Auckland Mayor Wayne Brown is hoping his brainchild of a Future Fund will insulate Auckland Council against the kind of economic conditions he inherited when he took over in late 2022.
But with the fund potentially being seeded from the remainder of the publicly held airport shares and profits from the operating lease of the Port of Auckland, it’s already proven a controversial idea among the councillors most opposed to asset sales.
Documents provided by council staff to the councillors in a workshop earlier this month lay out positives to a diversified wealth fund such as a new long-term revenue stream – but also warn of some potential pitfalls.
Accounting firm PricewaterhouseCoopers were engaged to take a look at the financial pros and cons of the Auckland Future Fund.
The exact configuration of the Future Fund will be knuckled out over the next few months, taking shape as part of the long-term plan – the council’s budget covering the next decade.
However, with the first proposal for that budget going out to public consultation next week, we can see for the first time the contours of what that fund might look like.
Councillors have been presented with four options they could conceivably take: the full Future Fund plan as featured in the consultation document, a mix of different ingredients added or left out to the mixture, or no fund at all.
Council staff explained the rationale behind the fund as diversifying two major assets into multiple financial assets and gaining greater liquidity of investments, with an expected return of 7.5 percent a year.
A value of two percent would be reinvested each year to maintain the real value of the fund, while 5.5 percent would be distributed across the council group to pay for a variety of services.
But the initial $3 billion to $4 billion needed to create the fund needs to come from somewhere.
The core proposal suggests selling the current $1.4b of airport shares remaining after last year’s sale.
The rest would be largely made up by selling the operating lease to the port, estimated at a value of $2b-3b.
PwC warned that though a 7.5 percent return may be achievable, high growth investments like this can be more volatile.
And though a 5.5 percent annual distribution back to council might allow the fund to maintain its real asset value, it may leave it unable to provide for or easily recover from being used as self-insurance.
Shocks requiring self-insurance – using the fund instead of opting for external insurance payouts – could occur at any time, as shown by the sequence of disasters including Cyclone Gabrielle and the sewer mains collapse which punctuated last year.
The PwC report recommended a buffer should be considered in case of future shocks.
But the report also detailed the benefit of the status quo – keeping the airport shares means continuing to receive the dividends, although these have been volatile of late.
Keeping those assets would also allow the council group to directly benefit from an increase in asset values over time.
Based on current forecasts, the airport shares are expected to grow in value by about $1.7b over the next 35 years.
At the same time, keeping the shares limits the council’s ability to quickly adapt if external factors suddenly affect that value.
Ultimately, the report concluded that the highest investment option of putting $3.5b in the fund had the potential for the greatest returns.
They forecast with this heftier starting nest egg, the fund could double in size to $7b over 35 years.
However, this option doesn’t include the recommended ‘buffer’ needed for emergencies requiring self-insurance.
Brown has sold the idea of the Future Fund partially as a way to keep Auckland steady through future shocks.
“Any natural disaster or pandemic would impact Auckland’s airport and ports, as well as the council’s other strategic assets,” he said. “It just makes sense to spread our exposure to risk across different markets and geographic locations. The last thing you want is to have all your eggs in one basket.”
Without specific self-insurance provision available within the fund, any funds used for self-insurance could result in a reduction in its value – but it could still have the desired effect of spreading council’s many eggs across a few more baskets.
But the fear of privatising assets has driven the most potent criticism of the fund from the governing body.
At the end of a 10-hour meeting in December, Waitematā and Gulf councillor Mike Lee accused the council process of being a “charade”, saying they would likely go ahead and sell the assets eventually if they were placed in the fund.
This week he said the move would “in effect make a slush fund … that will last about as long as the old expropriated asset fund”.
The details of the long-term plan proposal are going out to Aucklanders next week for consultation. Residents will be able to look at different Future Fund scenarios and decide which they would like to see.
It’s a crossroads for the city, which will determine for generations to come whether Aucklanders directly own the assets in question – or perhaps whether council has access to the revenue stream needed to get through economic turbulence.
