Funny how this story obscures the really painful ARC story. Just a couple of days later, the NZ Herald reported: "...Plunging global share prices have wiped $25 million in three months from a $1.2 billion fund for public transport and stormwater in Auckland. The books of Auckland Regional Holdings turned red in the first quarter of the 2008-2009 financial year on the back of an investment exposed to emerging market shares...."
But nowhere in that report can you find a single quote from the ARC politicians accountable for the decision to invest around $300 million of regional savings in global investment schemes. The $25 million loss is "unrealised" at the moment. $25 million are the paper losses for September 2008. The ARC hasn't been advised yet what the losses are for the months of October and November 2008. But these months saw spectacular losses internationally. Could be another $50 million down the toilet. Makes the Beckham thing look like a Sunday School picnic by comparison.
It gives me no pleasure at all to have voted against this investment. I was one of a minority of councillors who opposed it. The decision was taken a couple of years ago - in the last term of ARC. The politicians in charge then are the same as now: Cllrs Bassett and Walbran sat on the ARH Board then (and do now), and Cllr Mike Lee was in the ARC Chair (as he is now). They led the voting in support of this risky investment.
I well remember how the debate went. What was extraordinary was that ARH was not only recommending investing public savings in global investments - they advocating taking out a big bank loan as well, paying the interest, and investing that money in global investments also. They really believed this was a sensible thing to do, and that they could beat the bank rate.
My experience of this stuff hasn't been significant, but what I know I learned as a councillor on North Shore City Council when we sold our shares in Auckland International Airport. This was sometime before the end of 2004. We got over $82 million. I remember our investment bank advisers were keen that Council should invest that money. "Maximise return", they said. But NSCC finance officers advised that the prudent action for a city council was simple. They advised we desposit the money in the bank - to minimise risk.
The emphasis was on risk minimisation. Not return maximisation.
That time, councillors took the advice of their officers. The money went into the bank. It has since been applied to North Shore infrastructure projects.
While ARC councillors were persuaded to take a risk with regional savings, they have not - yet - agreed to take out a bank loan and chuck that into international bonds. But Cllr Walbran reckoned it was an OK thing to do. His business restores old MGs. Tweedledum reasoned this way: "it's like me taking out a loan to buy MG car parts. I get more from selling car parts than the loan costs me. It's like that..." I wasn't the only one to question his judgement. Would you buy $300 million in MG car parts? Using someone else's money?
Anyway. The upshot was that a "Diversified Financial Asset" was set up by ARC's treasury subsidiary ARH - with ARC agreement to that material transaction. And now we hear there's a $25 million loss. But that's just the start of the bad news. Bruce Jesson must be turning in his grave.
We need that financial asset as security against the bank loan ARC will use to buy electric train infrastructure. That loan will be around $500 million. The plan is to pay the interest on that loan from fuel tax revenues. That part of the plan is OK. The problem the ARC faces is that the value of its assets is in freefall on international markets. How will the bank assess ARC's financial security? Perhaps we'll have to put up a regional park or the Ports of Auckland as security.
That is one of the biggest issues for 2009.
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