Editorial: City Care result is a warning

Last updated 05:00 21/08/2013

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OPINION: City Care's disappointing financial result is a warning for those firmly in favour of the council continuing to own commercial assets. The supporters of ownership usually justify their stand by asserting that the assets provide significant and continuous profits that reduce rates. City Care, the 100 per cent council-owned construction company, is now demonstrating that profits are not guaranteed and that ownership involves risks.

In the year to last June, the organisation's profit dropped by $13.722 million from that made the previous year, and was some $11m below budget. Moreover, that happened at a time when the earthquake recovery offered much work.

It seems the prospect of many reconstruction contracts was partly responsible for City Care's poorer performance. It geared up for work contracts that did not come through when expected. Its employment of 706 new staff resulted in significant additional expenditure on initiation while revenue was falling. Taking resignations into account, the gain in personnel was 313, which pushed the wage bill up by about $20m. The impact of the added workers was negative in that the company took longer than expected to recruit and train them.

City Care board chairman Tony King says all staff are fully occupied. The problem, which King does not underline, is that some were employed on poorly managed projects and thus did not increase productivity. The company does not give details of the under-performance but it evidently contributed to the reduced profit.

In that context, the confidence of Bob Lineham, the chief executive of City Holdings, in City Care's management and governance is at least questionable. The executives and the board have brought City Care to a vulnerable position. In its haste to exploit the opportunities provided by the earthquakes it has failed to adequately administer the contracts it held.

But City Care needs to be considered while understanding that the earthquakes have produced problems for all businesses in Christchurch, especially those involved with construction. In the immediate aftermath of the catastrophe, it was not even certain that the CBD would be rebuilt, and it took months just to get the city running on even a jury rig. City Care was probably not the only construction company to miscue its response. It also needs to be remembered that it has performed well in the past.

The main lesson for ratepayers to learn from the company's recent performance is that their city's commercial assets are not sure bets. They can fail to perform and thereby become a drag on civic finances. For City Care the lesson is specific, in that its plans to expand into building construction must now be reconsidered. They were always questionable in that they expanded the company's traditional concentration on roading and underground services into an area highly competitive and well served by private construction companies. Now there are more questions over whether City Care has the expertise to expand its activities.

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- The Press

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