recent ey and cameronpartners reports: summary by |brian gaynor

8/20/2019 Recent EY and CameronPartners reports: Summary by |Brian Gaynor

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Liveable city faces some tough choices

Brian Gaynor

Achieving theAucklandCouncil’s ambitiousgoalswillrequire amore rigorousapproach to itsfinancialposition

TheErnst &Young (EY) andCameron Partnersreports onAuckland Council’slong term$18.7billioncapital

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.

Basedon recent growthtrends,theseprojectionscouldbe fartoo

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.

Auckland’s fivemajor 2015-25

infrastructure projects are:■ CityRailLink($2.5billion).Thisisthe3.4kmrailtunnelconnecting

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.

Atpresent,47.8percentofitsdayto dayactivitiesare fundedby rates,33.9percentbyfees,9.3percentthrough subsidiesand grants,6.5 percentfromfueltax,finesandinfringement fees and2.5 percentfrom interest and dividendsfrominvestments.

Howwillthecouncilfinanceits$18.7billion infrastructureprogrammeifrates,fees,parking finesand dividendsare allcommittedto dayto day activities?

Cameron Partnersidentifiestwomainoptions—borrowingandassetsales— whilethe council’sprojectionsindicate thatits annualoperating surpluswillmake thelargestcontributionto its infrastructurespend.

Rates,whichareprojectedtoincreaseby3.5percentperannumover 2015-25,are nota directoption but they could be raised by more than

3.5percentperannumtoboostthecouncil’sannual operating surplus.Cameronargues thereis no “free

lunch”but notes that the2015-25LongTermPlanrevealsthat“Aucklanders. . . haveno appetite for

large increasesin rates or councildebt”.

Thisisahugecontradiction.We want world class transport,recreationalfacilitiesand waterbutdon’twanttoraiserates,increasedebtorsellassetstopayforthese.

Thecouncilwillhavetorelyonacombinationof borrowings,asset

realisationsandratesincreasesinexcessof3.5percentperannum(to boost its annual operating surplus) inordertofunditsLongTermPlan.

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Weekend Herald, Auckland

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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.

CameronandEYbelievethattheCouncilhas additional debtcapacity

ofnomorethan$1billionto$2billion—wellshortofthe$18.7billionrequired over thenext decade.

Consequently,Cameron believesthatassetsalescouldpartlyfundtheregion’sLong TermPlan.

Theinvestmentbankhasanumberof commentson theseassets,particularlythe council’scommercialassets, whichare listedin theaccompanyingtable.

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.

The fivemost valuable alternativeusegolfcoursesareRemuera($517million), ChamberlainPark ($316million), Pupuke($307 million),Takapuna ($230 million)andWaitemata($212 million).

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.

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AucklandCouncil’s commercial assets

Auckland International Airport

Ports of Auckland

Commercial parking

DiversifiedFinancialAssetPortfolio

Housing for older persons

$870m

$779m

$153m

$328m

$200m

Book value

$1398m

$1121m

$153m

$328m

$225m

Marketvalue

Herald graphic

PanukuDevelopmentAucklandMarinas

Total

$80m

$2410m

$80m

$3305m

Based on recent growthtrends . . . Auckland’spopulation could be inexcess of 2.3 millionby 2033

WithAucklandgrowing fast, the council willhavetodecidethebestuse forassetssuch asPortsofAuckland(left), AucklandInternational Airport(top)andWatercare (above). Pictures / Brett Phibbs, NZME

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recent ey and cameronpartners reports: summary by |brian gaynor

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