Liveable city faces some tough choices Brian Gaynor Ach ie vin g the Au ckland Council’s ambi tio us go al s wil l re qu ir e a mor e rig or ous ap pr oach to its financial po sit ion T heErnst &Young (EY) and Camero n Partnersreports on Auckland Council ’slongterm$18.7billioncapital expe nditur e programme raisea numberof important iss ues . The se include: ■ Shouldratesincreases beused to fund theseprojects? ■ Can thecounc il rel y primaril y on debtfunding? ■ Sho uld the capitalexpenditur e programme be partlyfunded throu gh thesaleof cou ncilasse ts? Auckland’sin frastructure demandsare soaringbecause the region ’spopulation grewby 33,800 peop le,to 1,5 27,000, in theJune2014 yea r andby a fur the r 43,500, to 1,570 ,500 , in the latestJune year. Thepopulationisexpectedto grow by a further 440,000 , to 2 million,by2033andisexpectedto rea ch2.2 mil lionby 204 3. Basedon recen t growthtrends, the seprojectionscouldbe fartoo conserv ativ e and Auckl and’ s populationcouldbeinexcessof2.3 millionby2033and2.6millionby 2043. Thiswillcreateahugedemandfor additi onal infras tructur e assets, most ofwhichwillhavetobeorganisedand finance d by the Auckl and Council. The council ’sLong Te rm Plan, which is from 2015 to 2025, requires total capital expe nditur e of $18.7 billion over the 10-year period. This include s the constr uction of new infrastructureassetsandtheupgrade of exist ing assets. Auckl and’ s fivemajor 2015- 25 infras tructur e project s are: ■ CityRailLink($2.5billion).Thisis the3.4kmrailtunnelconnectingBr tomarttonewstat onsnearAotea Squareand KarangahapeRd. These will be linked to a redeveloped Mount Eden station ■ Centr al Inter ceptor($966 million) . A new wastewaterconveya ncing and storag e pipeline ■ AMETI ($552million). Transport impro vements to the Glen Innes, Panmu re, Pakur anga and Botany corridor ■ W aikatoWaterTreatmentPlant No 2 ($400million). Additi onal tre atme nt pla ntcapacityfromthe Waikato River ■ HuiaWater Treat ment Plant($241 mill ion) .Thereplacementof theHuia Wa ter TreatmentPlant. Nearly$8billion,or42percent,ofthetotalcapita l expend iturewill be on transportfacilit ies ; $4. 7 bill ion,or 25percent,onwaterassets;and$3.4 billion, or 18 per cent, will be on envir onmental,social and commu nity proje cts. Appro xima tel y 70per cent of the totalspendwillbeonnewassets,with theremaining30percentonthe upgrad e of existi ng infras tructur e. Thecounc il hasthe fol lowingobject ive:“Au ckland ’svision is to become the world’smost liveable city”. Ac hie vingthisgoal willbe dif ficu lt andcostly—probablyfarinexcessof$18.7billion — beca usethe cou ncil facesenormous press ure,primarily fromchangingdemographics.Itwill be a huge task to turn Auckland into the “world ’smost livea ble city” because of burgeoning immigration, a mas siv eincreas e in popu lat ionand an agein g existi ng populat ion. The situat ion is exac erbate d because the council has to fund its day to dayoperating activi ties in addition to itsambit ious LongTer m Pla n. Atpresent,47.8percentofitsday to dayacti vit iesare fundedby rat es, 33.9percentbyfees,9.3percent thr oug h sub sidiesand gra nts,6.5 per centfromfueltax,finesand infr ing ement fee s and2.5 percent from inter est and divid endsfrom investments. Howwillthecouncilfinanceits $18.7billion infras tructur e programmeifrates,fees,parkingfinesand div ide ndsare allcommit ted to dayto da y activities? Camero n Partnersidentifiestwo mainoptions—borrowingandasset sales— whilethe council ’sprojections indicat e thatits annualoperatingsur pluswillmake thelarge st contrib ution to its infrast ructur e spend. Rates,whichareprojectedto increaseby3.5percentperannum ov er 2015-25,arenota dir ectoption but they could be raised by more than 3.5percentperannumtoboostthe council’sannualoperatingsurplus. Came ronargue s the reis no “fr ee lunc h”but not es tha t the2015- 25 LongTermPlanrevealsthat “ Auckl anders. . . haveno appetit e for larg e incr eas esin rates or council debt”. Thisisahugecontradiction.We want world class transport, recre ationalfacilitiesand water but don’twanttoraiserates,increase debtorsellassetstopayforthese. Thecouncilwillhavetorelyona combina tion of borro wings,asset realisationsandratesincreasesin excessof3.5percentperannum(to boost its annual operating surplus) in ordertofunditsLongTermPlan. Page 1 of 5 21 Nov 2015 Weekend Herald, Auckland Author: Brian Gaynor • Section: Business News • Art icle type : News Item Audience : 204,549 • Pa ge: 4 • Printed Size: 129 8.00cm² • Market: NZ Country: New Zealand • ASR: NZD 12,980 • Words: 1389 • Item ID: 500906520 PMCA licensed copy. You may not further copy, reproduce, record, retransmit, sell, publish, distribute, share orstore this information without the prior written consent of the Print Media Copyright Agency. Phone +64-4-4984487 or email [email protected] for further information.
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Recent EY and CameronPartners reports: Summary by |Brian Gaynor
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8/20/2019 Recent EY and CameronPartners reports: Summary by |Brian Gaynor
expenditure programme raiseanumberof important issues. Theseinclude:■ Shouldratesincreases beused tofund theseprojects?■ Can thecouncil rely primarily on
debtfunding?■ Should the capitalexpenditureprogramme be partlyfunded throughthesaleof councilassets?
