Mayor Wayne Brown plans a regional wealth fund to secure the council’s financial future and respond to natural disasters, such as last year’s storms. The Auckland Future Fund, as it is called, would be set up by selling a long-term lease to run the Port of Auckland and
Explained: Auckland Mayor Wayne Brown’s $3-4b war chest to secure council’s financial future and natural disaster response
Auckland Mayor Wayne Brown is putting the Auckland Future Fund out for public feedback as part of the council's Long-Term Plan. Photo / Jason Oxenham
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A fund manager would be appointed to invest the proceeds from the port lease sale and the airport shares into a diversified package of shares and less risky income assets to give the council an annual return of 7.5 per cent.
The 7.5 per cent figure is based on advice the council received about average historical returns from similar funds in New Zealand and Australia.
The fund will be based on a mix of 80 per cent shares and 20 per income assets such as bonds - the same ratio used by the New Zealand Super Fund.
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The idea is for the council to be paid 5.5 per cent and 2 per cent to be reinvested in the fund to grow over time.
A report by PwC on the fund said the status quo gives the council the limited ability to respond to shocks without selling assets or cutting spending, saying a 7.5 per cent “may be achievable”, and adding high growth investments may be “more volatile”.
Council treasurer John Bishop says it is not sensible for the council to have all its eggs in just two baskets, and better to spread the risk and invest in hundreds, if not thousands, of different securities.
The fund is expected to be up and running by July 1, 2025, and pay a dividend of $185 million to the council a year later.
What happens in years when the return is less than 7.5 per cent, or negative?
Bishop said this is the average return over the long term and it is important to forecast revenue levels in advance to support budgeting to set rates and for public consultation.
“Therefore, the council would plan to receive the 5.5 per cent cash distribution every year, with the level of reinvestment fluctuating,” he said, saying if it became clear the long-run average returns and distribution budgets need to be revised, this would be done through the budget process.
Even in years when there is a negative return, Bishop said the council could still draw down in that year to ensure it can fund its operations.
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What’s the plan for Port of Auckland?
As part of the long-term plan (LTP), the council is proposing to sell a long-term lease of about 35 years to operate the Port of Auckland while keeping the waterfront land in public hands.
Plans to sell the port business were set in motion by former Mayor Phil Goff when global port operator DP World made an unsolicited $1b bid in 2021. Other port companies are also interested in the Port of Auckland.
Council officers say the sale could achieve a one-off upfront payment of between $2b and $3b for the term of the lease, but for financial modelling, they use a figure of $2.1b.
Auckland Council would retain the debt of the port company, of about $400m, as it is associated with the land and wharves, which stay under public ownership.
What’s the plan for the airport shares?
The council had an 18 per cent stake in the airport but sold a 7 per cent stake in Wayne Brown’s first budget last year. The latest plan is to put the remaining 11 per cent of shares, valued at about $1.4b, into the Auckland Future Fund and to sell most, if not all, of the shares over time for a diversified range of securities.
How do the returns from the port and airport stack up against a 7.5 per cent return from the fund?
The council estimates it will receive $941m from the fund related to selling the port lease over nine years, compared to $856m from projected dividends from keeping the port operations.
Port chief executive Roger Gray says the projected dividends are relatively conservative and being revised, and will be known by the time councillors approve the LTP. There could also be a situation where the port makes a capital return to the council, he said.
There’s a much harder commercial edge to the port now than in the past, said Gray, adding that under his and the new board’s leadership “the profit at Port of Auckland will increase” and hit its targets.
Regarding the proposed lease sale, Gray said that is a matter for the council as the 100 per cent shareholder in the port.
In the case of the airport shares, the council estimates it would receive $321m in dividends over nine years, compared to $745m from selling the shares and putting the proceeds into the diversified fund.
How much will it cost to run the fund?
The council will go through a competitive market process to secure a professional fund manager, Bishop says.
The council has provided for fees and overheads of 0.15 per cent, or about $5m a year. This is an estimate and the actual amount will depend on the size of the fund, the funds it invests in, legal, governance structures, tax etc, he said.
