Whither the Auckland Regional Services Trust?

Keith Rankin, 4 March 1998

The Auckland Regional Services Trust (ARST) is an organ of local Government, convened in 1992 as a vehicle to repay the city's debts through the privatisation of its assets. The central government plan came unstuck when Auckland voters gave the "left-wing" Alliance Party control over the trust in 1992, and proceeded to repay all of the debts out of revenue, thus removing the need to sell the city's assets.

The ARST does not own Mercury Energy, the electricity supply utility that has left central Auckland in the dark for two weeks.

The major assets of the ARST are Watercare Services, the Ports of Auckland (80%), and the Yellow Bus Company. The latter is the predominant supplier of public transport within Greater Auckland. The ARST is a highly profitable and well managed trust. Its problem is that it was designed as a vehicle to facilitate the sale of Auckland's public assets, and not as a vehicle for the ongoing investment in Auckland's infrastructure. Thus, something must happen. The trust should be reconstituted, not disbanded.

"Mrs Shipley's blue-eyed boys" [ref. Bernard Orsman, NZ Herald p.A17, "Privatisation agenda comes under fire", 28/2/98] in Wellington want the assets sold and a one-off dividend paid to "voters in the region" [ref. Brian Gaynor, NZ Herald p.E2, "Power crisis should give mayor a wake-up call", 28/2/98]. This dividend - which would be "approximately $2,500 to each elector" (Gaynor) represents an attractive bribe to cash strapped Aucklanders who are paying rents of $250 per week for a two bedroom flat while receiving wages as low as $6 per hour after tax. (Presumably those Aucklanders who leave too soon for the bright lights of Sydney or Wanganui will miss out, while new arrivals will get the full $2,500 and be free to move on the next day?) It doesn't take too much intelligence, however, to recognise that an annual dividend from revenue of say $250 (inflation-adjusted) would be a better deal for Aucklanders, or that an annual dividend of $500 commencing in say 2010 might be even better than that.

The more sensible option is to expand the ARST, by far the most successful organisation responsible for Auckland's infrastructure. The first move should be for the ARST to assume ownership of Mercury Energy (and to ask Chief Executive Wayne Gilbert, appointed in 1994 at an annual salary of $450,000 [ref. Simon Jones, SundayStar-Times p.7, "Dead calm in the eye of the storm", 1/3/98], to serve out his contract at a salary of no more than the $60,000 payable to, for example, a senior lecturer at the university which had to close its doors last week, thanks to the power failure).

The New ARST would become a super-LATE (Local Authority Trading Enterprise). The basic idea here is little different from that espoused by Helen Clark, an Auckland MP and Leader of the Opposition in Wellington [ref. Bernard Orsman, NZ Herald p.A7, "Clark's plan: one pot for Auckland's assets", 3/3/98].

Other enterprises that should also become a part of an expanded ARST would include the Auckland Airport company, any commercialised roading venture that might charge for the use of Auckland's roads. Furthermore, private operations that might come up for sale, such as TranzRail's Auckland commuter operations or Fuller's Ferry service would ideally fit into an expanded ARST.

There need be no requirement for ARST trading companies to be fully owned by the ARST. Ideally, however, the ARST would be expected to seek a controlling share in each of its operations. There would also be no need for ARST companies to be monopolies. The ARST should be seen as vertically integrated, being involved in almost every industry that comprises part of Auckland's infrastructure, while horizontally non-integrated.

The New ARST would be expected to make a commercial profit for the people of Auckland; that is, the owners of Auckland's infrastructure would expect a return at the prevailing normal rate of profit. The profit, being the property of Auckland residents, should not be distributed to customers through price discounting. It is the owners, and not the profligate users of Auckland's infrastructure who should receive the Trust's dividends. In effect the ARST would be the commercial manager of Auckland's public domain.

While there should be a provision to pay out New ARST profits as cash dividends,1 there also needs to be a priority provision for social investment; to reinvest the profits in the maintenance and expansion of the city's public domain. Thus, Auckland needs a planned and coordinated programme of infrastructural maintenance and expansion. While the revenues would come from all aspects of the city's trading activities, the expenditures would, in any particular year, tend to strongly favour a particular component of the city's infrastructure. Thus airport terminal development might dominate in one year, a bridge in another year, new electricity cables in another, and a water pipeline in another.

There also needs to be provision for the New ARST to borrow investment funds on the national and international capital markets, using its revenue base as collateral. Borrowing would become obligatory in the event of more projects needing immediate attention than can be funded from normal revenue.

The New ARST would also insure its assets according to standard insurance principles. First, the ARST and its insurers would be fully liable for any losses arising from failures to supply essential products such as power or water. Thus the ARST would face an excess high enough to ensure that it does not succumb to "moral hazard" (which means a willingness to allow someone else to pay for catastrophic supply failures), while the insurance would protect Auckland residents from anything like full liability. The other common insurance principle would be an expectation that actions by the Trust to minimise the likelihood of a supply catastrophe would be rewarded through lower insurance premiums.

While the immediate commitment of the New ARST would be to fixing Auckland in a coordinated way, its constitution must be to pay social dividends to the people of Auckland, and not to become some kind of public works department that constructs infrastructure for its own sake. Thus conservation must be one of its central constitutional values, in recognition that all profits that do not have to be charged to new infrastructure can be returned as social dividends. The maximisation of social dividends should be the long term aim of the Trust.

