Part 4: Infrastructure Auckland

Local Authority Governance of Subsidiary Entities.

Infrastructure Auckland (IA) was created on 1 October 1998 by an amendment to the Act.9 The amendment dissolved the former Auckland Regional Services Trust (ARST) and vested the majority of the ARST’s assets in IA. A significant asset not vested was the ARST shareholding in WSL. The governance arrangements relating to WSL are discussed in Part Three (pages 37-39).

The principal purpose of IA is:

to contribute funds, by way of grants, in respect of projects, or parts of projects, undertaken in the Auckland Region for the purpose of providing –
(a) Land transport; or
(b) Any passenger service; or
(c) Any passenger transport operation; or
(d) Stormwater infrastructure, –
where the projects or parts of projects generate benefits to the community generally in addition to any benefits that accrue to any identifiable persons or groups of persons.

IA performs two distinct functions:

  • to manage:
    1. the region’s investments in Ports of Auckland Limited (POAL) (80% owned), America’s Cup Village Limited (ACVL) (100% owned), Northern Disposal Systems Limited (NDSL) (100% owned); and
    2. its Treasury Fund; and
  • to fund infrastructure projects in the region by way of grants generated through its revenue and capital base, although it must use income in preference to capital.

The two functions are closely related as IA is charged with using the income stream and, in the event of sale, capital proceeds from its investment portfolio to fund infrastructure development for the region.

The Governance Framework

IA is a hybrid body. It has an appointed board and the powers of (variously) a territorial authority, a regional council, and a statutory corporation. The governance structure comprises the Electoral College, the Board of Directors, and the executive management team.

The Act largely determines the structure and operation of IA and prescribes the IA Deed (“the Deed”). See Figure 3 on opposite page. The Deed sets out the functions and powers of IA and specifies:

  • the manner in which appointments will be made by the Electoral College;
  • the general criteria to be used when evaluating applications for grants; and
  • the information to be included in the SCI.

Figure 3
Governance Framework of Infrastructure Auckland

Figure 3.

The Deed may be amended only by Order in Council on the recommendation of the Minister of Local Government after consultation with the Electoral College.

The Act and the Deed place certain special obligations on IA. The most significant of these are that IA must:

  • act in the best interests of the inhabitants of the Auckland Region;
  • adopt the special consultative procedure in the Act for any proposal to sell or dispose of shares in its subsidiary companies;
  • manage its assets in accordance with sound business practice;
  • avoid acquiring other assets (except in specified circumstances); and
  • not sell or dispose of more than 24.9% of its shares in POAL without first receiving a majority vote in favour of such a decision through a referendum of Auckland residents.

In addition, the activities of IA are governed by its SCI.

We visited IA in November 1999, at which time it had been in existence for only fourteen months. Nonetheless, we were keen to examine elements of the governance arrangements at an early stage in development and implementation. We focused our examination on two elements of the governance framework:

  • the role of the Electoral College; and
  • the key business processes for IA.

We examine each of these elements in turn before making some overall comments and recommendations.

The Role of the Electoral College

IA is overseen by an Electoral College that has eight members – one from each of the Auckland region’s seven territorial local authorities and one from the Auckland Regional Council. The Electoral College elects one of its members as chairperson. The Electoral College members were the mayors of the territorial local authorities and the chairman of the Regional Council.

The voting entitlements of the members are:

Auckland City Council — 3 votes
Manukau City Council — 3 votes
North Shore City Council — 2 votes
Waitakere City Council — 2 votes
Franklin District Council — 1 vote
Papakura District Council — 1 vote
Rodney District Council — 1 vote
Auckland Regional Council — 1 vote

The Electoral College meets four times a year. Its main functions are to:

  • consider and comment on the content of IA’s SCI;
  • monitor IA’s performance;
  • appoint the directors and the chairperson of the IA Board; and
  • consult as necessary with the Minister of Local Government about any proposed amendments to the Deed.

When IA was established, the Board had nine directors, six of whom were elected members from the ARST. The Electoral College appointed the other three directors, and the chairperson, in accordance with the process prescribed in the Act. From 1 July 1999 Board membership dropped to seven, and from 1 January 2000 the Electoral College has had the power to appoint all the directors.

The Act and the Deed prescribe the process to be followed for selecting and appointing directors. The Electoral College must:

  • publish a job description;
  • advertise vacancies; and
  • use an independent recruitment consultant to assess the suitability of applicants.

