Home > Social Issues, The Body Politic > Christchurch City Council – Having your asset-cake and eating it

Christchurch City Council – Having your asset-cake and eating it

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Prelude

On 29 January 2013, Prime Minister John Key announced that the rebuild of Christchurch would be a Herculean, multi-billion dollar task;

New Zealand also faces a domestic construction boom. That will be centred, of course, on Christchurch, where the total spend is now estimated to be around $30 billion.”

By 15 May 2014, National’s Finance Minister, Bill English delivered his sixth Budget speech to Parliament. The cost of the Christchurch re-build  had escalated by $10 billion;

The total cost of the rebuild has been estimated at $40 billion and the Government’s share will be significant.

On current estimates, the Government’s contribution to the rebuild is expected to be $15.4 billion, of which $7.3 billion will be incurred by the Earthquake Commission, net of reinsurance proceeds.

Despite central government’s massive re-build bill for Christchurch, in his Budget Conclusion, English was at pains to repeat his new mantra;

The Government’s books are on track to surplus next year and are the envy of most developed countries.”

The surplus English referred to was an Operating balance Before Gains and Losses (OBEGAL),  forecast to be a hair-thin  $86 million for 2014/15.

English’s  Budget document pointed out;

Government is still borrowing a net $78 million a week, and in dollar terms, net debt is expected to peak at $64.5 billion in 2015/16...”

Little wonder that English stated, with blinding obviousness four days earlier;

It means we will need to maintain firm expenditure control beyond our return to surplus...”

Which is why an increasingly nervous Finance Minister, conscious of spiralling re-build costs, came down hard and crushed any suggestion that taxpayer’s money be used to subsidise the proposed SkyCity convention centre;

There’s no contingency for that. If the less preferred option ended up being the option then that money would be part of the Budget process.”

Firm expenditure control in this case meant that the government-purse was firmly shut. And padlocked.

National Government’s Predictable Response

In May 2011, barely three months after Christchurch’s devastating earthquake that killed 185 people, there were already suggestions from Gerry Brownlee that the Christchurch Council would have to sell part of their community-owned assets to fund the re-build.

National’s mis-handling of the economy, with two unaffordable tax-cuts,  as well as the Global Financial Crisis and resultant recession,  had left the government’s books deep in the red.

At first, Brownlee was coy at any suggestion of asset sales;

I don’t foresee the council having to sell any assets, though in the end that will be their choice.

But in the next breath, he added;

I would suspect that Treasury have had a look at the city council’s balance sheet, given that we are going to have to take a whole lot of debt onto our [the Government’s] balance sheet.

It’s only natural we would have a look at what the council can stand [to pay].

Yes, there is provision in this legislation for Cera [Canterbury Earthquake Recovery Authority] to suggest to council that they might need to sell something.

Brownlee denied that government or Treasury had been scoping CCC assets with a view to partial (or full) privatisation;

The accusation is that Treasury have been looking at council assets with a view to what the council will sell. That is, I think, completely erroneous.

On 9 February 2012, a year after the second earthquake,  Brownlee admitted in Parliament (in response to questioning by the future mayor of Christchurch, Lianne Dalziel);

In the days leading up to that particular injudicious comment from me there were numerous discussions going on with the council—between the senior executives, the mayor, me, and the senior executives of the Canterbury Earthquake Recovery Authority—over a number of issues that we want the council to take some responsibility, alongside us, for. Although Treasury officials will have talked to the council, I am unaware of exactly what that discussion would have been about. But let me tell you that when the Government is spending $5.5 billion anywhere we expect the recipients of that to have some plan for how they will participate in what will be a very, very expensive recovery, and that plan has to be a lot better than saying “We’re just going to put up the rates, and we’re going to borrow a lot more money”.”

Brownlee would have us believe that he was “unaware of exactly what that discussion would have been about” between Treasury officials and  Christchurch council?  As Minister of Earthquake Recovery of that devastated city, that proposition is simply not credible.

Brownlee was not being truthful.

The Minister’s denial was further shown to be less than truthful with this evasive response in Parliament on 2 August 2012;

I have received advice from Treasury and the Canterbury Earthquake Recovery Authority on a range of funding options for the rebuilding of Greater Christchurch, to which the Government has committed $5.5 billion to date. Alongside the Christchurch City Council, I support the regeneration of our city, which will be enhanced by the development of the central city plan, released on Monday. I have publicly acknowledged the funding challenges for both the city council and the Government. Councillors and I have agreed to discuss, alongside our respective organisations, a sensible and achievable time line and funding programme for the delivery of the blueprint. I approach these discussions in good faith, as the thousands of city residents would expect us to do so. I intend to say no further on this matter.