Social dividends take two basic forms. The first form would be that of a cash dividend to Auckland residents. Mercury Energy does indeed pay such dividends to its owners, amounting at present to $120 per annum. The other form represents payments to boost the non-commercial parts of the city's infrastructure. The obvious examples here are places like libraries, art galleries, museums and cultural centres. While some of these are commercial, in that they charge for admission, the principal dividends gained from these activities are their social outputs, and not their revenues.

The non-commercial infrastructure is bigger than this, however. It includes nationally funded public sector activities as education and health care. I would like to see the New ARST taking some kind of ownership role with respect to each public university, polytech, school and hospital in Auckland. Through this role, the ARST would have some say in the management of these institutions, with a special brief to focus on their contribution to the wellbeing of Auckland. Thus the ARST would ensure that central government infrastructures within Auckland are subject to social audit, and hence make a contribution to Auckland's wellbeing. In return the ARST would have the right to provide additional funding to support the social objectives of, for example, its universities.

Education and public health are part of a city's infrastructure. The ARST fund needs to be able to direct expenditure to any component of that infrastructure, and to be able to get a return for the city on that expenditure, be it a cash return, or a return in the form of socio-cultural wellbeing.

I would expect the New ARST to be imaginative in pursuing its goals. Thus, the directors might like to notice that Aucklanders do take advantage of free offers, free concerts etc. Thus, it might be a very good long run investment to use the ARST fund make public transport within Auckland free, for an indefinite but not infinite period. That would involve the ARST paying the fares2 both for the transport companies it owns (eg Yellow Bus Company) and rival operations such as Cityline buses, the Devonport ferry, and the commuter rail service. This would eventually lead to a coordinated inter-ticketing structure (such as that, which I know, in Adelaide, South Australia, where a single ticket lasts two hours and can be used on trains, buses and trams).

Another initiative would be to offer free insulation equipment (and free installation) for all hot water cylinders, plus subsidies for such items as solar energy panels There is a major problem of market failure in that tenants have no incentives to undertake improvements that will ultimately be owned by landlords, while landlords have little incentive to act to reduce their tenants' power bills. Auckland is, increasingly, a city inhabited by tenants and not owner-occupiers. Housing costs are so high that is now difficult for even a senior university academic (senior lecturer) in Auckland to both support a partner and young family as an owner-occupier.

The New ARST will need to be managed in full recognition of the widening gap between non-propertied residents and ratepayers as two different classes of owners, so as to make sure that all residents benefit while contributing to the funding of local government in a way that is proportionate to their private wealth.3 As the ARST expands, increasing amounts of its revenue must come from rates. For example, it receives income at present from water rates. It is desirable that road funding, for example, will move in the same direction, being collected as rates and paid by the councils to the ARST.

There are two major dangers to be avoided in the management of a city's infrastructure. The first is the commercial model with its moral hazard implications; with its incentives to reap profits, and to cut ordinary costs while passing on extraordinary costs to the customers and to the wider community. The second danger is the fiscally conservative non-profit approach ("bulk underfunding"), where public bodies are starved of funding. Such bodies allow the assets they manage to depreciate. Alternatively, they maintain and build structures "on the cheap", thereby sowing the seeds for disasters of the Cave Creek type.4

How would the ARST board be structured? I would like to see half of the members directly elected, with the other half appointed by each of the city and borough councils, and one by the regional council. There are seven cities and boroughs in greater Auckland. With each appointing a member to the ARST board, plus the Auckland Regional Council appointing its own member, there would be 16 board members in total.

The Auckland Regional Council (ARC) would play an arms-length role, enabling it to, among other things, coordinate the activities of competing operators, of which the ARST would often be one such operator. Thus the ARC would ensure that ARST operations were competing fairly with non-ARST operations, while encouraging the different operations to be complementary, in the interest of Aucklanders.

A publicly accountable organisation is needed to manage Auckland's strategic assets for the profit of the people of Auckland; an organisation that controls a large fund drawn from a wide range of infrastructural enterprises. The profits must be able to be used to boost the city's infrastructure in a planned, sequential, and coordinated way. The fund must be able to be augmented by borrowing, and should be used to pay social dividends when the demands for social overhead investment are satisfied. Social dividends can take the form of cash, or of amenities, or a mixture of both.



1 In this case, one ideal existing model would be the Alaska Permanent Fund, which, on the basis on profits derived from Alaska's energy sector, pays a cash dividend (typically about US$1,000) to every man, woman and child resident in Alaska. This is of course a return on past investment, and Auckland needs to make a wide range of investments before it can really contemplate such a profit distribution scheme. [return]

2 That is, not lowering the fares, but instead paying a 100% subsidy. [return]

3 One way would be for rates to be charged to rented properties as a fixed percentage of the rent received. Even owner-occupied properties could be charged according to their imputed rental values. While it would still be possible, even necessary, for that percentage to be higher in say Manukau City than in Auckland City, on account of its lower property values, a formula could be devised at the greater Auckland level to ease the burden on ratepayers in Manukau and Waitakere. [return]

4 In 1996, 13 students and one Department of Conservation (DOC) officer died when a viewing platform collapsed. It turned out that the construction of the platform had been seriously flawed, with basic engineering standards ignored. [return]


© 1998

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