The Wellington Airport sale

A very good column by Paul Ridley-Smith, who is a former director of Wellington Airport. He notes:

The Officers’ paper, that vociferously argues to continue with the sales process, is a mixture of a well reasoned and economically rational arguments for the sale, and pages of complete nonsense and irrationally presented scaremongering about the consequences of not selling. 

Briefly, the principal reasons given for the sale are sound. When the big shake comes, the city will be better placed to meet the costs if it has an NZ Super type diversified investment fund, rather than a 34% shareholding in a compromised asset in a quake damaged city. 

Selling now removes the risk that the Council might need to tip more money into the Airport to maintain its 34% shareholding when Infratil decides to call for more capital to fund new projects. Auckland City has twice in recent years been diluted down in its Auckland Airport investment, on unfavourable terms, because it couldn’t fund the cash calls. 

And, for completeness and these are my views, there’s no strategic value in a 34% shareholding in a business where someone else holds 66%. If you believe, when push comes to shove, Infratil won’t do precisely whatever it wants with the Airport, I’ve got a bridge to sell you. 

There isn’t a strategic value in the Airport shares, just a strategic risk.

Yep, all good reasons to sell, basically:

1. Too much of WCC’s investments are tied up in one asset
2. If an earthquake strikes, the very time when Wellington City Council will need capital will be the very time its investment value will plummet.
3. It is a capital intensive business which means either WCC needs to borrow money to invest in the airport, or dilute its stake
4. A 34% stake only gives you risk, not control

However he also notes:

The case for sale should end there. But, for reasons that utterly confound, Officers go on to construct bogus scenarios to seek to scare the big-spending left-wing Councillors into selling and embarrass the fiscally sensible Councillors for not believing in alchemy. …

The errors start with Officers postulating that the 34% shareholding is worth $492m. But Infratil’s 2024 Annual Report assesses the fair value of its 66% shareholding at $624m, implying the Council’s 34% shareholding is worth $321m. Officers then postulate that investing this $492m (and another $50m from selling ground leases) could compound to deliver the City an investment fund worth $6,400 million by 2072, while still getting dividends each year from the fund equal to the dividends that the Airport is forecasting to pay, or perhaps $16,000 million if all dividends are reinvested.

Fantastical nonsense.

If the perpetual investment fund is the next version of Grant Robertson’s money-printing machine, then let’s keep spending. But not selling turns off the money-printing and Officers say $400-$600m will need to come off discretionary capital spending over the next few years. The Golden Mile, cycleways, the Khandallah Pool and Begonia House upgrades and all manner of nice things will have to be cut.

Now pause here, and sense check these claims. 

Does any reader believe that if they swap their $49,200 Kiwisaver balance from ANZ to BNZ they can then spend $60,000 more on a new kitchen and bathroom? But leave it with ANZ, then the kitchen and bathroom stay in the glossy catalogue. That’s what Officers are saying. Switch the asset from A to B and you can spend up to another $600m. Don’t switch then you must cancel that spending.

And this is why some fiscally conservative Councillors are now against the sale. Because it will be used to keep spending unaffordably high.

Half of the Officers’ advice makes perfect sense (diversification of investment risk is sound) so vote to sell. The other half admits that the Council is financially at its limit, the status quo position (ie keeping the Airport shares and spending up as the 2024-2034 LTP forecasts) creates too much financial risk, the Council is on the verge of imprudent financial management and a ratings downgrade, but all this can be managed by moving assets from one bucket to another. The rational and responsible response to such advice is keep the Airport shares and get on with cutting the excessive spending and escalation of debt and pulling back the rates increases. Deal to the underlying issues and not pretend that selling the Airport shares, or not, is pivotal. No sale could be that blessing in disguise.

Yep sell the shares, and cut the excessive spending.

A related issue is council staff have gained legal advice that says Council is not allowed to amend a recommendation from the LTP Committee, because it has delegated the plan to them. They say the only way to amend the LTP is to remove the delegation from the LTP Committee. In the absence of that, they can only accept a recommendation or send it back.

This contrary to every organisation I know. It’s like saying Cabinet can’t amend papers from Cabinet Committees or a company board can’t amend a recommendation from a sub-committee.