The full text  of a remarkable, and somewhat ‘testy’ exchange between Minister for Canterbury Earthquake Recovery, Gerry Brownlee, and the then-Speaker of the House, Lockwood Smith, under-scored the sensitivity of any suggestion that central government was putting the “squeeze” on Christchurch to sell community-owned assets and relieve pressure on English’s struggle to balance the books.

By May 2013, all pretences that asset sales were not being discussed were firmly kicked to the side, with John Key entering the political fray (and Gerry Brownlee standing pensively and obediently in the background);

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Christchurch rebuild - Council needs to come to the party - PM

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Key was clear with Christchurch residents in his expectations;

The only other option available to it is that it doesn’t actually embark on some of the projects it might want to embark on. In the end Cantabrians will have to have a say on what they think is the right mix.

I actually personally hold the view that for Canterbury, where you love sport, happen to be pretty darn good at it, and have climatic conditions that argue that a covered stadium might make sense, then actually it could be a really sensible thing to do.

And if it was up to me I would make that choice in a heartbeat if it meant changing the mix of assets, but I understand for lots of other people they might not hold that view.

This is the chance to get it right. I just urge everyone to think that through.  There is the opportunity to have some quite fantastic facilities here.

The Government is quite happy to step up and put $15bn in, and there is a limit as to how much we can put in, and some of it must come from the council.

The threat is obvious; ‘cough up the extra cash by selling some of the family silver, or  no more rugger for you lot’!

Faced with National firmly closing off any options to meet ever-increasing re-build costs, Christchurch was faced with few alternatives and on 1 August last year the Council caved to central government pressure in the form of a report from investment bankers, Cameron Partners. As Mayor Lianne Dalziel admitted;

We’ve got nothing, there isn’t even wriggle room any more, there’s just nothing there, we’re over the line and we have to pull it back before 2017.

Creating financial certainty will attract much needed investment in the rebuild. We want to work alongside the Canterbury earthquake Recovery Authority (CERA) to scope the possibilities for a one-stop landing point for both local and foreign investors.”

Note the year Dalziel refers to: 2017. An election year.

Dalziel’s reference to “both local and foreign investors” is an oblique acknowledgement that the Christchurch City Council will have to part-privatise community assets to raise money that will not be forthcoming from Key’s government.

She was more forth-coming here, on the same day;

Releasing capital from our balance sheet alongside the other options, (including increased income, reduced operational expenditure and government assistance), is clearly one of the ways we can address the uncertainty around the city’s finances.

Dalziel also hinted at why Christchurch was forced to undertake asset sales;

The purpose of releasing capital would be to generate funds to assist in solving the identified funding shortfall; provide the level of confidence and certainty required to develop a credible long term financial strategy and get on with the rebuild of our community facilities, infrastructure and housing; allow CCC to buffer Christchurch residents and businesses from the exponential rates increases; and allow CCC to align our vision and strategic objectives for the rebuild with our asset portfolio – that is, what we own and operate.

It is simply untenable – both from a commercial perspective, as well as morally – that citizens in one city should be forced to pay for the rebuild of their infra-structure. This was a disaster not of their making.

Any suggestion that the cost should not be spread more evenly around the country would create a precedent that we are each solely responsible for any disaster that might befall our own region. Do New Zealanders really want to go down that road? They should think long and hard if that is the kind of society they want for themselves and their children.

Earthquake Recovery Minister could not endorse the Cameron Partners report fast enough, releasing this statement on the same day – 1 August;

The Cameron Partners report makes it clear some major areas of financial uncertainty are causing headaches for Christchurch City, including the cost of repairing and replacing the city’s essential horizontal infrastructure [pipes, roads, waterways].

When we signed the cost-sharing agreement with the council in June 2013 we foresaw this and undertook to do a thorough review of where the shared costs of the rebuild lay by 1 December this year.

Once we have this information we can consider if any amendments are required to the cost-sharing agreement.

Officials from CERA and the Treasury are working with the council already to ensure the review provides Christchurch City with the clarity it needs to help make some of the big decisions ahead of it.”

National had won.

