The Hawke’s Bay Regional Council seems to have become the main lightning rod for ratepayer discontent over proposed rates hikes that are certain to come – from each of the region’s five councils.

A bit odd, because in dollar amount the HBRC increases will be dwarfed by increases expected from the Hastings District and Napier City Councils.

HBRC has sucked up most of the ratepayer ire – our four mayors must be immensely grateful – by proposing budget cuts to two of the region’s most sacred cows – Hawke’s Bay Tourism and Te Mata Park. One wonders whether straws were picked by each of the councils and HBRC lost – becoming the goat tethered to the post to distract the velociraptors.

HBRC also has the now-dubious ‘good fortune’ of holding about $488 million in assets. Our other councils don’t have such appetising bounty.

And so the cry has gone out … don’t raise rates, sell assets.

But how smart, how foresightful would that be, really?

Firstly, the least prudent fiscal path would be to sell assets (or borrow) to pay for current operating costs. That simply guarantees a worse situation down the road, as HBRC already knows, having borrowed money to avoid raising rates during Covid.

That aside, HBRC faces huge costs ahead to ensure some form of future climate resilience – the most obvious of these will be related to flood protection, a multi-faceted challenge only one part of which involves improved stopbanks. HBRC would also be expected to contribute to coastal protection. 

These represent inter-generational commitments where arguably loan financing and/or asset sales could be legitimate funding options, but the best course depends on the underlying math and the nature of the assets.

As for the math, most financial managers would compare the cost of borrowing to the foregone earnings if assets were sold. 

HBRC, like most other councils, borrows through the Local Government Funding Agency, which pools risk and therefore can deliver funds at a more favourable rate than commercial lenders – presently that rate is 4.5%. So if HBRC can borrow at that rate (and is comfortably below its overall borrowing ceiling, which it is), then it would disadvantageous financially to divest of assets that can earn significantly more than that borrowing cost. Over the past ten years, the assets managed by HBRIC (HBRC’s commercial arm) have returned 14.1% per year.

Decisions taken last year by HBRC will now place all HBRC assets under the management of HBRIC, with the expectation that attractive returns will be earned going forward.

But that’s not the end of the story. Not all HBRC assets perform the same, so were the option of selling some to be considered, the question would be which ones? And you might think … whatever’s performing worst.

At last report (as of 31 March), the combined assets of HBRC/HBRIC were:

HBRIC

Managed Funds (net of fees)  $ 48,810,729

Foodeast                                             $    3,202,662

HBRIC Cash                                        $   4,000,000

Napier Port                                         $258,500,000

Sub-total                                             $314,513,391

HBRC

Managed Funds (net of fees)  $118,752,367

Wellington Property                          $  24,298,000

Napier Property                                  $   12,045,000

Forestry                                                $   11,745,000

Carbon Credits                                     $    6,823,000

Sub-total                                              $173,663,367

TOTAL                                                   $488,176,758

Each of these assets represents different earning or sales values, and each has its own ease or difficulty of sale. A variety of slippery slopes.

As it happens, Napier Port, the most valuable asset, also returns the least – 3%. But selling Port shares would be procedurally rather difficult, since public consultation would be required to reduce Council/HBRIC ownership below 51% (now own 55%). The 4% that could be sold without consultation might yield about $10 million at current share price. 

For that matter, if rate relief is the paramount goal, why not sell all the Port shares?! Putting $258 million in a 6% term deposit would yield $15.5 million, that’s appreciably better than the current Port dividend and less risky. Anybody want to take on the politics of a Port sell-down, with the danger of shares falling into less community-spirited hands?

The other properties earn a better return but are encumbered in various ways, so their sale is also complicated.

Leaving chiefly the managed funds, presumably the easiest to unload. Those have earned 7%, under the risk-adverse strictures that this public money is managed under. Still, a 7% return against a $168 million portfolio yields about $11.8 million in capital growth per year. 

Which makes borrowing instead at 4.5% a quite attractive funding option for inter-generational infrastructure investments. If HBRC borrows, say $10 million at 4.5%, that’s a $450,000 per year interest payment. If they sell $10 million of equity funds earning 7%, they lose $700,000 in earnings. Which would you prefer?

So, selling the assets is no panacea for rate hikes, whereas some portion of earnings from assets might well be considered as a supplement to rates revenue, as is already the case with the Port’s dividend payments to HBRC.

As they weigh these options – serious cost cutting (#1), borrowing (#2), asset sales (#3) – hopefully our councillors will take aboard the expert financial advice they pay for, and apply the judgement we elect them to exercise. Managing natural resources on a sustainable inter-generational basis should go hand in glove with managing financial resources sustainably as well.