More bulldust from Auckland Council and its friends

​David Shand has gone out on a limb to defend Auckland Council’s debt woes with some classic PR spin in the Herald.

Quoting Shand he says:

‘The Auckland Council’s latest audited financial statements (for the 2012/2013) year show an operating surplus of $246m and total assets of $37 billion against a debt of $8 billion’.

We felt some clear facts should be made.

1. Auckland Council does not own ‘$37 billion’ of assets. Wikipedia states:

‘In financial accounting, an asset is an economic resource. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash’.

Wikipedia goes on to say that an asset is a resource from which economic benefits are to flow to the entity that owns it. Economic value is described as a benefit measured in units of currency because value is linked to price through the mechanism of exchange creating an observation of value.

In short what this really means is that for something to be defined as an asset – it must be a thing that can generate money – either through an ongoing benefit, or by its sale to another person who is willing to pay a ‘value’ to acquire it for that same ongoing benefit. 

Most of the infrastructure generates no income such as – roads, storm water pipes, and sewerage pipes for instance. The are in fact a liability because they cost money to maintain and operate. Arguably the water reticulation and treatment plants are assets but by law they are not assets that can be sold to private enterprise – so there is no real buyer and a bank cannot gain ownership through a loan default.

Shand is disingenuous if he believes that Council is sitting on ‘assets’ of such magnitude.

Lets also not forget that Council has a book value applied to each piece of infrastructure and it depreciates it at 17% per annum which suggests that the value applied is much less today.

What Council owns is around $5 billion in assets – buildings and land, that it can sell and or which have a real world value. That means it’s true loan to value ratio is around 160%. It owes more than it could sell to pay the loans back.

2. The Council’s AA credit rating is not based on a ‘loan to value ratio’ but on Council’s legal entitlement to mandate rates. Essentially Council can put up rates by any amount it wants and that means it is technically not able to go bust (of course massive rate hikes would draw protests in the street). Credit agencies and banks don’t give a toss about assets in the context of rates, particularly in a big growing city like Auckland.

3. Debt is much higher than what is known as ‘external debt’. The debate around that is as such one that calls for much more detail but suffice to say Council has for a long time used the mechanisms of short term internal loans to fudge the numbers.

4. Lastly Shand quotes an ‘operating surplus that is 2 years old and relate to the 2012-2013 period. How about the financial statement of accounts for the last financial year? it is simply gamesmanship to quote figures from years passed to answer the question about surpluses and deficits today.

Don’t believe the hype. Auckland Council is in the ka-ka and is only playing smoke and mirrors with the truth.

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