I hereby give notice that an ordinary meeting of the Finance and Performance Committee will be held on:

 

Date:

Time:

Meeting Room:

Venue:

 

Tuesday, 20 November 2018

9.30am

Reception Lounge
Auckland Town Hall
301-305 Queen Street
Auckland

 

Komiti ā Pūtea, ā Mahi Hoki /
Finance and Performance Committee

 

OPEN ADDENDUM AGENDA

 

 

MEMBERSHIP

 

Chairperson

Cr Ross Clow

 

Deputy Chairperson

Cr Desley Simpson, JP

 

Members

Cr Josephine Bartley

Cr Penny Hulse

 

Cr Dr Cathy Casey

Cr Mike Lee

 

Deputy Mayor Cr Bill Cashmore

Cr Daniel Newman, JP

 

Cr Fa’anana Efeso Collins

Cr Greg Sayers

 

Cr Linda Cooper, JP

Cr Sharon Stewart, QSM

 

Cr Chris Darby

IMSB Chair David Taipari

 

Cr Alf Filipaina

Cr Sir John Walker, KNZM, CBE

 

Cr Hon Christine Fletcher, QSO

Cr Wayne Walker

 

Mayor Hon Phil Goff, CNZM, JP

Cr John Watson

 

Cr Richard Hills

Cr Paul Young

 

IMSB Member Terrence Hohneck

 

 

(Quorum 11 members)

 

 

 

Sandra Gordon

Senior Governance Advisor

 

16 November 2018

 

Contact Telephone: (09) 890 8150

Email: sandra.gordon@aucklandcouncil.govt.nz

Website: www.aucklandcouncil.govt.nz

 

 


Finance and Performance Committee

20 November 2018

 

 

ITEM   TABLE OF CONTENTS                                                                                         PAGE

    

13        Transfers of land within the Council Group                                                               5 

 

      


Finance and Performance Committee

20 November 2018

 

 

Transfers of land within the Council Group

 

File No.: CP2018/21037

 

  

Te take mō te pūrongo / Purpose of the report

1.       To provide advice on issues related to the ownership of waterfront land and related assets and the implications of any potential transfers of ownership within the council group.

Whakarāpopototanga matua / Executive summary

2.       The legal ownership of waterfront land and related assets such as wharf structures, marinas, and investment properties currently sit with Panuku Development Auckland (a CCO) and Ports of Auckland (a Council Organisation or CO) rather than at parent (Auckland Council) level.

3.       The issue of legal ownership is a separate issue to the management and operational use of the land. For example, roading assets are legally owned by Auckland Council but managed and accounted for by Auckland Transport. 

4.       The current ownership arrangements were put in place when Auckland Council was established in 2010 and have not been reviewed since. These landholdings are of high importance to the council for both financial and strategic reasons. These landholdings are intended to play a key role in council progressing key Auckland Plan 2050 outcomes in areas such as spatial development, planning, environmental management and stakeholder relationships.

5.       Although not necessarily affecting day-to-day operations, direct legal ownership of these landholdings by the council parent would provide another layer of control over the medium to long-term use of these assets. On the other hand, direct ownership means that any long-term risks or obligations in respect of these landholdings also transfer to the council parent.

6.       Tax law is changing on 1 July 2019. One implication of this change is that after 1 July any transfer of land holdings from subsidiaries to parent cannot be made without creating a substantial tax liability. While leaving the land holdings unchanged for the foreseeable future is certainly an option, if there is an appetite to transfer land to parent ownership for governance or strategic reasons, then this should be considered before the new tax laws come into effect.  

7.       Because these land holdings are strategic assets, a transfer of ownership from CCO or CO to the council parent can only be done via a Long-term Plan (LTP) amendment and using the Special Consultative Procedure. As an LTP amendment this process would require audit review and an audit opinion from the Auditor-General. To enable transfers to be executed before 1 July 2019, practically speaking any decision to undertake consultation on a proposal to transfer ownership would need to be made by the end of this calendar year. 

8.       The changing tax law is not a reason in and of itself to change legal ownership. Rather, if the council considers that there may be good governance or strategic benefits to hold these assets more centrally in the future, then acting now is important to enable land to be transferred before 30 June 2019 to keep the council’s long-term strategic options open. 

 

Ngā tūtohunga / Recommendation/s

That the Finance and Performance Committee:

a)      request that the boards of Panuku Development Auckland and Ports of Auckland consider the potential transfer of legal ownership of waterfront land and related assets to the council parent

b)      request that staff include the respective positions of the Panuku Development Auckland and Ports of Auckland Boards in a final report back to council in December to enable a decision on whether to proceed to formal public consultation.

