Councillors grapple with difficult decisions constantly and I sympathise with them. I’ve been there.
And few are bigger than the Aurora decision. As a councillor, I was exhorted to "listen to the ratepayers".
But my problem was always "which ones?".
Faced with tearing myself asunder to please all, I decided I had been elected because people believed I would do my best to make sense of complex information, do my homework to ensure that I understood it, and make a decision that would best balance the many competing views and interests. I have taken the same approach to this decision.
A city cannot stand still and rust never sleeps. Ageing infrastructure is a huge cost alone.
And if previous councils had simply invested in "necessities" the Town Belt would have houses on it, and the town hall, the Mosgiel aquatic centre, the stadium and many other examples wouldn’t exist. Each will have their supporters and detractors.
Moana Pool would not exist, as we know it, if the council of the time had acceded to the ratepayers’ associations, or indeed this newspaper. But it costs.
The best way to reduce cost impact is to ensure the assets you own are providing dividends that reduce that rates burden. Aurora simply doesn’t.
It is the wrong asset to have most of your investment capital in. It has not provided a dividend since 2017 and before that, for many years, it did so by its owners demanding returns it couldn’t afford.
The cost of that was an increasingly unsafe and unreliable network and a Commerce Commission fine of $5 million.
This was not a circumstance created by a private company gouging revenue and under-investing in safety and reliability (a fear advanced by many opposed to the sale). It was a demanding Dunedin City Council.
That fine is a reminder this is not a normal company. It is a regulated monopoly. Its return on investment is fixed by the Commerce Commission.
If you sell it the lines charges will be the same, regardless of who owns it.
Aurora is a good company. It will be consistently profitable (based on the Commerce Commission’s regulated rate of return).
So why doesn’t that profitability lead to strong dividends? Dividends are not paid out of profit per se. They come out of free cash flow (the amount left after tax and reinvestment in plant) or you borrow to pay them.
Over the next 10 years Aurora is conservatively expected to need $220m more than its NPAT to reinvest in network development.
All of that will be borrowed. Any dividends would have to come from more borrowing.
A lines company like Powerco, which has been referenced by some critics of the sale, does both and is heavily leveraged (over 80% debt to regulated asset base).
Its owners are massive investment funds that have access to capital at short notice. They can be heavily indebted and know that is not a risk.
As a council-owned company, Aurora does not have that option. And any dividends over the next 10 years, and likely into the future, will need to be significantly borrowed, and there are limits to the risk a council-owned company can take before it affects the ability for council to borrow, and the cost of that debt.
If Aurora was sold and its debt repaid there is likely to be at least a $500m surplus available for a diversified investment fund. That fund can be protected (as the Waipori fund has been for 25 years). And Waipori’s equity investments have averaged 10.22% over the life of the fund.
But let us assume an 8% return and ensure intergenerational equity by reinvesting 3% per annum to cover inflation.
The remaining 5% generates a $25m dividend (greater than the dividends Aurora can safely borrow to pay).
That dividend, because the fund is growing, would, on average, grow by the equivalent of inflation.
Critics argue that we are passing up value growth in a chase for short-term returns. And it is true that the company will grow in value if we keep it.
But that value growth will be funded in large part by debt — which would offset a significant part of that value growth and is likely to generate lower dividends, also funded by borrowing.
And you can only realise that value by selling at some time in the future anyway.
However, so will the value of the diversified fund grow. We just don’t have to put debt in to achieve it.
This is not fundamentally about "selling public assets".
It is about swapping one investment for a different investment that will better support Dunedin’s needs.
So here is a question.
Imagine Dunedin has $500m to invest for future generations. The council has two choices: borrow an additional $700m so it has sufficient to buy a lines company, or create a $500m investment fund.
The lines company will increase in value but will need more debt and provide inconsistent dividends because it is focused on growth. The $500m fund will generate $25m in the first year to offset rates, and both the fund and its returns will grow with inflation, maintaining value for future generations.
Plus, it won't require hundreds of millions in additional borrowing. Which option would you prefer the council chose?
Oh, and a last thought. Had that fund been operating this year, the rates increase would have been 5.2% rather than 17.5%.
— Richard Thomson is a former Dunedin city councillor and a recently retired Dunedin City Holdings Ltd director.
