Investment columnist for the NZ Herald

Brian Gaynor: Auckland City deserves your vote

Auckland's new mayor will have to convince Government to pay fair share for development. Photo / Jason Oxenham
Auckland's new mayor will have to convince Government to pay fair share for development. Photo / Jason Oxenham

Auckland Council is one of the country's largest and more important organisations, yet interest in the council is extremely low. Voter turnout at the 2013 local body elections was only 35.5 per cent and this year's election, with the polls closing today, will be only marginally better.

With one day to go, postal votes had been received from only 35.2 per cent of eligible voters, compared with 33.2 per cent at the same stage of the 2013 election.

Only 24.7 per of Otara eligible voters had voted with two days to go, and 28.2 per cent of Mangere-Otahuhu voters. Waiheke residents are far more engaged, with 51.4 per cent voting to date.

Auckland voter turnout doubled, from 30 per cent to 60 per cent, when postal voting was introduced in 1986. However, the positive impact of postal voting has dissipated and voter turnout will be well below 40 per cent in this election.

By comparison, Australian local elections have voter turnouts in excess of 90 per cent because voting is compulsory and individuals may be fined if they don't vote.

The low turnout in New Zealand is both disappointing and surprising as local government probably has more impact on our daily lives than central government.

Auckland Council is a vast organisation that operates 30 regional parks, 3012 local and sports parks, 55 libraries, 196 community halls, swimming pools and art facilities.

Its assets also include the region's stormwater pipes, 7565km of roads, 7287km of footpaths and the provision of public transport through trains, buses and ferries. In addition, it is responsible for the unitary plan and local plans, policy development, town centre development, property management and development.

The Council has $44.7 billion of total assets, which is more than the nine largest listed NZX companies combined, and has annual revenue of $3.7b. Fletcher Building is the only top ten NZX company with a higher revenue figure.

Shareholders are far more engaged with their companies than individuals are with their local council. It is normal to see over 50 per cent of shares voted at annual meetings and not unusual for more than 60 per cent of shares to be voted. This compares with a turnout of less than 40 per cent in local elections.

Most voters don't engage with councils until something goes wrong or they disagree with a decision. The country's largest city would benefit from more engagement by its residents.

One of Auckland Council's main issues is its complexity and the vast scope of its activities. This makes it extremely difficult for voters to identify, focus and assess the political objectives of the individual candidates.

For example, the council's full June 2016 year annual report, which was released last week, comprises three volumes with a total of 614 pages. By comparison, the two largest listed NZX companies, Meridian Energy and Fletcher Building, have annual reports of just 108 and 106 pages respectively.

Shareholders are far more engaged with their companies than individuals are with their local council.

Auckland Council was formed on November 1, 2010 following the merger of Auckland Regional Council, Auckland City Council, Manukau City Council, North Shore City Council, Papakura District Council, Rodney District Council, Waitakere City Council and Franklin District Council. It is the largest local authority in Australasia and has significantly more assets than the Government of Tasmania .

The accompanying table shows the financial performance of the council for the 2015/16, 2014/15 and 2011/12 years. The latter was the first full financial year following the November 2010 merger.

The figures are for the wider Auckland Council Group which includes Auckland Council Investments, Auckland Transport, Regional Facilities Auckland, Watercare and a number of additional council-controlled organisations (CCOs).

One of the first points to note is that rates revenue has increased by a relatively modest 13.9 per cent since the June 2012 year, while fees and user charges have risen by 31.8 per cent over the same period. The main user charges are water supply and wastewater revenue, which has risen 43.4 per cent, from $309m in 2011/12 to $443m, and port operations revenue, which has increased 16.6 per cent from $175m to $204m.

Graphic / NZ Herald
Graphic / NZ Herald

On the expenditure side, employee benefits have increased 22.6 per cent, from $655m to $803m. The Council, excluding its CCOs, now has 6102 full-time equivalent employees compared with 5598 at the end of the June 2012 year. In the latest year, 55 council employees received remuneration in excess of $200,000, compared with 41 employees four years ago.

One of the more interesting features is chief executive Stephen Town's relatively modest remuneration of $656,000. CEOs of much smaller listed companies receive more than $1m a year while Town is responsible for a vast organisation with a wide range of activities.

A sharp increase in depreciation and amortisation since 2012 reflects the increase in the Council's long-term asset base, which is a massive $43.8b. The Council's most valuable assets are: roads, $8.0 billion; water and wastewater, $6.9b; infrastructure land, $6.3b; operation land and buildings, $5.2b; and parks, reserves and buildings, $5.0b. The assets with the highest depreciation in the June 2016 year were roads and footpaths, followed by wastewater treatment and disposal.

But the biggest challenge facing Auckland is the anticipated 630,000 increase in population, from 1.57 million to 2.2 million by 2045. To meet this challenge, the council is planning to spend $18.7b on new assets between now and 2025. These include infrastructure assets, commercial services, public transport and community services. These will be funded through a combination of rates, user charges, borrowings and central government funding.

It is a major disappointment that only a small percentage of the population is prepared to engage in the process.

One of the main challenges for the incoming mayor will be to convince central government that it should pay its fair share of the $18.7b as Auckland is the main destination for internal and external migration and is the country's major business centre.

Last year Auckland Council received 27,353 written submissions on its 10-year budget. The submissions showed that 50 per cent of respondents opted for a fully integrated transport plan. As far as funding is concerned, respondents opted for motorway tolls and fuel tax and rate rises.

But transport, which represents 43 per cent of forecast capital expenditure between now and 2025, is only one of the big expenditure items. The next two are water supply and wastewater (25 per cent of capital expenditure) and parks, community and lifestyle (13 per cent).

The Council has this to say on funding: "We consider the fairest way to pay for long-life assets is to borrow as this spreads the cost across the generations of ratepayers who will receive the benefits from these assets. However, we need to make sure we use debt sustainably and that it is affordable for both current and future ratepayers. To this end, we have adopted a set of three prudential limits to ensure borrowings and interest expenses do not grow too large relative to our rates and other revenue".

The Council's borrowings have increased from $5.0b to $7.6b since 2012, although they are still relatively low compared to a total asset base of $44.7b. However, a large proportion of these assets do not generate any income and the council has noted that Aucklanders have expressed "strong concern about the level of council debt".

The new mayor and elected councillors face enormous challenges. They have to plan for the region's enormous growth and identify the major capital expenditure projects and how they will be funded.

It is a major disappointment that only a small percentage of the population is prepared to engage in the process.

- NZ Herald

Disclosure of interests; Brian Gaynor is an executive director of Milford Asset Management.

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Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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