CCHL helps city keep rates lower
Christchurch City Holdings Limited (CCHL), the city council's holding group of trading companies, is celebrating its 20th anniversary. CCHL chief executive Bob Lineham reviews its growth into a $1.4 billion business.
In the early 1990s the Christchurch City Council wanted to build a vast range of "enhancement assets" - for example, swimming pools, libraries, a stadium and convention centre.
The council at the time was resistant to selling company investments to pay for these new facilities. With encouragement from the council's finance chairman, Derek Anderson, it was agreed that if the council couldn't sell the assets, then it would make the companies perform and achieve commercial rates of return.
Grouping the council-owned assets under the umbrella holdings group Christchurch City Holdings Limited, was the agreed-upon solution.
This decision ultimately allowed the council to build and upgrade community facilities such as CBS Arena and a Convention Centre, while retaining the assets to service the debt. It was not long before the returns from the companies were not only able to service the debt but largely pay it off and then continue providing income for the council.
At the time of CCHL's inception it was structured not only as a financial vehicle to make the funds flow from the city's trading companies more efficient, but also as a means of monitoring the companies in a professional way and establishing a quality level of governance.
Since then, the original mandate has definitely been achieved, with CCHL's group equity increasing from $260m in 1995 to over $1.4 billion today. Over the same period, CCHL has returned over $1 billion in dividends and capital payments to the council and achieved an overall average shareholder return of 14 per cent per annum.
The dividends returned enabled the council to have a relatively low level of debt (prior to the earthquakes) compared to other large councils around the country. At the end of 2007, the council was in a near net debt-free position.
This has had a major flow-on effect for the people of Christchurch, the ratepayers. Through retaining its investment in its companies, the council keeps rates at least 13 per cent lower than they would otherwise have been and ratepayers can have confidence that the city's key monopoly infrastructure assets are well governed.
The retention of the city's key infrastructure assets has also meant that the standard of infrastructure in these key assets has been maintained. A great example of this was highlighted after the region's earthquakes, when the city benefited from the strengthening work which Orion did to its network in the preceding decade.
This was done with the backing of its publicly-owned shareholder and ensured the resilience which stood us in good stead.
The region's earthquakes have presented many challenges for CCHL. However, the city would be far worse off if it was without the CCHL assets.
While some of the company assets still have rebuilding to do, especially Orion and Lyttelton Port Company (LPC), they are quickly returning to previous levels of profitability. CCHL has been able to largely maintain income flows to the council during this difficult time owing to its reserves, strong balance sheet and the diversity of its investments.
I am confident that during the rebuild CCHL will provide the city with certainty about the quality of key infrastructure assets and provide a significant alternative income stream to rates - a considerable advantage that most other cities do not have.
This is perhaps the strongest counter-argument to those who urge the council to sell its trading assets.
The CCHL board is of the view, along with the council, that the shareholder has the right to determine matters of what they own.
CCHL is here, ready and willing to advise the council if it perceives the need for more immediate capital. However, if the council decides to sell some assets it will need to weigh up the benefit of additional cash against the impact of losing future income to offset rates, and possibly reduced control over the quality of essential infrastructure trading assets.
Retaining the council's assets also leaves the potential to leverage them again at some time in the future while retaining the assurance that the companies are being run efficiently, for the greater public good.
During the initial years of CCHL's operations it was important to ensure that commercial governance was strong, and a policy was established requiring that all directors be chosen for their skills and experience.
The change involved convincing the council to move away from the representation model and impress upon them the value of appointing professional directors on merit.
This governance framework has enabled the companies to operate to their potential and to produce improved results.
Political oversight is maintained by structuring the CCHL board with a mix of commercial and councillor directors.
This works well while gaining the benefit of fully commercial boards at the operating company level.
CCHL will continue to have an important role to play in the future. It provides sound governance and accountability, and an effective monitoring role for vital community-owned infrastructure assets.
The continuing appointment of good-quality directors in the future is critical. The processes which have been developed over the years have stood the council and the companies in good stead.
The current model enables the council to retain ownership of assets while still receiving the benefit of them being operated under a commercial model.
Undoubtedly the model will continue to evolve and continue to play an important role if the council wishes to continue to receive these benefits from its portfolio of investments in the future, as it has in the past 20 years.
Bob Lineham has led the holdings company from its inception in 1993. For the first 11 years he was also the director of finance for Christchurch City Council.