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A new approach to managing Council's investments

The current situation

Council owns investment assets worth more than $160 million that bring in income. These include assets such as sections being developed for sale in Parklands, residential rental property, commercial property, and cash held in term deposits at banks. In 2023 we started developing an Investment Strategy to guide us on how to better use our investment assets to bring in a higher and more consistent income to Council. The strategy takes a long-term view on how we manage these assets as an investment portfolio to generate better financial returns. In time, these better returns will mean we’ll rely less on rates to fund our core services and activities.

Managing the value of our investment assets as an inter-generational investment portfolio would benefit the residents and ratepayers of today, and those in generations to come. It will eventually give us extra income to fund more services and activities our residents want and need, without depending as much on rates funding. It will help to build our financial resilience to unexpected events, such as what we have experienced with Cyclone Gabrielle, the 2020 Napier flood, and Covid-19 lockdowns. It will help us diversify our investment types to lower our risks. It will also help us to protect the value of our cash assets against inflation.

We have been looking at different scenarios of how we could manage some or all these assets as an investment portfolio for the city. More detail on all options can be found in the supporting documents here.

P20 Investments Option 1Our preferred option is to explore forming a Council Controlled Trading Organisation (CCTO). A CCTO is a subsidiary organisation of a council. In this case, it would be focused on managing the investment portfolio to achieve commercial objectives for Council.

A CCTO would also allow Council to attract commercial expertise and partnerships that would be unlikely if the investment portfolio was managed within Council.

Under this option, investments would be managed proactively, with a focus on maximising income over the long term (an inter-generational investment). Management and investment decisions on the investment portfolio would be done by dedicated experts, according to the wishes of Council. Council would set these expectations through a formal document called a Letter of Expectations.

The independence of CCTOs has allowed other councils to access people with suitable governance and management experience. By doing something similar, we believe we can seek development income and investment partnership beyond our Parklands property portfolio, which may not otherwise be available to Council directly. There will be an extra cost to create and run the CCTO, but this would be outweighed significantly by the additional income the CCTO would generate. Based on similar CCTOs set up at other New Zealand councils, we estimate the one-off establishment cost would be around $750,000.

Our draft Three-Year Plan is using the financial assumptions of operating a CCTO. Our cash flow from our investment portfolio is targeted to grow consistently at 5% per year. At this level of cash flow distribution, the CCTO is keeping some cash for reinvestment in the early years of the Three-Year Plan. This is to provide both long term asset growth and resilience in Council’s assets and future income.

We expect there would be more expenditure than income in the first year of operating the CCTO. However, we expect this will turn around from the second year of the Three-Year Plan. Over ten years, we expect a net benefit to Council of $15 million more than Option 2 and $20 million more than Option 3, the status quo. Just like an investment such as a savings account, the income earned by the CCTO would increase gradually over time, starting from around 2027/28.

How would it operate? 

The CCTO’s board would be appointed by Council. Council would be responsible for deciding which investment assets should be managed by the CCTO. Core social obligations of Council would not be passed to the CCTO. The CCTO board would have access to investment professionals responsible for the day-to-day decision-making and stewardship of the investments. The CCTO would be accountable to the community and to Council on the investment portfolio’s performance through a statement of corporate intent that is approved by Council.

CCTOs are a common practice in local government. More details can be found about them in our supporting documents here.

P20 21. Invest . Graph Option 1

P21 Investments Option 2Under this option, the investment portfolio would be managed by Council staff whose roles would be dedicated to this purpose. Their focus would be on making commercial returns, although the investment approach would be more passive.

The likely returns will be higher than Option 3, the status quo, given the focus on increased returns. They would not be as high as Option 1 due to conflicting objectives such as social and wellbeing objectives.

The advantages of this option are reduced costs in managing the investment portfolio, through using Council staff and our Audit & Risk Committee. The modelled returns assume all income generated is spent in the year it is gained.

 P21 22. Invest . In House Graph Opotion 2

P22 Investments Option 3Currently, Council investment assets are managed across the organisation by the team most closely related to the function of that asset. For example, leasehold property is managed by the team that looks after Council buildings that are held for either social or investment reasons. Parklands development is led by our infrastructure team. This approach to asset management has ensured that we’ve achieved our delivery objectives, but there has been no focus on the investment income to Council. Each investment asset is therefore managed in isolation at present.

Most Council assets are held where there is a social, economic, environmental, or cultural benefit to Napier. Earning a financial return on our investment assets has never been our main objective. There is little risk management currently applied in terms of building financial resilience by diversifying the asset types. In some cases, assets have been sold to reduce the impact on current rates, with no reinvestment of the proceeds to help reduce future rates increases. This includes the earlier stages of the Parklands development.

The constant sale of investment assets to fund operating costs is not sustainable and denies our future ratepayers the benefit that these assets could provide. Ultimately, it means rates will become more expensive as time goes on. There is no financial advantage to keeping with the status quo. The modelled returns assume all income generated is spent in the year it is gained.

P22 23. Invest . Status Quo Graphs Option 3P23. Invest . Investment Strategy Graphs

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