Michael Barnett writes (and I respond)
"As an optimist, I have long believed that Auckland has the ingenuity and capability to solve most of the city's growth problems using its own resources.
It’s a happy place being an optimist, but my information is that “most of Auckland’s growth problems” are transport problems and these are at least 50% subsidised by Central Government and in the case of state highways 100%. Auckland has never had the capability of funding its growth.
So it has hardly been a surprise that the recent disclosure that Auckland Council is talking of selling the port company but retaining the land has been extended to a further question: Why not also sell Watercare?
Adding Watercare to the talk of selling the port company would provide the city with a $5 billion nest egg - more than enough to kick-start action on critically needed transport infrastructure. With assets of more than $8b and debts around $2b, a Watercare sell down has potential to generate a conservative $3-5b for Auckland Council.
Split the difference. Assume an investor would pay $4 billion for Watercare. Realistically they’d expect 7% earnings minimum or $300 million/annum. In the 2015/16 year, according to its Annual Report, Watercare generated $570 million. So at the Chamber's projected sale price, revenues available to Watercare would be halved – not factoring in here possible asset-stripping revenues that the investor might find.
The billion dollars a Ports of Auckland company sale could reap (with its land staying in Council ownership) plus Watercare's contribution would give Government the evidence it has been seeking, surely, that Council is looking seriously at what it has to do to fund its share of the city's huge infrastructure investment programme.
On how urgent and decisive Auckland Council can be in making such a decision, I suggest, depends on the pace of action to start a fast-track programme to sort Auckland's infrastructure problems.
At the end of the day, Auckland's destiny is in its own hands.
A joint sell down, would give Council a sizeable chunk of capital to bring to the table in setting up a special purpose partnership or (SPV) with central government to drive an accelerated programme to address Auckland's rapidly worsening transport crises.
In welcoming talk of a port company sell down, Prime Minister Bill English said he was pleased to see Council looking seriously at what it could do to fund its share of the city's infrastructure. Adding Watercare to the package would, I am sure, get the action response all Aucklanders are crying out for.
Lumping Watercare and the Port together into a package ignores the facts these two services are not like each other. It’s chalk and cheese. For a start most of what the port does could be re-located elsewhere (I’m not saying that should happen – just saying). But you can’t relocate Auckland’s water and wastewater services. Before we get too carried away here, let’s look at what Watercare says it does with the revenues it earns. Its 2015/16 report states where the $570 million revenues went: $77 million was debt servicing, $210 million operating exp, $216 million mainly depreciation (providing for planned future maintenance) – leaving a surplus of $67 million. Even if the debt was all cleared, that still only leaves a possible “profit” of $144 million – less than half what the Chamber’s investor would be happy with.
In last month's Budget, Finance Minister Steven Joyce clearly signalled the watching brief Government is keeping on the potential for further investment in the infrastructure for our growing economy by way of, as he put it, "greater use of partnerships between central and local government, and between government and the private sector."
I suggest both sell downs could be structured by way of a designer ownership process, with central government facilitating an outcome that keeps both in New Zealand ownership. Designer ownership might be the Government establishing a platform that enabled funds like ACC, NZ Super, iwi and New Zealand investors to invest.
Council would get a good price, and the sell down process can be done in a way that reinforces Council's continuing regulatory control of both assets and to ensure Aucklanders don't view it as sellout of our silverware.
This really is the rub. What would make Aucklanders feel that either of these sales was good for Auckland, and wasn’t selling the family silver? Put another way, what guarantees would there be, no matter how benevolent the new owner was, that service quality is maintained at the status quo at least, now and into the future. Or put another way, how might it be possible to get two pints of gold out of the single Watercare pint cup – a pint for the investor, and a pint to maintain the service.
At the end of the day, Auckland's destiny is in its own hands.
Watercare's latest Annual Report "our journey toward customer centricity" is neither optimistic nor pessimistic but it is sobering. Data provided by Watercare in Council's long term plan states that 2,200 kms of local wastewater network pipes are in average to poor condition - ie not good or very good - and 3,500 kms of local water network pipes are average to poor. Aucklanders understand the need to budget and provide for future maintenance. The Thames Water privatisation in London is sad example of private investor neglect.
With Council and central government facilitating a SPV that delivers a designer ownership that secures each company's ownership firmly in New Zealand hands and under an independent board of control, Aucklanders would get the benefit of a win-win: First, we would have raised the funding required for a dramatically accelerated programme to reduce traffic congestion, boost public transport services and do key projects that have been sitting on Auckland's books in some cases for more than 20 years. The long-planned infrastructure 'catch-ups' could at last happen, and with smart investment we would give ourselves a chance of getting in front of the demand created by our population growth curve.
There is nothing but optimism behind this statement. If the last ten years have proved anything, that is private investor reluctance to invest in long term infrastructure. Why would that suddenly change with Watercare in private hands?
Second, a sale of both CCOs would give Council some debt-to-revenue freeboard by removing their capital requirements from Council's books, which I am advised could be as high as 25-30 per cent of Council's indebtedness.
Again, this is false economics. Yes, Watercare’s share of Council’s debt mountain would disappear, but Watercare’s own projections are that it would quickly rebuild to fund deferred maintenance and new growth infrastructure. And under private control any revenues would be prioritised to keep shareholders happy – not pipes in better than good condition.
Commercially, if both became listed companies (with Council possibly retaining a share holding), a market-led opportunity would be created for them to invest and expand without the constraint of impacting Council's books.
This sounds too good to be true. And one thing I have learned in Auckland. That is: if it sounds too good to be true, it’s almost certainly not true. Smells too much like golden geese and golden eggs. Watercare projects (Auckland Council Long-Term Plan 2015-2025) that the cost of wastewater treatment capex and opex will increase from $350 million/annum now, to $500 million in ten years. Water supply capex and opex will increase from $200 million/annum now to $350 million/annum over the same time.
Ports of Auckland would be released to grow to the scale it is likely to require to be a serious investment prospect to relocate, if and when the feasibility study on where that relocation might be to is completed.
We need only look at the success of Tauranga's port since it was partially privatised and listed some years ago. It has grown from a small provincial port to be NZ's largest, worth $2.2b, twice the value of Ports of Auckland.
Similarly, a commercialised Watercare would be better positioned to independently debt fund an accelerated and badly needed capital expenditure programme required to cope with Auckland's population and housing growth.
You can’t get two pints out of a one pint cup. Watercare is prevented from paying a dividend. Any surplus it generates today is ploughed back into debt reduction and borrowing to pay for growth and infrastructure maintenance. While revenues will increase, they don’t keep pace with increasing costs. There is no free lunch here.
A dramatically accelerated effort by Council and Government working together to address Auckland's critical transport issues is what we all want. Here's is a way to make it happen.
No comments:
Post a Comment