Chch faces challenge to balance books

JOHN MCCRONE
Last updated 05:00 10/08/2014
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DEAN KOZANIC/ Fairfax NZ

MONEY MAN: Balancing the city's books is taxing Raf Manji.

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MONEY WOES: Will the cost of Christchurch's earthquake recovery break the bank?

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The lid has been lifted on the earthquake recovery cost-sharing agreement. So has Christchurch City Council been backed into more than it can afford? John McCrone reports.

Council finance committee chair Raf Manji is looking ashen, dog-tired. Well, so would you if you had spent the last few weeks dealing with a $800 million "black hole" in your accounts.

Manji says his phone and email inbox have been burning up with Christchurch citizens alarmed about the likely coming rates bill hike or incensed at the prospect of the city's assets being flogged off to fill this financial chasm.

Yes, politics can age you fast, he admits, slumping forward and running his fingers through his normally luxuriant hair.

"I look in the mirror and it used to be so bushy, now it is thinning fast," Manji wails ruefully.

A week ago the results of a second independent report into the state Christchurch City Council's finances were released.

A first earlier report by forensic accountant KordaMentha had scrutinised the council's three-year budget that fell out of last year's cost-sharing negotiations with the Government - how would the city's earthquake recovery bill get split between ratepayer and taxpayer?

The second report by investment banker Cameron Partners looked ahead to the 10-year long-term plan (LTP) which the council will begin consulting on in September - so the knock-on consequences of the cost-sharing split once the city's budgets from 2017 onwards are properly considered.

And in many eyes, combined, they tell of a game of Government manipulation.

Not to put too fine a point on it, the Government has painted its contribution to Christchurch's recovery as generous - a down-the-line 60/40 split on both horizontal infrastructure, the roads and drains, and the anchor projects, the stadiums and libraries, that are part of the central city blueprint.

But while 60/40 on costs seems fair - with the Government shouldering the larger share - the Government has also had too much control over the actual spending decisions.

Critics say with Earthquake Recovery Minister Gerry Brownlee firmly in charge, the power split has been more like 90/10.

And as a result the council may just have been monstered into committing itself to way more debt than it can sensibly afford.

Which would certainly now explain Manji's grey face.

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That is the view of rebuild commentators like Christchurch accountant Cameron Preston - a confessed numbers geek who spends his evenings making official information requests and poring over Treasury accounts. "My wife's always shouting at me to get off the computer," he grins.

Boiling it down, two factors dominate, Preston says.

The first is that the earthquakes happened when as a country, New Zealand was already trying to borrow its way out of the global financial crisis. "Remember, just weeks before the September quake the Government was having to find $1.6 billion to pay out to South Canterbury Finance investors."

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Preston says since 2008, the gross national debt has leapt from $30b to $70b. So New Zealand's credit card has been maxxed out, leaving not a lot of scope for generosity in dealing with Christchurch's problems.

Then, says Preston, there was the other special feature of Christchurch's situation. No-one had really anticipated the extent of the infrastructure damage that would follow from such a direct hit on a city with swampy foundations.

"If you look at our roads and pipes, the damage is because there's been so much liquefaction. If this had happened in Wellington, you would have ended up with a few broken mains but you wouldn't have had to fix entire streets and suburbs."

Preston says the council turned out to be woefully under-insured because its cover did not model this extra infrastructure risk correctly. Likewise, the Government was caught out in its own disaster planning, never expecting to have to share the expense of such a widespread rebuilding.

So infrastructure was always the one to watch if the recovery spending was going to be squeezed.

The KordaMentha report on the closed-door cost-sharing negotiations held during the first half of 2013 certainly suggests some fun and games. Dig into the details and there does seem an obvious power imbalance in the shaping of the spending decisions.

On the infrastructure repairs, the council's position was that a total of $3.4b of public works was needed to bring Christchurch's roads and pipes back to their pre-quake level of service.

But KordaMentha notes the Government unilaterally capped its "60 per cent" contribution at $1.8b. A maximum figure was named. Once the council's 40 per cent share was calculated off that, it effectively lopped $400m off the infrastructure budget, bringing the agreed spend back to $3b.

Some 83 road, sewer and water projects got axed from the council's priority list to make this work.

However, now - because the money actually does need to be spent says the council - the missing millions have just reappeared to haunt the accounts as the largest part of its $800m balance sheet black hole.

Preston says for Christchurch ratepayers, the choice seems to be either to find a way to pay or else get used to bumpy roads and land that does not drain for a long time to come.

Then the KordaMentha report reveals that in contrary fashion, during the same cost-sharing negotiations, the Government imposed a capped minimum on what the council must contribute towards its own central city blueprint rebuild programme.

The global cost for all the anchor projects was worked out at $1.9b and the council was told that a 60/40 split meant it was now locked into a $760m commitment on that - regardless of the ongoing uncertainties about its insurance recoveries or possible desires to do other things like save the Town Hall.

Preston comments on the obvious impact of that. With the blueprint having first call on council funding, the squeeze immediately went on the repair of lesser community facilities - the local pools, libraries and halls - as well as social housing.

So does that seem a fair outcome, Preston asks?

Infrastructure fixed at below pre-quake standard, or plug the $400m gap yourself? A central city rebuilt to meet aspirations dictated by Wellington? And caught in-between, community facilities skimped because the well has been drained by these other priorities?

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So Raf, is it right you are being monstered? Manji laughs in a "you may very well say that but I can't possibly comment" kind of way.

