KEY POINTS:
Plunging global share prices have wiped $25 million in three months from a $1.2 billion fund for public transport and stormwater in Auckland.
The books of Auckland Regional Holdings turned red in the first quarter of the 2008-2009 financial year on the back of an investment exposed to emerging market shares.
The investment turned a projected profit of $17.1 million for the quarter into a $5.3 million loss, raising alarm bells about the ability to fund public projects over time.
The blow from unrealised losses on global sharemarkets is also affecting Environment Waikato, which has announced a spending freeze.
Local Government Minister Rodney Hide has been told in briefing papers from the Ministry of Internal Affairs that councils relying on investment returns could be exposed to a big loss in income because of declining world sharemarkets.
ARH chief operating officer Peter Casey yesterday said the loss would not affect its ability to make a $155 million cash distribution to its parent body, Auckland Regional Council, this year. At the end of the year, the ARH would have distributed $540 million to the ARC in five years, he said.
Mr Casey said the diversified financial assets (DFA) fund accounted for 23 per cent of ARC's $1.2 billion of investments. Of the DFA fund, 44 per cent was invested in global equities, or about 10 per cent of total investments.
The rest of ARH's investment portfolio is a 100 per stake in Ports of Auckland, property at the Tank Farm for a long-term development and $210 million in cash. These assets produced a profit during the September quarter, but a $25.5 million loss from the DFA fund took the bottom line into the red.
Mr Casey said the ARH had a diverse, long-term investment strategy and a large buffer of New Zealand cash.
"We planned for volatility, but no one planned for this level of volatility," he said.
The issue has raised alarm bells with senior ARC officers, who said the DFA being "overexposed" in emerging markets had resulted in a 0.5 per cent loss of the ARH equity over a quarter.
"This loss for the quarter is significant and, unless recovered in future periods, will strongly limit the ARC's financial flexibility ..." officers said in a report to the ARC.
They said once the ARH had exhausted its cash portfolio, it would have to borrow or break the DFA fund to make contributions.
"This could arise as early as 2010, and needs to be monitored carefully," the report said.