Auckland’sinfrastructuredemandsare soaringbecause theregion’spopulationgrewby 33,800people,to 1,527,000, in theJune2014year andby a further 43,500, to1,570,500, in the latestJune year.
Thepopulationisexpectedto grow by a further 440,000, to 2million,by2033andisexpectedtoreach2.2 millionby 2043.
conservative and Auckland’spopulationcouldbeinexcessof2.3millionby2033and2.6millionby2043.
Thiswillcreateahugedemandforadditional infrastructure assets, mostofwhichwillhavetobeorganisedandfinanced by the Auckland Council.
The council’sLong Term Plan, which is from 2015 to 2025, requirestotal capital expenditure of $18.7 billion over the 10-year period. Thisincludes the constructionof newinfrastructureassetsandtheupgradeof existing assets.
Br tomarttonewstat onsnearAoteaSquareand Karangahape Rd. These will be linked to a redeveloped MountEdenstation■ Central Interceptor($966 million).A new wastewaterconveyancing andstorage pipeline■ AMETI ($552million). Transportimprovements to the GlenInnes,Panmure, Pakuranga and Botanycorridor■ WaikatoWaterTreatmentPlant No2 ($400million). Additionaltreatment plant capacityfromtheWaikatoRiver■ HuiaWaterTreatment Plant($241million). Thereplacementof theHuiaWater Treatment Plant.
Nearly$8billion,or42percent,of thetotalcapital expenditurewill beon transport facilities; $4.7 billion,or25percent,onwaterassets;and$3.4 billion, or 18 per cent, will be onenvironmental,social andcommunity projects.
Approximately 70per cent of the
totalspendwillbeonnewassets,withtheremaining30percentontheupgrade of existing infrastructure.
Thecouncil hasthe following objective:“Auckland’svision is to become the world’smost liveablecity”.
Achievingthisgoal willbe difficultandcostly—probablyfarinexcessof $18.7billion — becausethe councilfacesenormous pressure,primarilyfromchangingdemographics.Itwill be a huge task to turn Auckland intothe “world’smost liveable city” because of burgeoning immigration,a massive increase in populationand
an ageing existing population.The situation is exacerbated
because the council has to fund its day
to dayoperating activities in additionto itsambitious LongTerm Plan.
De tisa via eoption utEY warns that “the downside of debt isthe interest payments incurred andtherisk of adverse interest rate orinflation movements”.
Interest rate increases wouldhavetobefundedfromoperating expenditure thatcould result in ratesincreasesinexcessofthe3.5percentperannumforecastoverthe 2015-25period.
Auckland Councilowns 22.4 percent of Auckland InternationalAirport,with a marketvalueof $1.4 billion. Cameron notes that aselldown of the council’sairport stake
from22.4percentto10percent would realise nearly $750 million. A10percentstakeshouldbemaintained because this wouldblockany attempted takeoveroffer.
Cameron notes “itis impracticaltoconsider thesaleof Ports of Auckland(orpartsale)untilthecouncilreview
process currentlyunderway iscompleted. The uncertaintyregarding business plan and valuation would likely see a materialdiscount to value”.
However, the reportsuggeststhatthelandshould be separatedfromtheportoperations andthe council
should consider sellingthe latter, withthelandremainingin publicownership.
Thesaleof thecouncil’scommercial parkingassets couldcreateissues because thenew ownerscould raise prices or reducethenumber of downtown parkingspaces,particularlyif theseassets aresold with associated development rights.
The council’sDiversified FinancialAsset Portfolioconsistsof stocksand bonds which are held in reserve tomeetanyunforeseenliquidityorfunding events.
Thehousingfor older personscouldbemovedtocentral
government or private sectoroperators couldprovide theseservices undercontract. Themarinas, whichconsist of Westhaven,Silo,Hobson West and ViaductHarbour assets, couldbe sold, with
publicobjectionsmet throughcontractual and regulatory means.
Two otherinterestingassets arethe13 golf courses, whichhavearateablevalueof$61.2millionbutanalternative usevalueof $2.1 billion,and Watercare.
Cameron doesn’t recommend thedisposalofgolfcourses,parksandcommunity facilities butrecommendsthateach oftheseassetsshould be analysed carefully to assessthevaluethatisforgonebycontinuingto operatethemas non-commercial assets.
Finally, Watercare, whichisclassifiedby Cameron asan
infrastructure assetand is valuedat$8.4billion. Cameron doesn’trecommendthefullorpartialsaleof Watercare but gives a clearmessagethatthe company should considerselling surplus land.
TheEYandCameronreportsare balanced and do not recommend the wholesale disposal of the council’sassets.
However, they do give a very clearmessage thatAuckland Councilneedsto adopt a farmorerigorousapproachto itsfinancialposition asit cannotrely mainlyon an annualoperating surplusto fund itsmassive$18.7 billion infrastructure spend over thenextdecade.● Disclosureof interests;BrianGaynor is anexecutive directorof MilfordAssetManagement, whichholdsAucklandInternationalAirportshares onbehalfof clients.
Page 2 of 5
21 Nov 2015
Weekend Herald, Auckland
Author: Brian Gaynor • Section: Business News • Article type : News Item Audience : 204,549 • Page: 4 • Printed Size: 1298.00cm² • Market: NZCountry: New Zealand • ASR: NZD 12,980 • Words: 1389 • Item ID: 500906520
PMCA licensed copy. You may not further copy, reproduce, record, retransmit, sell, publish, distribute, share or
store this information without the prior written consent of the Print Media Copyright Agency. Phone +64-4-4984487