Brownlee had successfully forced Christchurch Council to adopt unofficial National Party policy; that Council’s were expected to divest themselves of strategic assets if funding for extraordinary projects was required. This was the same policy that Brownlee had forced on Auckland, to fund it’s rail loop, and which he outlined on TV3’s ‘The Nation‘, on 30 June 2013;

Rachel Smalley:John Key said on Thursday that Auckland should consider selling its assets in order to meet some of these costs. Should the Council consider that?”

Gerry Brownlee: Well I think it’s one of those things that’s inevitably going to be on the table. Remember that we’ve got a programme that is now set out for the next 10 years, and as we come up to the point where you’re getting the business case together for the city rail link and that huge expense that’s involved in that, and recognise that you’ve got a 2016 Local Body Election as well, I’d be very surprised if it wasn’t something that was considered by some people.”

But more was come on 6 December 2014, Brownlee was demanding that Christchurch Council increase the level of asset sales;

So it’s a positive step but it’s not the end yet. I do have some worries that it might be a little timid and particularly if it were to lead to much higher rates there in Christchurch.

Murray Horton, from the lobby group ‘Keep Our Assets Canterbury’, was correct when he warned;

Once a chunk of ownership of those assets, the council’s assets, is gone then it won’t be long before there are calls for more to go.

Horton’s prescience was proved barely three months later.

Costs & Consequences

On 26 February, 2015, four years and four days after the city’s second quake, the Christchurch City Council voted;

“...subject to public consultation, the council will release $750m in capital through the sale or partial sale of assets the council owns through its commercial arm, Christchurch City Holdings, to help plug its $1.2 billion funding shortfall.

By the following day, Brownlee was demanding more asset sales, which he repeated more forthrightly on TVNZ’s Q+A on 

I don’t think you can put a particular price on it. What I think they need to do, and I’m sure that the council will get there. I’ve got to say the council have been edging their way to a position that I think will leave them in a good space progressively. What really is necessary is a sales process that gets you the highest possible price. If you go out and say, ‘Look, I’m just going to sell a little bit of this and a little bit of that,’ then you’re not going to get any premium on it at all. And if you’re going to sell something, you may as well get as much for it as you possibly can. That’s my real point.

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…if you look at something like the airport. It’s essentially a real estate company that just provides parking for planes. You could break it down to being that simple. It’s still going to get used. It’s still going to provide the service the city requires whoever owns it. It is partly price controlled through the Commerce Act, as is Orion. Completely price controlled. So the idea that someone else would buy it and the pricing of your electricity lines are going to become completely out of control is completely wrong. ”

The sale of community assets is a perfect fit with National’s ideological and fiscal needs;

  1. Ideologically, National is as wedded to privatisation as it ever was. It is only held back from a  more radical asset sales programme by public opinion – a point no doubt reinforced through National’s on-going secret polling.
  2. Fiscally, forcing local territorial authorities to finance infra-structure through sales of community-own assets lets central government off the hook, and gives English his desperately needed surplus.

Territorial Authorities have little control over Point 2.

With regards to Point 1, however, Territorial Authorities finding themselves under financial pressure can be more strategic when it comes to finding ways and means to navigate political pressure from the likes of right-wing governments and ministers like Gerry Brownlee.

One such mechanism is found within Christchurch City Council’s own document, “Council decision on proposed Financial Strategy“, where it states;

The sale of 14.3 % of Orion on condition that the shares are only offered to another public entity, such as another TA [Territorial Authority], or an institutional investor such as NZ Super Fund, and that any agreement would be subject to the shares returning to the CCC should the investor wish to sell down its share at a future date.

The same document suggests the sale of 34% of Lyttleton Port Company and 9% of Canterbury International Airport Ltd to “a suitable strategic partner“.

The latter measure opens the proverbial slippery slope to further down-selling of Christchurch Council’s shares in both companies. As such, it would be unacceptable to most Cantabrians (and New Zealanders, who have experienced the down-side of sales of strategic assets).

The NZ Super Fund would be an ideal partner for a Territorial Authoritory such as Christchurch Council. At present the NZSF’s investment in New Zealand amounts to only  13.8% in 2014  (down from 14.2% in 2013).

Not only would the NZSF offer an ideal means by which to keep these assets in New Zealand ownership, but would retain the profits instead of seeing them sent off-shore, worsening our Balance of Payments even further.

It would also fulfil the Super Fund’s  2009 directive from the Minister of Finance “requiring us to, while always investing in a prudent and commercial manner, identify and consider opportunities to increase the allocation to New Zealand assets in the Fund“.

