Capital Markets: Christchurch tackles thorny issue of asset sales

Lianne Dalziel will wager political capital on Christchurch's asset sales move. Photo / Martin Hunter

As Auckland faces up to a massive funding shortfall in infrastructure, all eyes will be on how Christchurch's controversial approach plays out.

The shortfall in Auckland is likely to be met with significant rises in rates. The Lianne Dalziel-led Christchurch City Council is favouring an approach that will curtail rate increases by selling off some assets to help bridge the funding shortfall for the ongoing rebuild.

Submissions on the proposed asset sales begin this week, with heated debate expected. After the mixed performance of the Government's asset sell-down in 2013, Dalziel will wager significant political capital with the move.

But city councillor Raf Manji says the move is primarily around asset performance and utilising them for maximum benefit. "It's a strategic issues around how we manage our assets. Even if we didn't need the funding aspect sorted out, we would still be reviewing a lot of our companies and maybe making similar decisions anyway," he says.

"Our commercial portfolio has an equity value of around $1.6 billion and is generating $45-50 million per year in dividends, so it's returning less than 3 per cent. If we are paying over 5.5 per cent for our debt, you could argue it makes sense to release some capital, with valuations where they are."

The Christchurch council went out to the community last year with their "smart choices conversation" to gauge the public's interest in the range of ways to raise capital for the funding gap.

"Christchurch is very much still in the earthquake recovery process. When the new council came in, we found out that the previous planned budget was a bit of a fiction and we've spent all of the last year trying to work out what the financial position really is," says Manji.

"We've said there are a lot of assumptions in this budget, and the final budget is likely to look very different to the one that we just notified for submission."

Opposition has been strong from inside and outside of council, with People's Choice councillors led by Andrew Turner arguing the figures could be made to work without gutting the asset base. Manji, however, says this is inaccurate, calling Turner's calculations a "back of the envelope budget".

He says "the headline of Turner's budget was that we can save $700 million and then we don't have to sell any assets, and that's not quite true. What they are suggesting is deferring around $450 million worth of spending out of the 10-year plan.

"But under the new guidelines, we are required to have a 30-year infrastructure plan.

"With a 30-year debt profile, if you defer spending from year seven to year 12, it doesn't really make a difference - we still have to spend the money."

In an effort to build public support, the council signalled early on that it intended to sell down assets to "strategic partners". These partners had to have an ability to work with council and ensure that it continued to meet the needs of the Christchurch people.

"If it was a question of trying to get the best return in terms of any kind of sale, whether it was a partial or full sell-down, you would just stick it on the open market and sell it to the highest bidder," Manji says.

"If we look, for example, at what investors have been paying for ports in Australia - 20 times earnings or even more - that is where you'd get the best return. But from a strategic and political perspective, that is not going to be as well-received."

"Over the past six months we have had a lot of interest and have now set up a formal process with a project team. They are doing some scoping work out in the market, trying to bring some information back to council to lay out the options and interests expressed by the market."