How to best use 'family jewels'

By Peter V O'Brien

Friday 13th December 2002

Auckland City Council's sale of half its holding in Auckland International Airport renewed the debate about central and local government involvement in business enterprises.

Auckland mayor John Banks said the sale proceeds would be used to reduce debt, although last year he argued sale of the airport shares and the council's holding in Ports of Auckland should be put toward improving the city's road system.

The council may be able to meet both objectives. There are opposing views on local authorities' passive or active investment in airports, seaports, power companies and other utilities. Elected councillors' opinions are usually related to their political philosophies and the state of a particular local authority's finances.

Mr Banks is hardly a disciple of left-wing ideas and probably would be offended if anyone suggested so.

Christchurch mayor Gary Moore has a different stance. He heads a Labour-dominated Council. He was quoted as saying his city had no debt and no intention of "squandering our family jewels," those apparent gems being majority shareholdings in Christchurch International Airport and Lyttelton Port Company.

He calculated the city's rates would rise 30% if it did not have its trading asset investments. His rate-increase claim was doubtful when considered in relation to selling the council's investments.

The city receives dividends from the companies. They would be surrendered if the holdings were sold but sale proceeds would be substantial and allow the city to finance many infrastructure requirements.

There could possibly be money left over to be salted away and take pressure off rates.

Mr Moore's reference to "family jewels" was a nice image but inappropriate. Some family jewels may generate an income flow if put on display and fees charged to view them. Many families would be better off if heirlooms were sold, irrespective of their income-generating capacity.

Wellington mayor Kerry Prendergast was reported as saying her council would consider its holding in Wellington International Airport next year. The Wellington City Council has debt that must be financed from general revenue as well as requiring repayment. Interest on local authority debt impinges on rates, subject to an offset from shareholdings in companies.

Therein lies part of the difference between public bodies and companies. The best financial structure for a company is a mixture of debt and equity, the latter a combination of paid-in capital and reserves.

A local authority has no paid-in capital in the corporate sense. It has no shareholders who can trade their equity. Aucklanders, Wellingtonians and ratepayers in other towns and cities are unable to trade their "shares" in councils, apart from the ability to opt out of rates by selling their dwellings and moving elsewhere.

They will contribute to council revenues wherever they go. Proceeds from the sale of a former dwelling were the result of earlier private sector assets creation. There is an old, but fallacious, argument that ratepayers (and taxpayers in relation to central government) are "shareholders" because they can vote for the "directors."

Voters in general and local authority elections get one vote each. Shareholders in companies get a vote for each ordinary share held, with occasional exceptions where there are restricted voting rights. Few, if any, of the latter cases would get a listing on the Stock Exchange.

Comparisons between companies, local and central government operations and the asset bases of both need two other qualifications. Company shareholders have proportionate financial stakes in net equity and capacity under the Companies Act to object immediately to the company's apparent, or real, misuse of assets. They can also contract out through sale of shares.

Ratepayers and taxpayers lack those options. Wellington, for example, is often praised locally and elsewhere for its partial, or fully, civic-funded facilities, including the Westpac Stadium. Ratepayer access to the stadium is restricted to those who pay entry fees to events, giving a 2002 meaning to the famed UK judicial dictum that the courts were, like the doors of the Ritz hotel "open to rich and poor alike."

This city had grandiose expenditure on the vanities of former councils while people broke ankles on unmaintained footpaths and sewerage and storm water systems degenerated to a shambles.

It seems to an outsider that Auckland's roading system degenerated to a similar shambles, paradoxically as a result of people flocking to the city in search of the good life. Use of the family jewels may depend on whether family members want nostalgia wallowing or financial realisation of granny's valuables.

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