The strategic focus and activities of IA were under discussion at the time of our visit. Consultation on the content of the Board’s draft SCI had led to an exchange of views between the Electoral College and IA. Discussions were also occurring between IA and the Electoral College on the Board’s quarterly report. The quarterly report outlined progress against the objectives set out in IA’s SCI and covered:

  • progress against SCI objectives;
  • grant activity;
  • staffing issues;
  • communications, relationship management, and liaison;
  • environmental improvement and issues for IA and its three subsidiaries;
  • value of its investment portfolio;
  • investment activity, summarising monthly reports from its three subsidiaries;
  • detailed schedule of grant applications in hand; and
  • financial performance, including investment reports from AMP Asset Management New Zealand Limited which manages IA’s Treasury Fund.

Establishing IA and appointing the Board largely dominated the workload of the Electoral College for its initial meetings, and at the time of our study the College was still developing its monitoring role. Over time, we expect the Electoral College to take a more systematic approach to examining IA’s SCI and monitoring performance against its objectives. We understand that an Officers’ Group was established by the Chief Executive Officers’ Forum in February 2000 to provide analysis and assistance to the Electoral College. This role involves analysing documents such as IA’s SCI and quarterly reports, and providing comments and advice for consideration by the College.

At the time of our study, the Electoral College did not have a structure for evaluating the performance of the Board. Evaluating the Board’s performance will help to provide some assurance that the board has the right mix of skills, is working well, and has the necessary systems in place to fulfil its dual functions. The College had, however, recognised this need. We understand that a system for measuring the performance of the chairperson and directors of IA has now been developed and was to be used for the first time before the end of 2000.

The six local authorities we visited endorsed the role of the Electoral College and its decision-making framework. There was also support for the role of mayors as Electoral College members given:

  • their understanding of the region’s needs; and
  • the need to manage the political issues surrounding the activities of IA.

Key Business Processes

The key business processes of IA relate to its two distinct functions:

  • To manage its investments in POAL, ACVL, NDSL and in the Treasury Fund. The ownership and investment role involves management of investments and discharge of ownership obligations.
  • To fund infrastructure projects through grants, drawing on income and capital from those investments (subject to the requirements of its legislation).

Owner and Investment Manager

Investment Management

IA’s investment portfolio was worth $813 million at 30 June 2000, in the following proportions:

  • Ports of Auckland — 52%
  • Northern Disposal Systems — 2%
  • America’s Cup Village — 6%
  • Treasury Fund and Commercial Property — 40%

The legislation requires these assets to be managed in accordance with sound business practice. IA’s stated aim is to “optimise returns within an acceptable level of risk to maximise funds available to make grants.”11

The Treasury Fund transferred to IA from ARST has grown from subsidiary companies’ dividend receipts and from interest earned on the Fund. A private asset management company was appointed to manage the Fund on IA’s behalf. The range of potential investments is limited by IA’s Treasury Management Policy.

IA’s investment portfolio is dominated by its shareholding investment in POAL. This raises the following two significant issues:

  • The likely realisable value of IA’s investment portfolio is heavily influenced by the market value of POAL shares. There have been significant fluctuations in the share price. The size of the shareholding held by IA, and the statutory constraints on IA’s ability to trade in those shares, also mean that the share price may not be an accurate reflection of the potential value.
  • The statutory requirement for public consultation before IA can sell its equity investment to fund infrastructure projects may affect its ability to realise optimal value. IA may have to liquidate assets at a time when share prices are low, and the market may under-value shares if it perceives a forced sale.

IA has made clear in its SCI for 2000-2003 and its Annual Plan for 2000- 2001 that it has no plans nor current intention to sell or otherwise dispose of any of the shares in POAL.

Discharging Ownership Obligations

The relationship between IA and its wholly owned subsidiaries, NDSL and ACVL, is managed through the SCI. The relationship with POAL – a subsidiary but also a publicly listed company – is determined by POAL’s constitution and the requirements of the New Zealand Stock Exchange.

IA is establishing an effective framework for managing its investments. From our observations, IA has approached its investment obligations actively by:

  • pursuing strategic issues with its subsidiaries;
  • reviewing subsidiaries’ SCIs;
  • establishing communication channels with subsidiary boards for ongoing monitoring; and
  • initiating reviews of long-term value and holding costs.

In its role as owner of POAL, NDSL and ACVL, IA is committed to acting in the role of a “diligent, constructive and enquiring shareholder”,12 focusing on strategic issues and leaving the subsidiary companies to manage their own business on a day-to-day basis. There is evidence of IA undertaking extensive and rigorous evaluation of its ownership interests at regular intervals.

IA appoints the directors of its subsidiary companies. However, at the time of our study a system for monitoring the performance of directors and boards of subsidiaries had not been put in place. IA undertook to introduce such a system in 2000.

IA was receiving monthly reports from NDSL and ACVL, in addition to formal quarterly reports against SCI objectives. POAL also provided monthly and quarterly reports and quarterly and six-monthly briefings to IA. However, consistent with listing requirements, POAL was supplying only limited financial information in addition to that released to the market through publication of its six monthly and annual results.

