More than $1 billion worth of major Auckland civic developments are under threat from the global recession which has sent returns from the regional council's strategic investments into freefall.
Politicians, directors and senior Auckland Regional Council staff held crisis talks on Friday to get to grips with the rapidly deteriorating books of the ARC's business arm, Auckland Regional Holdings.
The meeting broke up in acrimony and will reconvene on Thursday.
Auckland Regional Holdings is struggling to pay a $155 million grant to the parent body this year.
Serious doubts have also been raised over how it will pay $548 million over the next decade to help fund rail electrification, integrated ticketing and development of the Tank Farm.
"There is a lot of ducking for cover going on," one insider told the Herald yesterday.
Auckland Regional Holdings is responsible for $1.2 billion of assets and investments including a 100 per cent stake in Ports of Auckland. Its investment fund last valued at about $276 million, $210 million in cash, and property at the Tank Farm.
The slump in its earnings follows Weekend Herald revelations that the ASB Community Trust has lost $200 million since October as a result of the global recession.
The trust is having to slash distributions to community groups in health, education, cultural, heritage and sport in Auckland and Northland.
Finance Minister Bill English is aware local government is starting to suffer dropping revenues and investment income from the recession and indicated Government help could be at hand.
"They [councils] may end up cancelling capital projects which, with a bit of assistance from Government over debt-raising and so on, could actually go ahead," Mr English said.
Auckland Regional Holdings chairwoman Judith Bassett yesterday said the recession was affecting all income-generating assets. Volumes were down at Ports of Auckland, sharply falling interest rates were affecting cash returns and equities in the diversified financial assets fund had "taken a nosedive".
In December, the Herald reported that plummeting share prices turned a projected profit of $17.1 million in the September quarter for the fund into a $5.3 million loss. The ink will be redder when the December quarter is reported.
Mrs Bassett said she pointed out in December when reporting the September quarter, that the economic situation was "extremely volatile". In the space of one month things had got worse and people were less confident about global recovery times.
ARC chairman Mike Lee said he was concerned, but not surprised by its business arm's performance.
He was adamant his council was "past the point of no return" for the signature projects of rail electrification and integrated ticketing.
The council has sought expressions of interest for the $1 billion rail electrification project. Half the bill is being funded by the Government, the other half by the council.
A regional fuel tax, due to be phased in, starting at 1c a litre in July, will pay for the ARC's capital costs. Money from its holding company and rates will go towards the operational costs for electrified rail.
The holding company's income is also expected to contribute to the operational costs of a $170 million integrated ticketing project. A tender process is nearing completion for the project.
Asked how the ARC could continue these projects with so much uncertainty about funding from its investments, Mr Lee said: "I'm absolutely confident we can, and we will."
He said proceeding with rail electrification and integrated ticketing could mean "sacrifices" for other capital works.
The most likely candidate is the $1 billion-plus Tank Farm development on the western edge of the city, which could be deferred for several years until the holding company's profits pick up and the property sector recovers.
The Auckland City Council, an ARC partner in the Tank Farm, plans to defer construction of the $51 million Te Wero bridge linking the Viaduct Harbour with the Tank Farm until 2012 at the earliest. The councils had hoped to have the first stage of the Tank Farm ready for the 2011 Rugby World Cup.
The chairman of the Auckland Regional Council, Mike Lee, complained to the Press Council that the New Zealand Herald had published a report containing inaccurate information about the cost of an integrated ticketing system for public transport in Auckland.
The complaint is upheld.
BACKGROUND
On February 2, 2009, the Herald published a front-page lead headed Slump hits city's major projects; ARC holds crisis talks on state of business arm's books.
The article said more than $1 billion worth of major civic developments were under threat from the global recession "which has sent returns from the regional council's strategic investments into freefall. Politicians, directors and senior Auckland Regional Council staff held crisis talks on Friday to get to grips with the rapidly deteriorating books of the ARC's business arm, Auckland Regional Holdings."
The article said: "The meeting broke up in acrimony and will reconvene on Thursday."
Further in the article, a paragraph said: "The holding company's income is also expected to contribute to the operational costs of a $170 million integrated ticketing project. A tender process is nearing completion for the project."
Accompanying the article was a graphic which included an illustration of buses and the headings: Threatened: Integrated ticketing. The caption read: "The successful tender for the $170 million integrated ticketing project is to be announced shortly, but can Auckland afford the project?"
THE COMPLAINT
Mr Lee disputed how the meeting had ended and the cost of $170 million, and took up his complaint with the Herald. The reporter who wrote the article had interviewed him the day before and he had told him there was commercial sensitivity about the ticketing project but the capital cost was expected to be $60 to $80 million.
The day the article appeared, he left a message on the reporter's cellphone complaining about the $170 million figure and the statement that the meeting had broken up in acrimony.
The reporter was by then on leave and his call was not returned. Mr Lee said he also complained to another Herald senior journalist.
The same day - February 2 - he wrote to the editor again stating the meeting had not broken up in acrimony, and this was published in full. At the time, he decided not to raise the issue of the ticketing system because of commercial sensitivity surrounding the project.
