Rating the performance of Christchurch City Holdings

21:00, Nov 22 2013
Bruce Irvine
Bruce Irvine, chairman of Christchurch City Holdings

Christchurch City Holdings, the city council's investment arm, celebrated its 20th anniversary this week with a cocktail gathering at the Christchurch City Council. Press business editor MARTA STEEMAN raises a few questions about the community-owned group.

Christchurch City Holdings stewards seven trading companies owned by the Christchurch City Council - Canterbury's own state-owned enterprises, if you like.

This week at its annual meeting CCHL offered up a few measures of its 20-year performance.

More than $1 billion in dividends and capital repayments to the Christchurch City Council in the two decades.

Those capital repayments reduced rates by an average of 13 per cent a year.

Equity of $76 million in 1993 blossomed to $1.4b in 2013.


CCHL controls strategic infrastructure that other cities and regions have sold off, to their regret.

Sounds pretty good but The Press sought an independent view from Professor of economics and finance Glenn Boyle at Canterbury University.

He says the key measure of a company's performance is whether its operating profits are covering its operating costs and its costs of capital, which is the cost of debt and the cost of equity. Yes there is a cost to equity.

CCHL may trot out its returns on equity but it's meaningless unless they put it in context of the cost of capital, Boyle says. For instance a company could trumpet their return on equity is 6 per cent but if their equity capital is actually costing 10 per cent then they are losing money.

"Without knowing that [their cost of capital] we've got no mechanism for working out if they are making us or costing us money," Boyle says.

In his opinion CCHL's comment that its dividends are keeping rates "13 per cent lower than they would otherwise have been" is disingenuous because CCHL is not comparing that with what could have happened if the city council had invested differently.

Boyle suspects CCHL will not reveal its cost of capital but would surely calculate it because without it they are operating totally in the dark, he says.

The Press asked CCHL chairman Bruce Irvine about CCHL's cost of capital.

Irvine says since a significant amount of income is regulated by the Commerce Commission the cost of capital model cannot easily be applied to them.

"So the cost of capital argument is fine in the private sector but it doesn't apply where you are a monopoly and regulated where the Commerce Commission is overviewing what you are doing and your performance," he says.

The cost of capital theory is not relevant to CCHL, Irvine says.

Orion is the only company in the stable of seven city companies whose prices are actually regulated.

Christchurch Airport has information disclosure requirements to the Commerce Commission which monitors its returns but so far has not regulated them.

Irvine says cost of capital might be relevant for City Care because it competed with the private sector, and "they achieve their cost of capital."

What about the struggling Red Bus or recycling business EcoCentral?

"You've got to understand with this group we actually have a far higher level of social agenda in the group."

"So there are social objectives on top of the financial objectives. So you can't just measure those organisations in terms of financial return. There is a large public good aspect to what they do."

Irvine says the CCHL group as a whole earns an average return of 14 per cent a year over 20 years - that's both dividends and the increase in the value of the companies in the two decades, and that return is more than its cost of capital.

That suggests some of the seven companies may be subsidising others.

Boyle is taken aback that Irvine considers cost of capital irrelevant to CCHL because that is precisely what the Commerce Commission spends a lot of time and money estimating so monopolies like Orion and Christchurch Airport cannot charge an excessive price or earn a monopoly profit.

Canterbury Employers Chamber of Commerce chief executive Peter Townsend says "When you are running a monopoly - the lines company Orion, the port and the airport effectively are - you have to be really careful that you get the balance right between what is a reasonable rate of return and what is artificially gearing up profits to subsidise rates."

There needs to be transparent checks and balances in place because "if you have a monopoly it is easy to dial a profit ".

While the Commerce Commission tracked and regulated these companies he considers there still needed to be "maximum amount of transparency".

From a commercial perspective CCHL and trading companies meet "adequate" disclosure' in their annual reports.

"But once again reflecting on the fact this is a special ownership model there needs to be special accountability back to the community," Townsend says.