Horopaki / Context

9.       The waterfront land in Auckland’s city centre has long been identified as an area of high strategic importance. In 2012, The Waterfront Plan defined a vision for the waterfront as “a world-class destination that excites the senses and celebrates our sea-loving Pacific culture and maritime history. It supports commercially successful and innovative businesses and is a place for all people, an area rich in character and activities that link people to the city and the sea.”

10.     The legal ownership of waterfront land and related assets such as marinas, wharf structures and investment properties currently sit with Panuku Development Auckland (a CCO) and Ports of Auckland (a Council Organisation or CO) rather than parent (Auckland Council) level.

11.     The issue of legal ownership is a separate issue to the management and operational use of the land. For example, roading assets are legally owned by Auckland Council but managed and accounted for by Auckland Transport.  The current ownership arrangements were put in place through the establishment legislation when Auckland Council was formed in 2010 and have not been reviewed since. The legislation did not provide any simple mechanism to change ownership arrangements, so unless further legislative intervention is sought, any change to subsidiary structures or asset holdings initiated by Auckland Council would require a commercial transaction between legal entities in a similar way to the private sector. 

12.     Under these current arrangements, key decisions concerning waterfront and ports land are not made directly by elected members of Auckland Council. The accountability chain is provided by indirect measures such as:

(a)      Shareholder approvals of “major [financial] transactions” (Companies Act).

(b)     Council approval rights for strategic land / assets disposal (Significance and Engagement Policy, and the Substantive CCO Accountability Policy).

(c)      CCO / POAL board appointments and removals.

(d)      Statements of Intent (or in the case of POAL, Statements of Corporate Intent).

13.     The specific assets that could potentially transfer are listed in the following table and are located within the area shown in the map below. 

Current legal owner

Asset

Panuku Development Auckland

Panuku waterfront land, including investment properties

Panuku wharf structures

Panuku water rights

Westhaven marina

Other marina assets

Ports of Auckland

Ports of Auckland Land

Ports of Auckland Wharf Structures

Ports of Auckland water rights

The Ports of Auckland land and wharf holdings have a current book valuation of $658 million and Panuku’s land, wharves, marina assets and investment properties have book values of $740 million.

Tātaritanga me ngā tohutohu / Analysis and advice

14.     While a change of legal ownership within the group would not necessarily affect day-to-day operations and would not change the level of public ownership, it does present a range of implications which require careful consideration.

15.     A transfer of legal ownership of Ports of Auckland land holdings would involve a lease arrangement between the council and Ports of Auckland to enable the port to continue its operations. A transfer of legal ownership of Panuku Development Auckland land holdings would involve a change in Panuku’s mandate to allow them to manage these assets on the council’s behalf.

16.     The principal options here are to do nothing, transfer all of the assets referred to in this report, or to transfer only some of these assets.

Governance implications

17.     The waterfront landholdings of Panuku and Ports of Auckland are of high importance to the council for both financial and strategic reasons. These landholdings are intended to play a key role in council progressing key Auckland Plan 2050 outcomes in areas such as spatial development, planning, environmental management and stakeholder relationships.

18.     Although not necessarily affecting day-to-day operations, direct legal ownership of these landholdings by the council parent would provide another layer of control over the medium to long-term use of these assets. On the other hand, direct ownership means that any long-term risks or obligations in respect of these landholdings also transfer to the council parent.

19.     Implementing the change would require engagement with and approval of the boards of Panuku and Ports of Auckland. Some minor consequential changes would also need to be made to CCO and CO accountability policies and documents, including statements of intent and corporate intent. For example, in the case of Panuku these documents should make it clear that their role in managing property development at the waterfront on council’s behalf would then become the same as their role in the other Panuku development areas. There would also need to be some changes to delegations to enable Panuku to carry out this role on council’s behalf.

20.     For the purpose of preparing this report, council staff have engaged with the staff of Panuku and Ports of Auckland. Staff and advisers of both organisations have responded in an open and constructive manner. At the time of writing formal engagement with their boards has not yet occurred, although we understand that the board of Ports of Auckland are expected to discuss this matter at a meeting on 19 November.

21.     The use of lease arrangements could lead to greater transparency and efficiency in the use of land, as the subsidiaries would have an incentive to only use land that they are willing to pay for.   

