Submission on GDC Asset Transfers

Below is the TRA submission to Gisborne District Council on the proposed transfer of commercial assets to Gisborne Holdings Limited.

Submissions are due by 4pm Friday 3 June.

If you support the submission, please:

  1. Enter your contact details in the form below
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  3. Select the checkbox if you wish to speak to a Council meeting in person about the submission (you can change your mind later if you choose not to)
  4. Hit the Submit button to send as your submission.

 

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Submission by Tairāwhiti Residents Association on the Council’s Proposal to Transfer Commercial Assets to GHL.

 

Tairawhiti Residents Association (TRA) is an incorporated society with a diverse and growing membership across the region. We have sought feedback from our members and 100% of responding members endorse this submission (though one had issues with the punctuation).

TRA does not support the proposal to transfer the ownership of the Vehicle Testing Station and the Waikanae Top 10 Holiday Park to Gisborne Holdings Limited (GHL) for the following reasons:

 

  1. These commercial, non-strategic assets are inappropriate investment entities for a CCTO.

They clearly compete directly with the private sector and to promote further investment in these assets makes no strategic or commercial sense for ratepayers.

1.1   While we applaud Councils attempts to “increase other income” streams, to reduce the pressure on rate increases, we do not believe this proposal is an appropriate method.

1.2   There is no evidence to suggest that other CCTO’s in NZ have breached the ‘market neutrality’ principal in this way. The principal purpose of CCTO’s is to enhance the management and performance of strategic, infrastructural assets, not to compete with commercial ratepayers in such a deliberate manner.

 

2.    The following claims, made in the proposal, have not been substantiated:

2.1    “[T]hese commercial activities will increase Council’s non-rates revenue”. The recent PriceWaterhouseCoopers report, commissioned by Council to examine the benefit of transferring these two assets to GHL, confirmed that the profits ($574,000 in 2017) that had previously been used internally to offset other overheads, would be lost to Council. This equates to a loss of $6m of revenue over the next ten years (Table 1, PwC Report).

2.2    The proposal suggests that the shortfall in the interim will be covered by savings and efficiencies Council will make within current budgets”. TRA is concerned this ‘streamlining’ can only result in current services being compromised or other projects put on hold. If not, then why have these potential savings not already been implemented?

2.3   The assumption, that the profits from these assets will simply be returned by GHL, as a dividend, has been disputed by Council advisors. The PwC report clearly states “GHL’s distributions to Council are not forecast to change as a result of this transfer” and subsequent analysis from PwC reaffirmed this. It is clear that the cost of supporting a new asset management team, increased directors fees and other costs, will erode much of the cash flow benefit from these two small enterprises.

2.4   The PwC report also questions the assumptions supporting the dividend increases. Revised dividend projections from GHL have been boosted by an increase in the forestry revenue forecast, not from the transferred assets. GHL has been prudent in reminding GDC that even with the transfer of these assets most of their income stream will continue to be from farming, and that as a result, forecasts will be weather and market dependent. The farming revenue for GHL dropped 25% in the last financial year from $4.3m to $3.3m.

2.5   As a CCTO, GHL has a greater ability to run the businesses more commercially and enable expansion of activities that will generate more revenue and ultimately increase dividends back to Council”. The lack of any business plan or feasibility report on the potential for revenue growth from these assets suggests GHL has not yet done proper due diligence, or these have not yet been made available to GDC.

2.6    It is clear that the debt burden imposed on GHL, to fund the rebuilding of the municipal buildings, will restrict their ability to raise further capital and invest in these new assets, to grow revenues without increasing the debt limit still further.

2.7   The $14m farm debt, held by GDC, directly relates to GHL and should be acknowledged as part of determining GHL’s debt to asset limit. GDC claims a tax deduction on the loan interest and the $1m dividend from GHL has historically been tagged to the Council’s cost of servicing this loan.

2.8    The suggestion that the commercial discipline and director expertise, of GHL, will result in more revenue growth, has been assumed and there is no evidence to support this in the proposal. The management team that will be responsible for these assets is exactly the same as previously employed by GDC.

2.9   As mentioned in the proposal, it will be vital that the investment aspirations and strategies of Council and GHL align. The current SOI has no reference to the asset transfers, and with the terms of the updated SOI still to be confirmed, ratepayers have no basis on which to judge its merits.

 

3.   TRA remains concerned that Key Directive Four, from the GDC’s financial strategy, in the LTP, promotes GHL to invest in activities that may compete with ratepayers.

3.1    TRA accepts that there is a clause in the SOI that requires GHL to seek approval from GDC before investing in such an activity. It is clear however that the majority of the Council do support investing in competition with ratepayers, otherwise this proposal would not have been progressed.

3.2    TRA does accept that there are complications with the land ownership of the Holiday Park site but question why the option of leasing this asset to the private sector, has not been considered.

3.3    The proposal suggests that the Holiday Park land will be leased to GHL at a rental that is consistent with Council’s rental policy. This arrangement makes a nonsense of the proposed strategy to have all commercial assets managed by GHL. Is it envisaged that GHL will be paid a rental to also act as the asset manager, as is currently the case?

 

4.   TRA is very disappointed with the lack of integrity in the public consultation process by GDC on the asset transfer issue.

4.1    TRA believes the repercussions of increasing GHL directors fees, transferring across asset management staff, and the management of the commercial assets, prior to proper consultation with the community, seriously compromise the consultation process.

4.2    TRA also believes that the premature transfer of staff to GHL was commercially irresponsible and has resulted in a convoluted series of unnecessary management fees (>$100,000) and rental payments (>$100,000) that have added unnecessary expense.

4.3    The consultation document states: “The Holiday Park and Vehicle Testing Station are currently commercial activities managed by Council”. This is clearly incorrect given that GDC has paid over $100,000 in management fees to GHL this year to manage those commercial assets.

4.4    The consultation documents states: “No decision has been made.” While technically that could be argued, it is clear that GDC has already assigned day-to-day responsibility for these commercial assets to GHL.

4.5    Undertaking these arrangements before public consultation on the asset transfer proposal had even begun and making quite misleading claims in the consultation documents compromised the process and leave us with no confidence that GDC is acting in good faith with ratepayers and residents of the region.

 

5.   In summary, it is TRA’s position that:

5.1    The transfer of these commercial assets will breach the ‘market neutrality’ principal and further investment in these enterprises may expose GDC to legal action from disadvantaged, competing ratepayers.

5.2    The current evidence suggests no financial benefit to ratepayers for this proposal to proceed. The facts support the opposite, that as a consequence of these assets being transferred, GDC will lose $570,000 in 2017, $6M over the next ten years.

5.3    “Council and GHL should have clearly documented commercial grounds for undertaking the transfers” says the PwC report. This has not yet been demonstrated.

5.3    Until the new SOI and distribution policy have been agreed to, with GHL, it would be irresponsible to approve this proposal. How can the community have confidence in this proposal when so many issues are still unresolved.

5.4    Councilor’s have a responsibility to take a prudent approach when considering this proposal and should not allow it to be rushed through, without the support of reliable evidence that demonstrates a clear commercial benefit to ratepayers. Councilors remain culpable for the actions of the GHL directors, it will simply not be good enough to say “we trusted the GHL directors to make this work”.

5.5    The supposed consultation process lacks integrity because the consultation information provided by GDC is incorrect and misleading, and the very arrangements the consultation is about were already actioned six months prior to the consultation period.

 

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