Key Proposal 3: Manage insurance and investment risks
Do we sell our airport shares to help manage insurance and investment risk?
We need to better manage our insurance and our investment risks. Insurance is getting harder and more expensive to get, and the Council’s assets – like buildings, roads and pipes – are underinsured by $2.6 billion. We’re exposed if there’s a natural disaster, and our biggest investment assets, including our shares in Wellington Airport and ground leases, are poorly diversified and exposed to the same risks. We’re proposing to sell our shares in the airport and some ground leases to set up a new investment fund as a form of self-insurance, so we can diversify our investments and have money to help with recovery if there’s an earthquake or other disaster.
There are three options:
- Sell all airport shares and reinvest into a newly established perpetual investment fund. Proceeds from future ground lease sales could also be transferred into the fund (if/when these leases were considered for sale). (Preferred option.)
- Sell some airport shares and reinvest into a newly established perpetual investment fund. Proceeds from future ground lease sales could also be transferred into the fund (if/when these leases were considered for sale).
- Retain current airport shares, and do not establish a perpetual investment fund. Proceeds from any future ground lease sales will be utilised for other purposes.
Do we sell our airport shares to help manage insurance and investment risk?
We need to better manage our insurance and our investment risks. Insurance is getting harder and more expensive to get, and the Council’s assets – like buildings, roads and pipes – are underinsured by $2.6 billion. We’re exposed if there’s a natural disaster, and our biggest investment assets, including our shares in Wellington Airport and ground leases, are poorly diversified and exposed to the same risks. We’re proposing to sell our shares in the airport and some ground leases to set up a new investment fund as a form of self-insurance, so we can diversify our investments and have money to help with recovery if there’s an earthquake or other disaster.
There are three options:
- Sell all airport shares and reinvest into a newly established perpetual investment fund. Proceeds from future ground lease sales could also be transferred into the fund (if/when these leases were considered for sale). (Preferred option.)
- Sell some airport shares and reinvest into a newly established perpetual investment fund. Proceeds from future ground lease sales could also be transferred into the fund (if/when these leases were considered for sale).
- Retain current airport shares, and do not establish a perpetual investment fund. Proceeds from any future ground lease sales will be utilised for other purposes.
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Note: The question box is to enable us to provide any additional information to you to better inform your submission. We are unable to count any comment submitted in the questions box as a final submission.
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What are the ground leases that would be sold? And how much of those proceeds would be transferred into the perpetual investment fund? How much of the stated $2.6 billion underinsured amount will be covered by the sale of the airport shares and ground leases?
GordonR asked 7 days agoKia ora GordonR,
Thank you for your question and your interest in the Long-term Plan.
The answer from the Finance team is below:
There is no particular proposal of specific ground leases to be sold at this point. Subject to the decision to establish the fund, it is simply the Council’s intention that the proceeds of future ground lease sales could be added to fund to enable it to grow.
The extent to which the fund addresses the underinsurance issue depends on the value of the shares and ground leases sold and the performance of the fund over time. A sale of the full minority shareholding allows the fund to make the biggest contribution to the underinsurance issue. We would need to get a market valuation done ahead of selling the shares, but our current mid range estimate is that the proceeds from the share sale could be up to $500m.
Ngā mihi
The Long-term Plan Engagement Team
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Could the airport operating company be separated from the ownership of the airport land? Is there anything to prevent the airport company selling all or part of the land for another use? e.g housing Has any thought been given selling the dividend stream or the income from ground leases to provide a capital sum instead of selling the underlying asset? The question of selling the airport shares and creating an investment fund are two separate issues . Why ave these two issues been conflated? Has any thought been given to asking central government for a legislative change to enable any investment fund to be run in tandem with the EQC funds invested or ACC or other government funds (whichever is appropriate) rather than having some commercial entity clipping the ticket all over the place?
onetime asked 10 days agoKia ora onetime,
Thank you for your question and your interest in the Long-term Plan.
The answer from the Finance team is below:
- Separating the operating company from the land ownership - This relates to an operational item which falls to the mandate of the airport company rather than Council as a minority shareholder.
- Selling the dividend stream or the income from ground leases to provide a capital sum instead of selling the underlying asset would not provide a suitable solution to the problems Council is facing.
- The rationale on selling airport shares alongside creating an investment fund is outlined in the Consultation document – please refer the insurance issues facing Council and the items proposed to work towards a solution.
- Legislative change - This is something that Council could consider as part of the process if/when decisions are made to sell the minority shareholding and set up a PIF, noting that this cannot be considered ahead of establishing a mandate to do so.
Ngā mihi
The Long-term Plan Engagement Team
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Why does WCC need to set up its own Investment fund - fund managers get paid well above the average wage so its going to be expensive to set up and run. When there are already good sustainable, ethical funds that the money could be invested in. eg Simplicity, Pathfinder. WCC cant manage its own finances properly (we can be seen from major rates increases) so dont see why its then suddenly going to run its own investment fund.
Jill asked 15 days agoKia ora Jill,
Thank you for your question and your interest in the Long-term Plan.
The answer from the Finance team is below:
The investment fund will be set up by Council but who administers it (i.e. runs it) will be decided once the mandate to transfer the investment in the airport to a diversified fund is established. Outsourcing this (with appropriate controls over the investment strategy) is something that will be considered to ensure appropriately qualified people/entities are managing this on behalf of the Council to protect the ratepayers investment.
If you are ready to make a submission click here. Or download a hardcopy submission form here.