Tax implications  

22.     Tax law is changing on 1 July 2019. One implication of this change is that after 1 July any transfer of land holdings from a CCO or CO to parent cannot be made without creating a substantial tax liability. While leaving the land holdings unchanged for the foreseeable future is certainly an option, if there is an appetite to transfer land to parent ownership for governance or strategic reasons, then this should be considered before the new tax laws come into effect.

23.     Indicatively, if all the land holdings referred to in this report were transferred at the current book value of $1,398 million after 1 July 2019, then the potential tax liability would be 28% percent of this value or $391 million.

24.     External tax advice on this matter has been obtained from PwC and is included as Attachment A. To provide certainty of the actual tax treatment that Inland Revenue will apply to any asset transfer, PwC recommend the council seeks a binding ruling from Inland Revenue before executing any transfer.

Public consultation implications  

25.     Because these land holdings are strategic assets, a transfer of ownership from CCO or CO to the council parent can only be done via an LTP amendment and using the Special Consultative Procedure. As an LTP amendment, this process would require audit review and an audit opinion from the Auditor-General. To enable transfers to be executed before 1 July 2019, practically speaking any decision to undertake consultation on a proposal to transfer ownership would need to be made by the end of this calendar year.

26.     Once waterfront landholdings are transferred to the council parent, under the council’s current policies, the council could only make a decision on any further changes to ownership and control of these assets by way of another LTP amendment and using the Special Consultative Procedure. This provides for additional political and public scrutiny over any future proposals to change ownership or control of these strategic assets.

Implementation implications  

27.     Execution of a potential transfer of legal ownership would require significant work, including due diligence, transaction implementation, lease negotiations with Ports of Auckland and engagement with the boards of Panuku and Ports of Auckland.

28.     The legal due diligence would need to review the title of each asset and identify any potential challenges to the proposal or any underlying land ownership issues. Financial due diligence would include working with an external tax adviser to seek a binding ruling from Inland Revenue.

29.     While some work will be done in-house, external legal, tax, audit, accounting and valuation costs are likely to exceed $1 million if all of the assets discussed in this report were transferred.

30.     Given the tight timelines, strong project management disciplines will need to be employed to meet the deadline and manage delivery risks.

Financial and accounting implications

31.     Because any potential land transfers would occur within the council group, there should not be any material financial implications at an overall group level, aside from the transaction costs discussed above.


 

32.     However, there would be a range of accounting issues to be worked through for each entity within the group. This would include a range of valuation and technical accounting issues, including working through the impact the lower asset values would have on the subsidiaries’ balance sheets. 

Ngā whakaaweawe ā-rohe me ngā tirohanga a te poari ā-rohe /
Local impacts and local board views

33.     Despite any potential transaction being internal to the council group the Waitematā Local Board is likely to have views on the governance of these assets within their board area.

34.     If a decision is made to proceed with consultation on ownership transfer, views of all local boards will be sought to inform final decision-making.

Tauākī whakaaweawe Māori / Māori impact statement

35.     Despite any potential transaction being internal to the council group the nature of the assets involved will mean that local iwi groups have a particular focus on any decision.

36.     If a decision is made to proceed with consultation on ownership transfer, engagement with relevant groups will take place alongside other consultation activities early in 2019.

Ngā ritenga ā-pūtea / Financial implications

37.     The financial implications are addressed in the body of the report.

Ngā raru tūpono / Risks

38.     The key risks are addressed in the body of the report. In general, transferring legal ownership of assets within the group will not materially change the risk profile of the group overall. It may however change the allocation of some risk between specific entities within the group.

39.     Given the tight timelines, there are implementation risks that will need to be carefully managed. There is a risk that a favourable binding ruling is not received from Inland Revenue within the necessary timeframe. To some extent this can be mitigated through good ongoing dialogue with Inland Revenue throughout the process.

Ngā koringa ā-muri / Next steps

40.     If the recommendations of this report are agreed, staff will engage through Panuku Development Auckland and Ports of Auckland executives to establish the positions of their respective boards. Staff will report in December 2018 on the positions of the boards and provide advice to support decisions on whether to proceed to formal public consultation.

 

Ngā tāpirihanga / Attachments

No.

Title

Page

a

Ownership of Strategic Land Assets - PwC Tax Considerations Letter

11

      

Ngā kaihaina / Signatories

Authors

Ross Tucker - Acting General Manager, Financial Strategy and Planning

Kevin Ramsay - General Manager Corporate Finance and Property

Bram VanMelle - Manager Property and Commercial

Hinewairere Warren - Project Manager

Authoriser

Matthew Walker - Group Chief Financial Officer

 


Finance and Performance Committee

20 November 2018