The NZ Super Fund, which began investing with $2.4b from the Government in 2003 and has grown to $70b, including $26b of Government contributions, pays external management and performance fees of $100m a year, and staff costs of $62m.
The Auckland Future Fund is likely to be a different model from the Super Fund, which in-sources and engages in direct investments “which is not envisaged for the Auckland Future Fund”, says Bishop.
The Auckland Future Fund is also different from the NZ Super Fund, which was set up to grow over the long term to help pay for superannuation costs, in that the council plans to draw down payments every year within two years of its establishment.
What protections are in place to ensure the fund does not go the same way as the Diversified Assets Portfolio?
A $300m-plus Diversified Asset Fund comprising international stocks, bonds and cash built up by the former Auckland Regional Council was sold down between 2016 and 2018 for one-off payments towards several projects. The fund is long gone.
Bishop said the Auckland Future Fund would be established with rules and restrictions in place, including the circumstances in which the funds would be accessed in future. Setting the fund up as a trust or similar structure could add extra restrictions. The Diversified Asset Portfolio has no such rules or restrictions, he said.
There’s a plan to use part of the fund for self-insurance. What’s that all about?
The plan is to allocate a minimum of $1b of the fund for self-insurance to potentially reduce the council’s insurance premiums by $12m a year. As things stand, the council’s insurance bill could increase substantially over time.
A major event such as last year’s floods could require a significant withdrawal from the fund that would require trade-offs between reduced payments from the fund to the council, or a reduction in the fund over time.
Does Wayne Brown have the numbers to set up the fund?
At this stage, the fund is on shaky ground because a narrow majority of councillors are opposed to selling a port lease.
The proposal to go out for public consultation on the options for continued public ownership of port operations, and leasing the port operations in the long-term plan (LTP), was only passed at the budget committee stage before Christmas because two members of the Independent Māori Statutory Board (IMSB) voted for it.
When the LTP is approved in May by the governing body, because IMSB members are not members of the governing body, that leaves 11 councillors opposed to leasing the port operations and 10 in favour.
The numbers could change between now and May but if not, the fund could still be set up with just the airport shares. There are options in the consultation material for this.
What do others have to say?
Maritime Union of New Zealand national secretary Craig Harrison said under port “privatisation”, Auckland businesses would end up paying inflated costs to deliver profits to a global port operator with a monopoly stranglehold.
Major price hikes from private terminal operators like DP World have led to an outcry recently in Australia, and the result could be even worse in New Zealand, he said.
Furthermore, after years of bad blood with the previous port management and board, the union said the port has seen a major turnaround under new management and a large part of this was due to the union now being involved in decision-making and planning.
“The port is rapidly improving its performance, as even the mayor has acknowledged. We have a successful, growing port that is delivering for Auckland, so why risk all this?” the union’s Auckland agent Russell Mayn said.
Mark Lister, investment director at Craigs Investment Partners, liked how Brown is thinking outside the box regarding getting more bang for the buck out of council assets to supplement rate increases.
He said the proposed 7.5 per cent rate of return is a typical return from a diversified portfolio - “some years it will be 17 per cent, some years it will be minus 7″ - saying using some of it for Auckland’s needs and reinvestment is good.
“Is the council the natural owner of the port or the airport? For me, they are not. I look at the Port of Tauranga and I look at the Port of Auckland, I look at the track record over 20 years, and the council hasn’t been a great steward of that capital.
“The time is right for councils, not just Auckland, to start thinking whether there is a better ownership structure and better way to deliver the needs of the city.
“All councils need to be a little more open-minded about some of the assets they own, the way they are structured, partnering with the private sector, other investors, partial sell-downs - they should put all of those things on the table,” said Lister.
Public consultation
The Auckland Future Fund is part of the council’s Long-Term Plan - also known as the 10-year budget - that is out for public consultation between February 28 and March 28.
Tomorrow: Wayne Brown and councillor Mike Lee on the Auckland Future Fund.