There was some evidence that the reporting relationship between IA and its subsidiaries has not yet fully developed to the satisfaction of all parties. Occasionally, IA had experienced resistance to its requests for information. It had investigated ways to obtain more information than it was currently receiving – for example, by entering into a confidentiality agreement with the boards of its subsidiaries.

In the private sector, parent companies may appoint directors or employees to the boards of subsidiaries to align their strategic interests. This mechanism is not available to IA, as it is expressly prohibited by the legislation. The view was put to us that this provision constrains the ability of IA to manage the governance relationship with its subsidiaries in the same manner as its private sector counterparts.

Funder of Infrastructure Projects

IA provides grants for transport and stormwater projects in the Auckland region. The grant application process has the following four stages, which are simplified for grant applications under $500,000:

  • expression of interest;
  • grant application;
  • project evaluation; and
  • grant determination and allocation.

Initial demand for grants was low. By 7 March 2000, IA had approved only 12 grants totalling $1,683,709, with no single grant exceeding $500,000. However, by the same date IA had received a total of 62 expressions of interest which, if approved, would require total capital expenditure of nearly $3,000 million.

In considering grant applications, IA is required to act in the best interests of Auckland as a whole. The Regional Growth Forum and working parties and liaison groups at political and officer levels have developed a set of regional strategies, such as the Regional Land Transport Strategy. These strategies provide IA with the necessary framework within which to consider infrastructure priorities and make funding decisions.

IA’s capacity to fund grants for infrastructure depends on the performance of its investment portfolio – in particular, decisions about its investment in POAL. Those decisions rest with the political leadership and the public in the Auckland region.

IA faces a tension between its dual roles as asset manager and as funder of the infrastructural needs of the region. IA has signalled its intention not to sell or dispose of its shares in POAL in the short to medium term. However, demands for infrastructure funding and possible changes within IA’s investment portfolio suggest that this will not be a sustainable long-term position.

The future investment strategy of IA – in particular, the relationship between its investment functions and funding obligations – needs to be clarified. While recognising the relationships between these dual roles, we consider it important that IA treat the two roles as discrete functions. IA’s investment portfolio is fundamentally unbalanced and its value can change significantly over time.

The timing of any sale may affect the funds available for infrastructure expenditure. IA should continue to monitor the opportunity costs of its investments actively, working closely with the board of POAL in particular. Monitoring requires continual review of the investment options available against which to assess the relative risks and returns of its current investment portfolio.

Conclusions and Recommendations

The Electoral College has important functions in relation to Infrastructure Auckland. The local authorities we visited endorsed the College’s role and decision-making framework.

With the IA Board now established, the Electoral College can take a more systematic approach to monitoring IA’s performance, especially in respect of progress in meeting the objectives set out in its SCI. The College is also addressing the need for an effective structure to evaluate the performance of IA’s board, to ensure that the Board:

  • has the right mix of skills;
  • is working well together; and
  • has the necessary systems to fulfil its investment and funding obligations.

IA is actively managing its investment obligations, seeking strategic information to meet its needs as owner, and regularly reviewing its ownership interests. At the time of our visit, it was planning to establish a system for monitoring the performance of directors and boards of its subsidiaries.

Some issues of communication between IA and its subsidiaries need to be addressed. At the time of our visit, IA was continuing to negotiate with its subsidiaries for flows of information. In its opinion, this information was needed to meet its statutory obligations, to monitor the risk profile of its investment portfolio, and to fulfil the role of an informed and diligent shareholder.

For its infrastructure funding role, regional strategies have created a planning framework within which IA will be able to make necessary funding decisions about the overall needs of the region.

IA faces a tension between its dual roles as “asset manager” and “funder”. The relationship between the two roles needs to be clarified. IA’s capacity to fund grants in the future will be influenced significantly by decisions about its investment in POAL. Those decisions rest with the political leadership and the public in the Auckland region.

IA should continue to monitor actively the performance of its investments, having regard to the composition of its portfolio and opportunity costs.

The future of IA’s investment in POAL is both a commercial and a political issue. Long-term regional planning requires some certainty, and in turn this requires some clarification at political and community levels about the preferred use of the public funds that are currently invested in POAL. Factors influencing this decision are judgements about:

  • the relative value of retaining the region’s equity investment as a source of future capital gain and dividend income;
  • preservation of other perceived strategic benefits; and
  • using the capital to make improvements to the region’s infrastructure.

9: Local Government Amendment Act 1998.

10: Local Government Act 1974, section 707ZZK(1).

11: Final Annual Plan 2000, page 22.

12: Final Annual Plan 2000, page 25.

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