As a city Auckland will have to embrace philosophical and structural change if it is to overcome its current growing pains

By David Hargreaves

Ah, it grows and it grows. According to Statistics New Zealand Auckland's population received a net boost of 3294 people due to migration in October.

That's not a record. But it is apparently the third-highest monthly increase ever.

The second-highest was 3360. That was in September. The record's 3402. That was January of this year. 

In the 12 months to October, Auckland's population was increased by 29,010 through migration alone. That's a 2% increase to a city of 1.4 million-plus people that is currently having well publicised problems with availability and price of houses. Any sensible person might think that any sensible Government might want to do something about the migration situation. But I have aired my views on this before.

The latest migration figures help to give a greater sense of urgency, if it was really needed  to Auckland Council's current attempts to look at what it does with its assets and what it can do about some increased housing densification in the city.

I've got to say looking on from the outside that the council's current approach to increasing densification is all wrong. Nothing gets up ratepayers' noses more than the council excluding the public from the council chamber and debating important issues (of vital interest to said ratepayers) 'behind closed doors'. The immediate reaction from the public is that whatever's being discussed and deciding on won't be in their best interests. It seems to me that if the council continues down this route it will find legal challenges and delays at every turn and nothing will be done for years.

I wouldn't call Auckland unique in its structure, but I think it is quite unusual. It doesn't look like a city. It looks like a small town that got bigger. A lot bigger. If you look at somewhere like Wellington, it has a fairly clearly identifiable city area, moving into outskirts and then suburbs.

Where is central Auckland? I guess you say Queen Street. But in terms of shopping there's Newmarket, Parnell, Ponsonby that I would rate higher, depending on what you are looking for.

And then within walking distance of so-called central Auckland there's the leafy suburbs. Some very nice ones.

Look at a lot of cities around the world and what you have nearby to the central city area is a lot of fairly high density housing. There's some in Auckland, but obviously not enough. There will have to be more, but how to achieve it? The council's going all the wrong way about it in my view.

If the idea is to start pepper-potting high density housing across a range of 'leafy' suburbs I just don't think it will work. What maybe needs to happen over time (though this is where it gets real tricky) is the reinvention of one or two current suburbs adjacent to the central area into all high density housing. The logic in that is that if you are a city slicker New York apartment wannabe you can live surrounded by similarly inclined people while the half-gallon, quarter acre, Pavlova paradise people can carry on as before. But mixing the two? Nah.

As I say, attempts to redevelop a current leafy inner-city suburb into a higher density area - such as terraced housing perhaps - would meet the most rigid resistance, but it just might need to be done.

Of course the densification debate's re-emerged at the same time as the council's looking for creative ways to use its assets in a way that can balance the books given the spending that will be needed in coming years.

Looking at what the council's decided so far it seems clear to me that what is likely to happen is the selling off of some silver, or what one councillor termed the "low hanging fruit". Trouble with that approach is that once you've gone and removed all the nice readily accessible fruit someone else has to come along with a big step ladder later to reach the rest. If you keep carving off the easily saleable items (such as airport shares) but don't do anything regarding the efficiency of the ongoing assets under management then it becomes, literally a case of diminishing returns.

Consultants often get criticism thrown at them, not least for an inclination to charge like charging things for their services. But the value of bringing in outside consultants is that they are just that - outsiders with no preconceptions who can see where problems are and give an unslanted view of what might be done about them.

One passage in the Cameron and Partners report really caught my eye and it is reproduced here.

Asset recycling - observations

As we have reviewed AC’s assets our discussions with AC management have highlighted a number of practices on which we make the following observations. There is:

►No systematic opportunity cost analysis applied to assets despite AC’s capital constraints. The decision to retain ownership of an asset should consider the alternative use of the capital involved. For example, in a capital constrained world, a decision to own Asset X is actually a decision to own Asset X in preference to spending the capital on Project Y. An analogy is to start from a premise that Council has the cash and does not hold either Asset X or Project Y. On which opportunity would Council choose to spend the money on?

►Limited rigorous testing or ownership / control imperative – we consider a decision process as set out on page 6 should be followed when assessing Councils rationale for ownership of assets (particularly commercial assets)

►No systematic cost of capital analysis applied to investment / ownership decision and when there is, it typically uses AC’s borrowing rate as the hurdle rate:

• This (unjustifiably) favours retention of higher yielding assets (as to sell to repay debt results in a cash shortfall) but takes no account of the associated risk
• In corporate finance terms is incorrect – AC’s assets are not funded 100% by debt. Of AC’s $42 billion of assets, only $7 billion is debt funded and the remainder of the balance sheet is ratepayers equity. We believe ratepayers should be receiving a better return on their equity than AC’s borrowing rate, i.e. investment in assets that provide a return that includes a delivery of services and outcomes that enhance the liveability of Auckland

►A focus on capital solutions rather than solutions that increase expenses (e.g. ownership vs leasing) due to close scrutiny of expenses and the lack of application of a ‘cost of capital’

►Strong incentive to not sell assets at Ward level because proceeds from sale of community assets at Ward level are typically returned to the general AC coffers

►All other things equal these factors create a bias towards asset ownership, ‘inefficient’ use of capital and difficulties identifying and implementing asset recycling financing options

I thought that was really interesting and it's a message that I reckon will be completely lost. People will remember the possibility of selling airport shares, or the rights and wrongs of golf courses. But those very insightful observations from specialist outsiders on how the council operates? Probably already forgotten if they were ever taken on board at all.

But you see, I think this is the true "low hanging fruit" for the council. Its assets should be managed all the time with an eye to what everything is worth and whether there are lost opportunities in the utilsation of assets in certain ways - simply because that's the way things have always been done. And the reference by Cameron Partners to there being a "strong incentive not to sell assets at Ward level" because proceeds from such sales are typically returned to general council coffers is particularly damning though not unexpected if you really think about it.

It seems clear that the council's focus during this asset drive will be simply to raise cash. And selling the airport shares, for example, would be the most simple thing in the world. But the point is by actually managing operating assets better the council could satisfy more than just a desire for cash. Yes, to look at the golf courses, if some of that land was made available for sale, the council might raise some cash - and also provide opportunity for some more housing development. Two big priorities covered off in one go. And, no, I'm not suggesting laying concrete throughout Auckland and building on everything. One of the appealing things about the city at the moment is that it does have nice parks, so, certainly any surplus council land should at least be reserved for development into new parks.

I think anybody casting eyes for the first time on the spread-out, uncontrolled mess that is Auckland would be inclined to utter the phrase: "What the hell happened here?" The city's undoubtedly been handed an enormous structural challenge, simply through the way it was historically created, or more to the point, simply evolved.

It's going to require better leadership and management than has been in evidence so far and it's going to require more tolerance and ability to adapt than has been shown so far on the part of Aucklanders as well.