Selling Canterbury Infrastructure Assets

image from oriongroup.co.nz

The question has been raised by the theoretical ability of the Canterbury Earthquake Recovery Authority (Cera) to direct the Christchurch City Council to sell its shareholding in a number of companies including Orion New Zealand (electricity network), Christchurch International Airport Ltd, the Lyttelton Port Co, Red Bus and City Care.

ACT leader Don Brash has stated; "If you were a householder whose house had been substantially destroyed or wiped out in the quakes and you had a bunch of shares, logically you would sell those shares to help out, wouldn't you?"

It has been estimated that dividends from the companies have kept rates at least 15% less than they would otherwise be – but I don't believe that should be the main reason to keep the assets, which lies instead within the poor nature of Mr Brash's analogy, and relates to the nature of the companies, their relationship with Christchurch, and the obligations of Company Directors.

Shares are assets, so in Mr Brash's analogy, the householder simply converts his long term asset which is held in share form, into a form of short term asset (cash) which he can use in either reinvest in another long term assets such as his house, or use to cover short term expenses. The only relationship between the householder and the asset is that he has chosen that particular investment.

The companies the council holds controlling shares in are of a particular type; they are all infrastructure companies.

What is infrastructure? Wikipedia defines it as; “the basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function”.

For those people who went through the major earthquakes in Christchurch, the importance of infrastructure such as the sewerage, water and power, and the roads and communications networks, the interdependence of each on the other, and the impact of their loss on the quality of life became very clear.

Already we can see there is a relationship between people and infrastructure absent in Mr Brash's shareholder analogy, one is an integral part of their lives, and one is simply a monetary transaction.

But does it matter whether that infrastructure is held by an elected local council, or privately owned?

Directors are required to act in the best interests of the company. This means extracting as much profit as possible, through maximising income, or minimising costs, a classic example of this being Transrail who minimised costs by failing to invest in their infrastructure. I am not trying to denigrate the nature of private enterprise – it has many good points, and is fundamental to our economy and way of life. Without it there would have been no Industrial Revolution and the technology and science we take for granted. It's just not an optimal way of dealing with every type of asset - infrastructure is, by it's nature, both in need of long term planning and investment and also often a natural monopoly, making it difficult for the normal market forces to control charging practices.

As indicated in the definition given above, infrastructure is important for the local economy – look at the economic cost of traffic issues in Auckland. Roading and ports, electricity and other infrastructure are essential for manufacturing and production.

In comparison with the narrow interest of directors, this is the Christchurch City Councils stated aim; “As a democratically elected body, it is the job of elected members to govern and manage the interests of our City on behalf of everyone who lives here. It is also their responsibility to look after the social, economic, environmental, and cultural well-being of communities, now and in the future.”

Above all, Council decisions are accountable to local residents, whereas if the infrastructure is held by a private company there is far less accountability, and responsibility to residents – remember its purpose is to put the interests of the company first.

Infrastructure is vital both for maintaining a way of life for residents, and for economic activity – both of these are the purview of the Council. Infrastructure is central to the Council mission in a way the householders shareholding is not.

In view of the above is Mr Brash's analogy even close? If the householder sells his shares, he looses what minimal interaction he had with the company he invested in, but otherwise it makes no difference - he is just swapping one asset for another. If the Council sells its shares in its infrastructure companies it looses control both of the ability to influence local economic development, but also assets fundamental to the well-being of its citizens. Either Mr Brash is choosing to oversimplify the issue, or he really only views the world as a series of economic transactions.