Ngā mihi
The Long-term Plan Engagement Team
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Kia ora, May I know what aspects WCC currently 'has a say in' as a current shareholder in the airport and how would these change upon selling the airport shares?
saml asked 17 days agoKia ora saml,
Thank you for your question and your interest in the Long-term Plan.
The answer from the Finance team is below:
The Council is currently represented on the airport board which means it contributes to all aspects of board decision making (albeit as a minority shareholder, which means the Council’s influence is limited). If the Council sold the shares, it would no longer have representation on the board. However, an ongoing strong partnership between the Council and the airport would be important for the city and the Council would seek to maintain a working relationship with the airport on issues that matter for the city (e.g. inward visitor and investment attraction).
If you are ready to make a submission click here. Or download a hardcopy submission form here.
Ngā mihi
The Long-term Plan Engagement Team
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If selling the airport shares, what consideration has been given to the loss of input to future airport strategy that could have an impact on the city’s future economic prosperity? E.g. reduction of routes/capacity, or failure to take advantage of new opportunities.
CP3O asked 18 days agoKia ora CP30,
Thank you for your question and your interest in the Long-term Plan.
The answer from the Finance team is below:
Regardless of whether the Council remains a shareholder, the partnership between the Council and the airport will remain critical to achieve desired outcomes for the city (e.g., inward visitor and investment attraction) and we will ensure we continue to maintain a strong relationship as we do with our other partnerships.
It is important to note that, even as a shareholder, the Council holds a minority shareholding, which means its ability to influence the strategic direction of the airport is limited. Under the Companies Act, Directors of the airport must make decisions in the best interest of the Company.
If you are ready to make a submission click here. Or download a hardcopy submission form here.
Ngā mihi
The Long-term Plan Engagement Team
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1 Would WCC be expected to help fund the rebuild of the airport after say an earthquake? 2 Can the 10-11% per annum return from the airport shares be invested in a perpetual fund rather than selling the shares?
EllenB asked 21 days agoKia ora EllenB,
Thank you for your question and your interest in the Long-term Plan.
The answer from the Finance team is below:
As a shareholder, if there was an earthquake the Council could be called on to contribute funding to the rebuild of the airport.
The return on the shares is a combination of asset revaluations and dividend payments – the majority of the return is in the form of revaluation. Only the dividend component of the return is funding that is received by the Council. This dividend funding is currently used to offset rates increases – if the funding was used to invest in a fund, rates would need to go up to compensate for lost revenue. Additionally, the value of the dividend stream will not create a fund of a sufficient size to contribute to deal with the scale of the insurance gap that we currently have.
If you are ready to make a submission click here. Or download a hardcopy submission form here.
Ngā mihi
The Long-term Plan Engagement Team
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Was consideration given to selling the airport shares, but then using the money to renew more pipes faster rather than setting up an investment fund with the money from selling the shares? If so, why was that option rejected, and if not, why not?
MEG123 asked 22 days agoKia ora MEG123
Thank you for your question and your interest in the Long-term Plan.
The answer from the Finance team is below:
Selling the shares and setting up the fund are proposed to address two key problems that the council has:
We are significantly underinsured, and, in the event of a major earthquake, we cannot manage this underinsurance through our current debt capacity
Our investments are at risk because they aren’t diversified
We need to solve both these problems as they are both sufficiently critical that they are having major implications for our financial resilience. We are not proposing selling shares and using the proceeds for pipes (or other expenditure priorities) as that will not solve the two problems we have. Additionally, if we progress with the sale and setting up the fund, this will mean that we no longer need to hold debt headroom for a natural disaster (or other event) which means there is more borrowing capacity available for the Council’s spending priorities, including pipes.
If you are ready to make a submission click here. Or download a hardcopy submission form here.
Ngā mihi
The Long-term Plan Engagement Team
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How do the returns from a perpetual investment compare to those from the airport? What risks would there be in nvesting in such a fund?
Joan Waldvogel asked 23 days agoKia ora Joan,
Thank you for your questions and your interest in the Long-term Plan.
The response from our Finance team is below:
There is risk in any investment and returns are never guaranteed – including the airport shares and an investment fund.
While the investment returns from the airport have gone up and down over time, generally the airport has been a good investment for the Council, returning approximately 10-11% made up of a combination of asset revaluations and dividends. The expected return from the perpetual investment fund would depend on the investment strategy adopted by the Council (i.e., whether it chooses to invest conservatively or more aggressively). When looking at comparable investment funds (e.g. the NZ Superannuation funds and KiwiSaver funds) to the one we are proposing to set up, it is reasonable to assume the fund could achieve similar returns to what has been achieved through the airport.
Decisions around investment strategy would be made by the Council, if the decision was made to progress in setting up the fund. These Council decisions would then be provided to the fund manager that the Council appoints, and the fund manager would be required to invest according to the Council’s investment strategy.
If you are ready to make a submission click here. Or download a hardcopy submission form here.
Ngā mihi
The Long-term Plan Engagement Team
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Is it an option to only sell the WCC airport shares to Greater Wellington Regional Council?
Gerardic asked 26 days agoKia ora Gerardic,
Thank you for your question and interest in the Long-term Plan.
The response from our Finance team is below:
These sorts of decisions cannot be made until we have a mandate to undertake the transaction. Once the final decisions have been made and the Long-term Plan is adopted in June there will be more work to do to set up the fund and manage any potential sale of the shares.
If you are ready to make a submission click here. Or download a hardcopy submission form here.
Ngā mihi
The Long-term Plan Engagement Team
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