But on February 10, the Herald published a letter critical of Mr Lee under the heading ARC's $170m ticket plan absurd. He contacted the Herald's editor, Tim Murphy, by cellphone to take up the cost issue again but Mr Murphy did not call back.
He also wrote a letter to the editor and what Mr Lee described as a heavily truncated version of his letter was published on February 12. It said, over Mr Lee's name: "A Herald article and subsequent letter to the editor said the cost of integrated public transport ticketing would be $170 million. The likely cost of that ticketing is between $60 and $80 million."
In an exchange of emails between the pair, Mr Murphy said he had had no indication of Mr Lee's disputing of the figure until February 10 and once he was aware of it, he referred it to his newsroom. The reporter was on leave and not contactable until February 12.
Mr Murphy said the reporter remembered Mr Lee mentioning figures of between $60 and $80 million but took that to be referring to the ARC's proportion of the overall cost, both capital cost and running costs. He believed the ARC proportion was set at between 50 and 60 per cent.
A total figure higher than $80 million had been made by a "central government figure," and that reinforced the reporter's understanding that Mr Lee's estimate was for the ARC proportion only. "If indeed you are now saying the overall cost (not just capital, as specified in your letter) is going to come in under $80m in total, we will clearly be prepared to correct that in the paper."
In an email to Mr Lee the same day, Mr Murphy said he had been made aware the New Zealand Transport Agency's estimates of capital and running costs for the project over 10 years were close to $150 million "before CPI increases". This was "close" to the reporter's published figure.
In his formal response to the Press Council, Mr Murphy said the February 2 story had said the cost, including operational costs, was likely to be around $170 million.
He also expanded on his figures, quoting a report from the NZTA of December 2008 which put the capital cost at $70 to $85 million and annual operating costs of $6.5 million over 10 years.
"Aware of this overall figure, he [the reporter] misunderstood Mr Lee in an interview before publication of the February 2 story to be referring to the ARC proportion of cost when Mr Lee specified a total of $60 to $80 million," the editor said. "As it happens, that misunderstanding was not material - we stand by the total used as an accurate estimate at that time of capital plus operating costs of the integrated ticketing system."
In his formal complaint to the Press Council, Mr Lee disputed that. The February 2 article said the "holding company's income is also expected to contribute to the operational costs of a $170 million ticketing project." He added: "One could infer from this that the operational costs are in fact extra."
He pointed out Auckland Regional Holdings and the ARC were also expected to contribute to ongoing operational costs of a $1 billion electric train system mentioned in the article.
While it was correct the operational cost over 10 years was estimated to be $6.5 million a year, the region's cost would be 40 per cent of that. But adding that figure to the $80 million capital cost gave a total of less than $150 million, not $170 million.
The editor's argument was specious. "It is like someone claiming a copy of the Herald costs $10,000 and then explaining that one meant the cost of buying the Herald for 10 years."
DISCUSSION
A first issue for the Press Council is whether a reasonable person reading the February 2 article would believe the reference to the $170 million ticketing project referred to the capital cost or the capital cost plus operational costs.
The article makes two references to the figure - one to the holding company's contribution to the operational costs of the $170 million project. A second, a caption, referred to "the successful tender for the $170 million project".
While operational costs are mentioned, it is by no means clear the figure of $170 million includes both capital and operating costs and the latter are extrapolated over 10 years. The sentence cannot bear the weight the editor places on it. It does not, as the editor says, "clearly" stipulate operating costs as part of the $170 million - it reports only of the holding company contributing to the operating costs of a $170 million project.
The caption does not mention operational costs but links the successful tender to the $170 million project. Without further explanation, the Press Council believes a reader would be entitled to believe that was the capital cost alone.
A second issue is whether the $170 million is correct. The figures by the editor's calculations from the NZTA estimates do not add up to $170 million. It is closer to $150 million. While the editor indicates the $170 million allowed for costs to rise through inflation, this was not stated in the article and readers should have been made aware that such estimates had also been factored in.
The Herald agrees its reporter did misunderstand Mr Lee's figures but the claim the figures are approximately the same is not convincing.
It is obvious no figure can be regarded as accurate because a tender for the integrated ticketing system had yet to be let, and therefore unknown, and operational costs 10 years into the future and rates of inflation can only be regarded as estimates.
Mr Lee's letter, albeit truncated, published on February 12 does present his point of view, but without background about the previous article and letter, its overall corrective or explanatory value is diminished.
It is regrettable both parties did not adopt a more conciliatory approach with a view to resolving the issue so readers and ratepayers could have been better informed on the issue of cost, capital and operational, and the sharing of those costs between central government and the regional council.
DECISION
Mr Lee's complaint about the inaccuracy of the figure is upheld. The caption and sentence in the February 2 article taken together indicate the figure refers to capital costs only and, if it didn't, the Herald should have explained how it reached the figure. There was no reference to the figure including 10 years operating costs.
The publication of Mr Lee's truncated letter does not absolve the Herald. It should have carefully made clear its calculation methodology in the initial article so readers were in no doubt.