He is calling on the council and CCHL to regularly review the validity of its investment strategies and to gauge the views of the community on which businesses or activities the council may be involved in.

The chamber would never say the city council should not be involved in certain areas if the community thinks it should because the community owns these companies.

But CCHL should be open and transparent about the performance of each of the companies, Townsend says.

"For example if one of the companies that CCHL was involved in was a lousy investment then the community should know that and should demand a particular response," Townsend says.

"I don't necessarily think we should own all seven."

The question should be asked whether the council needs to own City Care long term and other questions should be posed such as whether the council needs to own as much of each of the companies as it does. he says.

"I think they need to be answered because of the relationship between CCHL, the council and its community," Townsend says.

The Press asked Irvine about a perceived lack of transparency from some of the CCHL group of companies and the ease at which commercial sensitivity can be cited.

Red Bus, for instance, does not post its annual report on its website for ratepayers to read.

City Care reveals "the legal minimum" in its annual report.

The chief executive of two of the CCHL companies have been reluctant to have face to face or even telephone interviews with The Press over company issues.

CCHL and the council committed the city and ratepayers in mid 2011 to investment in a $440m ultrafast broadband network without public discussion and after "in camera" debate. The broadband investment will not start returning dividends until 2020.

Following the council's commitment the council's banks required a much higher security pledge - $650m compared to the previous $350m.

As Professor Boyle points out the ultimate burden of any failure in the CCHL companies will fall on ratepayers and ultrafast broadband investment is a highly risky undertaking.

"We had to explain in significant detail the consequences, the detail of that contract to the councillors so that they could get comfort they knew what they were committing to, " Irvine says.

"If that was in the public arena we wouldn't have won the contract. It's that simple "

The Press put to Irvine that what ratepayers and citizens did not know was how much debate and division took place over the issues.

Nor did they know the pros and cons or the persuading arguments.

"There was significant debate at council at the time of the commitment and there was significant explanation and there was significant information put forward to them but it was commercially sensitive because we were applying against other parties for a contract. If the information I gave council, if Chorus was sitting on the wall, we would never have won the contract."

Council company Enable is now in an eight-year joint venture with the Crown to build the 350 kilometre fibre optic network to completed by the end of 2019.

"I'm telling you it is an incredibly good investment and good on the council for making it because the ratepayer will reap the benefit of it in the long term," Irvine says.

Regarding City Care, Irvine says it is operating in a competitive environment where a lot of commercially sensitive information is not provided by its competitors so City Care could not reveal as much to the public.

"What is the information they provide, where do you stop that?" he says.

The Press put it to Irvine that greater transparency just goes with the territory of being a publicly-owned company.

"So do you want City Care to put themselves at a competitive disadvantage," he replies.

"There is no difficulty with providing additional material to the owner at council," he says.

But not to local people?

"Do you want City Care to fail because it's providing extensive commercially sensitive information?"

The city just has "to rely on our judgment" about what information is disclosed, end of story.

With regard to CCHL's 20 year performance, Irvine says "You tell me who else has made a 14 per cent compounded return over 20 years. You find somebody else who has done that. You will struggle."

Is CCHL too big?

"I think that the ownership of the infrastructure assets that we have in the city is entirely appropriate," Irvine replies.

Notice Irvine says "infrastructure assets".

City Care, Red Bus and Ecocentral are not infrastructure assets.

CCHL's annual reports say its key role is to invest in and promote the establishment of key infrastructure in Canterbury and to identify infrastructure that the private sector does not want to fill. Again City Care, Red Bus and EcoCentral do not fit this requirement.

In the past year City Care has launched new operations in areas easily served by private sector companies - commercial building construction, residential earthquake repairs and providing a tree cutting service to households.

Professor Boyle says this looks like plain old fashioned empire building and that was a concern.

"I'd be pretty hacked off if I was one of these small businesses around town and found that my rates were going to fund my own competition," Boyle says.

The Press