Take the money and run ...

By BERNARD ORSMAN

Imagine inheriting a blue chip share portfolio worth $1 million. Do you put it in the bottom drawer and watch it grow, banking dividends along the way, or do you sell? There's that mortgage of $250,000 and the house could really do with painting. The 10-year-old car needs replacing and school fees are piling up.

John Banks faced a similar scenario when he was elected mayor of Auckland City 13 months ago: a stake in Auckland International Airport now worth $500 million.

To put that sum into perspective, the National Government sold New Zealand Rail in 1993 for $328 million and Finance Minister Dr Michael Cullen has a frugal $2.2 billion available over the next three years for all new Government spending. He must be green with envy.

You can imagine Banks' excitement at the prospect of $500 million to splash around, not to mention the political spinoffs.

According to Banks, the council was faced with a "mountain of debt" when he came to office. Making matters worse was the crumbling state of the city's sewerage, stormwater and roading infrastructure.

The way Banks tells it, the "house of Auckland" was cranking up its mortgage from $155 million to $350 million over the next two years, largely because of Britomart.

"The philosophical problem I have with that is if you had a substantial first mortgage on your home and it needed repairs and maintenance, would you go out and put a second and third mortgage on it to do the repairs if you owned shares in Auckland Airport? The answer to that is probably not."

So, with the political right on the new council, Banks has decided to sell the shares to reduce debt and establish a capital fund to fix infrastructure and build new assets without a big impact on ratepayers. That's the plan.

The political left believes otherwise. City Vision leader Dr Bruce Hucker says the airport is a strategic asset, which will fall into foreign hands if fully privatised and be ripe for asset stripping.

He believes that Auckland City and Manukau, which hold 34.3 per cent of the airport shares between them, have sufficient leverage to ensure the board takes into account the interests of the region when it comes to things such as landing charges, developing land and fostering tourism. Manukau City Council is staunchly opposed to selling its airport shares.

Furthermore, Hucker says cashing up the shares and putting the money into a capital fund, along with $83 million the council is due to receive from the Government for the sale of pensioner and general houses, is a recipe for fiscal irresponsibility.

"In my view the capital fund will be seen as a lolly jar and we will see all sorts of projects come up for capital funding," says Hucker, a former member of the Alliance, which saved Ports of Auckland and other regional assets from privatisation.

While the sale goes ahead, Hucker and four other left-leaning councillors have scuttled any chance ratepayers had of buying the council shares. They refused to sign a prospectus which, by law, had to be signed by all 20 members for a public offer.

This ideological grandstanding means that when it comes to a sale to institutions or trade buyers, the shares may be gobbled up by foreign buyers. A sale is expected to be wrapped up by Christmas.

Auckland Airport began life in 1928 when land rented from McRae Peacock's dairy farm at Mangere was turned into the Auckland Aero Club. Auckland City Council played a big part in establishing the site as the official Auckland airport.

In 1946, the council shifted the official airport to Whenuapai and it was not until 1965, after five years of construction at a cost of $20 million, that the Mangere site regained its official status and the first commercial jet services flew into Auckland International Airport.

In 1998, the National Government sold its 51.6 per cent share in Auckland International Airport in a public float at $1.80 a share. The shares were snaffled up by 67,000 people, mostly New Zealand mums and dads.

Local councils were issued with the remaining 49.4 per cent, of which Auckland City got the largest stake with 25.75 per cent, followed by Manukau with 9.64 per cent, North Shore 7.14 per cent, Waitakere 3.7 per cent and Franklin 1.17 per cent.

Since 1998, Auckland Airport has flourished under managing director John Goulter and a strong board and become a darling of the New Zealand Stock Exchange. It has consistently exceeded profit forecasts and successfully diversified into retail and property management.

In the last financial year, 8.8 million passengers travelled through the airport, cargo totalled 189,000 tonnes and the company gained approval to build a second runway.

Weekend Herald investment analyst Brian Gaynor last year argued there was a strong case to sell and use the money to foster business growth.

In March, he changed his mind and said there was no justification for selling these shares to repay debt and put the surplus money into a capital fund.

Gaynor argued that far from suffering under a "mountain of debt", the council does not have much debt at all. This year's annual report shows borrowings of $228 million, compared with total assets of $6.2 billion.

Another argument in favour of the sale is that the public sector is hopeless at running commercial operations. True, said Gaynor, but politicians do not run the airport.

Gaynor found the problem with Auckland City's analysis of the airport was that it does not take into account any potential growth in the value of the investment.

"Given its past performance and strong strategic position, it is reasonable to assume that Auckland Airport's share price can grow by at least 8 per cent a year over the next 10 years.

"Over 10 years, the interest cost savings from the repayment of debt will exceed dividend payments, but this will be more than compensated for by the capital appreciation of the investment."

Figures prepared for the Weekend Herald by council officers show that since 1998 the council has received an average annual dividend return of 8.89 per cent return on the shares, including special dividends. This does not include a capital repayment of $54 million this year when the company cancelled seven shares out of every 25 and paid $1.80 for each cancelled share. This was offset by a $54 million reduction in the value of the council's shareholding - making the transaction neutral.

A council treasury officer, Nicki Lucas, said proceeds deposited in the capital fund are expected to earn 6 per cent or higher. The likely savings in debt servicing costs are $17 million a year.

Doug Armstrong, who chairs Auckland City's finance committee, is unimpressed with Gaynor's arguments but has not commissioned any independent analysis of his own.

The only outside advice the council has to go on is two pages in Sir William Birch's cost-cutting report in December where the former finance minister and cheerleader for privatisation said the shares were not a core activity of the council and should be sold.

Birch undertook no detailed financial analysis of the past or projected future returns to ratepayers.

In Armstrong's view, Auckland Airport is the best-run airport company in the world, "performing stunningly in a capital gains sense and doing nicely in a dividend sense".

Why sell then? "It's a financial investment philosophy. I don't think it's prudent for the city to have that much money tied up in one entity."

Armstrong comes back to Banks' view on crumbling infrastructure. For example, in the neglected - and unsexy - area of stormwater, Armstrong says the council is spending about twice the amount it is legally obliged to spend to bring it up to scratch. The money has to come from somewhere, preferably not ratepayers' pockets.

What do ratepayers get for selling the shares? Near zero debt after paying off loans for the Britomart transport interchange and other capital projects. Possibly an $80 million indoor arena at Quay Park and a big convention centre. Improved stormwater, sewage and footpaths. The eastern highway is another candidate.

Armstrong is coy about rates. At first he said rates would be lower from the interest cost savings from the repayment of debt. Then he said the sale would help the council to hold rates.

Auckland Citizens & Ratepayers Now, which campaigned to hold rates in dollar terms for three years, has broken that promise in the first year by increasing household rates by 4.2 per cent.

Gaynor noted in March that all the councils that have sold their Auckland Airport shares would have been better advised to hold them.

North Shore City Council sold its 7.1 per cent stake in 1999 for $87 million. The money was used to reduce debt from $70 million to $17 million and to increase capital spending. The capital assets of the council have increased since then by $250 million - but council debt is back up to $78 million.