Lastly, the Christchurch Council could eventually re-purchase the shares from the NZSF once the city’s re-build was essentially completed and it’s books were back to some semblance of normality.

The first option should always be that local strategic assets remain in local ownership, so that everyone in the community benefits.

In the face of intransigence from an ideologically-bound, and fiscally inept National Government, the best we can hope for is Plan B.

Plan B: transferring ownership, by temporary sale, to the New Zealand Super Fund. It ticks nearly all the boxes.

Additional – Christchurch City Asset Holdings

  • Christchurch City Holdings Ltd (CCHL) is the commercial/investment arm of the Christchurch City Council.
  • CCHL manages the Council (ratepayers’) investment – worth around $2.6 billion – in these seven fully or partly-owned council-controlled trading organisations.
  • CCHL is forecasting to paying $46 million in dividends for 2015/16 period.
  • CCHL Special dividend for 2015/16 period: $549,300,000
  • “The return on our CCHL investment from cash dividends has averaged 3 per cent in the last three years and 4 per cent in the last 10 years. When the appreciation in the capital value of its investments is taken into account, CCHL has achieved an internal rate of return over the past five years of 8.0per cent a year, or 25.9 per cent a year since its inception in 1996.” (Source)

Trading Organisations

Orion New Zealand Ltd: 89.3% shareholding

Christchurch International Airport Ltd: 75%

Lyttelton Port Company Ltd: 78.9%

Christchurch City Networks Ltd (trading as Enable Networks): 100%

Red Bus Ltd: 100%

City Care Ltd: 100%

Selwyn Plantation Board Ltd: 39.3%

[Acknowledgement Fairfax Media]

 

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References

National Party: Prime Minister’s Statement to Parliament

NZ Treasury: 2014 Budget Speech

NZ Treasury: Rebuilding Christchurch

NZ Treasury: Budget Priorities

Beehive.govt.nz: Budget will confirm track to surplus in 2014/15

Interest.co.nz: Finance Minister prefers not to spend taxpayer cash to avoid Sky City ‘eyesore’; no money in Budget 2015 for it

Fairfax media: Christchurch door open for asset sales

TV3 News: Government accounts show $18.4 billion deficit

Scoop media: Parliamentary Questions And Answers Feb 9 2012

Green Party: Eugenie Sage questions the Minister for Canterbury Earthquake Recovery on Christchurch asset sales

NZ Herald:  Christchurch rebuild – Council needs to come to the party – PM

Fairfax media: Cameron Partners Review – full report

TV One News: Christchurch facing huge financial black hole

Sharechat.co.nz: Christchurch considers selling strategic assets stake to fund rebuild

The Press: Council asset sales mooted to help raise $900m

Scoop media: Brownlee says its up to Len to sell assets for loop

Radio NZ: Asset sales plan ‘may be too timid’

The Press:  Christchurch City Council votes for $750m asset sales

The Press: Gerry Brownlee says Christchurch rate rise as ‘too much’

Scoop media: TV1 Q+A – Govt will protect identities of NZ troops – Brownlee

NZ Super Fund: 2014 Annual Report

NZ Super Fund: 2009 Ministerial Directive

Statistics NZ: Balance of Payments and International Investment Position – December 2014 quarter

Christchurch City Council: Christchurch City Long Term Plan 2015 – 2025

Christchurch City Council: Council decision on proposed Financial Strategy

Additional

Christchurch City Council: Long Term Plan consultation document adopted

Previous related blogposts

Christchurch, choice, and charter schools

Christchurch – Picking the bones clean?

The “Free Market” is a fair-weather friend


 

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This blogpost was submitted to the Christchurch City Council as a submission to the Long Term Plan, on 22 March 2015.
This blogpost was first published on The Daily Blog on 23 March 2015.

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  1. Noel
    28 March 2015 at 10:07 am

    And yet almost everyone I speak to – and the very few exceptions seem to be staunch National Party supporters – would happily pay a bit more tax to help rebuild Christchurch – most National Party supporters included. The one ACT supporter I know would even pay more tax for this – I won’t name him he might be ostracised.

    We, the people, would help with Christchurch’s rebuild. It’s the ideological rigidity of this current group of politicians – Labour included – that is not letting this happen.

    • 28 March 2015 at 9:13 pm

      Noel – nailed it. It could even be a special surcharge tax with a “sunset” clause, so that people understand what it was designed to achieve. I think most folk would accept the moral rightness of such a move, as well as the fiscal common sense aspect to it.

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