sheet pretty hard — including doing some of the things that they haven’t wanted to do in the past.”

Mr Thomas is adamant his plan, which includes selling shares in Ports of Auckland, isn’t an ‘asset sale’, but rather a ‘swap’.

……

He also says rival candidate Phil Goff hasn’t outlined how he would fund infrastructure growth, considering his promise not to sell strategic assets.

Mr Thomas ruled out including Watercare in his asset ‘swap’.

……..

Source, full article and video of the interview: HERE.

 

 

Effectively what Thomas is promoting is reinvestment rather than a straight sale (as you would get for debt retirement or fund OPEX) given an existing asset is sold off to invest in another (hopefully productive) asset for future generations. Businesses already do this and Panuku Development Auckland is about to start with Transform Manukau.

 

So the question is do we need to be so up-tight if the Airport Shares windfall would be used to speed up transport and water infrastructure?

 

budget

 

Well let’s check Panuku with Manukau!

Panuku (after getting Auckland Development Committee approval last week to start Transform Manukau) will be going to the Finance and Performance Committee next month to seek Budget approval for the Transform Manukau Program. Panuku needs an upfront $72 million to get Transform Manukau under way. That is $2m for a set of plans and $70m for initial place making to kick start development in the Manukau City Centre area.

 

Below is extracts from the Auckland Development Committee Agenda concerning Panuku, Transform Manukau and the Budget:

  • Value creation:
    • 16. As part of the framework planning process we will establish the procedure to assess and report on the creation of value arising from implementation of the Framework Plan.
    • 17. Value creation will address the baseline values, both commercial and non-financial, of existing assets and future increases in value at key project milestones. In addition, estimates of developed project values will be determined for the Council assets, which will be the subject of realisation and development by the private sector through the market process. Consideration will also be given to reporting on value creation in the context of other service assets held by Council that will benefit from the activities of Panuku.
    • 18. Reporting on commercial value creation will identify the nexus between the actions of Panuku and the value implications, and also seek to isolate value effects from broader  issues such as general market movements. In addition to the above, the project will also seek to report on wider value creation associated with economic and social factors such as employment creation, housing choice, community safety and wellbeing etc. This element will be further detailed and assessed as part of the framework planning and implementation stages of Transform Manukau.
  • Financial implications of transformation and investment approach
    • 22. This Transform project will require significant funding for both operational and capital works. It has been estimated indicatively at this early pre-framework planning stage that around $70m worth of public good investment projects will be needed to realise the necessary anchor, exemplar and catalytic initiatives. Some of these public investments will be in streetscape upgrades, greenways, stream restorations and place activation. Other initiatives will be focusing effort on better integration between current projects and work streams in the area. For example, the bus station project presents some significant spatial challenges, which if left un-corrected could erode the quality and intent of recommendations in this HLPP. Similarly, the Kotuku House refurbishment project would be optimised and enhanced by considering other integration options beyond solely a building refit.
    • 23. The proposed funding strategy to deliver on these public works is the revinvestment of the proceeds of asset realisation. This approach recognises that the current funds within the LTP budgets do not include funding for any Transform locations capital or operating expenditure. The proposal is for Transform Manukau (and Onehunga as the other Transform location) expenditure to be funded from reinvestment of proceeds from properties which are disposed within each of these locations. Any associated group debt and rates impact will need to be approved by the Finance and Performance Committee.
    • 24. Panuku will commence the framework, design, engagement and implementation planning along with early place making which will require a budget of $1.9m to complete. These
      internal and external costs will not be recoverable against specific sites. It is recommended that these costs will be approved as part of the Annual Plan 2016/2017 process, and are
      seen as part of the reinvestment approach.
  • Project funding strategy
    • 25. The Transform Manukau project will require significant funding for both operational and capital works in the short, medium and long term as outlined by the intent of the Panuku
      Transform category as highly custodial locations. The scale of transformation envisaged cannot be achieved within current budgets and funding for Transform Manukau will require
      access to a number of funding sources:

      • a. The primary proposed funding source to deliver the range of Transform Manukau projects is through the reinvestments from proceeds of asset realisation. This proposal
        recognises that the current funds within the LTP budgets do not include funding for any Transform locations capital or operating expenditure. It is proposed that the Transform
        Manukau (and Onehunga as the other Transform location) expenditure is funded from reinvestment of proceeds from the sale of properties which are disposed within each of
        these locations.
      • b. The reinvested funds from sale proceeds would be used for OPEX associated with preparing the HLPP and undertaking the subsequent Engagement, Framework and Implementation Plans.
      • c. The utilisation and reprioritisation of existing Council budgets towards delivering the key strategies and initiatives, such as through the Spatial Priority Area process.
      • d. Possible access to funds arising from a partnership approach with government.
  • Commercial Value Creation
    • 73. A desktop assessment of the baseline existing rating assessment land values has been undertaken for the 10 properties with immediate and near term potential and have an
      estimated conservative value of $100m. This value has a wide value range and is conservative as it assessed from 2013 and is prior to value creation and the transformation
      process. This is scheduled in attachment C.
    • 74. The subsequent framework and implementation planning will establish the opportunities these properties and the others potentially offer in contributing to the implementation of the key strategies and initiatives for Manukau. This will establish the basis for the submission of detailed business cases to the Panuku Board and Auckland Development Committee as
      necessary in the future.
  • Non – financial Value Creation
    • 75. The framework planning phase will establish a number of key indicators and a baseline for these indicators that will enable the broader benefits of Transform Manukau to be monitored and reported on at key milestones of the project.

Attachment C:

Manukau land sales Source: Panuku Development Auckland
Manukau land sales
Source: Panuku Development Auckland

 

Full report:

 

So Panuku is selling off $100m worth of assets that do generate income to invest in new place making assets that over time will drive the desirability up in the Manukau area. That consequence of driving up desirability will mean an increase in generating income to Council usually via more Rates income from higher Rateable Values because of that desirability (think the Isthmus and the City Centre).

Selling off car parking land as Panuku is doing to allow residential and commercial complexes in their place will also mean ultimately increases in Rates generation that can pay for further place making investments down the line. But for now the initial sale of $100m of assets in Manukau (if realised) to pay for the initial $70m in place making in Manukau is an example of asset reinvestment rather than an Asset Sale.

 

The initial place-making proposal by Panuku for Transform Manukau 

Proposed Manukau Place Making  source: Panuku
Proposed Manukau Place Making
source: Panuku

 

What do you think?

 

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3 thoughts on “Auckland Assets, Selling, Swapping and Reinvestment. The #Auckland2016 Question

  1. I don’t mind asset sales if they are used to buy better assets.

    1. For example would people oppose selling Airport Shares to help fund an Southwest-Airport line.

    2. If we sold 49% of Watercare so can still state owned to pay for triple/quad tracking, puke elect, LRT etc.

    1. Technically yes
      While we get dividends from the Airport Shares we have no Governance arrangements on the Board of AIA despite our 22.5% holding.

      Car parks in Manukau also generate dividends from leasing and also governance arrangements on what do to do with them and the land they sit on.

      And that is where the Technically no comes into play.

      Both produce revenue or capital to be used somewhere else.

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