Of course, says Manji, there is some knockabout politicking going on. A general election looms.

The Government is being accused of having fiddled Christchurch's recovery books, trimming the $400m off the infrastructure budget in particular, simply to protect its promised election year budget surplus.

Likewise, the council is being called turncoat for apparently caving on its long-standing "no asset sale" vow.

But no, Manji answers carefully. Step away from the fractious party politics, the combustible personalities, and everything - even the council's threatened $800m budget blow-out - can be viewed in a more rational light.

Look back and the Government did the proper things, says Manji. After the earthquakes it arrived with the simple promise that it would underwrite Canterbury's recovery.

It immediately spent not just on civil emergency measures but offered other "no questions" help like the wage subsidy for local small business.

So the Government created a baseline of security. Then in the subsequent cost-sharing discussions, it took a perfectly defensible line.

"The key driver there was that Christchurch had to be left in a financially sustainable position. It should take as much of the strain as it could without crippling it. That was the ultimate goal."

The real issue, says Manji, is that the cost-sharing decisions that got made were opaque and the budgets unrealistic. They were a fast first cut. The task now is go back over the spending proposals and if not rewrite them, certainly fine-tune them - and with rather more community input.

Manji says the public probably do not realise what a difficult situation the new council table were in when they arrived late last year.

Tony Marryatt and Paul Anderson, the chief executive and chief financial officer who had negotiated the cost-sharing, were gone. No-one else had been privy to the inside detail of the discussions.

And at the Government's insistence - its emergency powers being invoked - the three-year plan that resulted was a hasty unaudited document. The financial projections also cut off just before the years when council spending would actually peak.

This is why there had to be the independent financial reports, Manji says. It was not a move designed to annoy Gerry Brownlee but to produce an honest picture of the commitments that had been made. Now the council knows that there is a problem. The three-year plan already takes the council to the limit of its permitted local government debt levels, yet the spending curve keeps rising until it tops out in 2019. This is where the $800m hole has opened up in the accounts, says Manji.

The Cameron report says there is the likelihood that by 2019, some $360m of extra infrastructure costs will need to be recognised. Another $55m will be owing on the anchor projects. Insurance shortfalls could add another $220m to the council's bills.

Then for prudence - Cameron says it won't do for the council to run with its own credit card literally maxxed out - a further $150m headroom ought to be built into the balance sheet to cover other possible borrowings by then.

So some scary numbers, Manji agrees. But in fact as a former London currency trader - he used to deal with Prime Minister John Key on the other end of the phone - he is not too perturbed. In reality, there are many ways to manage this debt.

Manji says it still makes better sense to spend what the city needs to make its recovery if the projects are going to be ones that serve Christchurch the next 50 to 100 years.

But the council's task now is to flatten that financial peak, the 2017 to 2020 hump that has appeared in its 10-year accounts.

So how exactly? The Cameron report suggests rate rises could be in order - more income to allow the servicing of more debt. Despite earthquake levies being added by the previous council, Christchurch still has some of the country's lowest rates.

But Manji says it is clear that further rate hikes are politically unacceptable. "That would be a huge flashpoint. You've got to remember what people have been through over the past four years. They're stretched emotionally more than you could ever imagine."

However, Manji agrees with Mayor Lianne Dalziel that a sale of council assets - or rather finding strategic partners to take a 25 per cent share in the holding company - makes eminent sense. This alone could knock $400m off that 2019 hump.

Manji bats away the suggestion this would be evidence of the council giving in to sustained Government pressure. He says the previous council already knew the assets portfolio would have to be tapped somehow. The fact was just never admitted.

And Manji says with the dividend flow from the port, airport and Orion being 3 per cent, the cost of borrowing more like 5 to 6 per cent, financially it makes better sense to release money that way, so long as Christchurch is investing directly in other longterm economic assets like its roads and drains.

Pragmatism must rule over politics. And even with the anchor projects there are other ways of doing things, Manji says. The cost of the new central library could be got off the balance sheet by leasing the building rather than owning it, for instance.

So the issue is not the $800m overshoot itself. Christchurch still enjoys an A+ credit rating and can find ways to manage some further debt. Rather, the question that actually matters to the city is whether the right money is being allocated to the right priorities.

Here Manji reveals the council's strategy for pushing back at the Government on that score.

Manji says the old council's philosophy was to keep information tight and make spending decisions largely out of sight. But the new council wants open books - the financial information all on the table - then as much as possible it is going to put decisions on how to cut the pie back out into the community.

Manji says plainly not everything can be afforded. But if infrastructure repairs are going to be scrimped, then that should be a public choice and not a roundabout outcome of secret cost- sharing negotiations.

"We've got to ask do you want rubbish roads? Well all the feedback I've had is that people do in fact want the basics done first, they want us to focus on the core services."

So Manji says he is drained. "We knew the first six months of this year were going to be hard yakka, cutting through this jungle of information."

However, now the council has clarity on its financial plan, it can get on and execute.

Manji says there is even the hope that once the fuss of the general election is out of the way, there will be a quiet squaring up of the infrastructure budget.

A joint review is scheduled in December and with sufficient evidence, the Government may be nudged back towards the council's $3.4b figure.

But to sum up, the council's challenge is not so much to spend less as to spend wisely.

And while a 60/40 split on costsharing seems fair enough, as has been said often enough, it is the power split that needs working on if ratepayers are to get a bigger say in where their money is all going.

- The Press

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