Wayne Brown wants to sell Auckland Airport shares to save $88 million a year in interest costs, but has no plans to sell golf courses costing $162 million a year to run and worth over $2.9 billion. Bernard Hickey asks – why not?

This article was first published in Bernard Hickey’s newsletter The Kākā.

Auckland mayor Wayne Brown wants to sell the council’s $2 billion stake in Auckland International Airport to cut interest costs by $88 million per year and try to fill the council’s $295 million budget “black hole”.

But he is ignoring the annual losses of over $160 million a year to run the council’s 13 golf courses, which have a combined value of well over $2.9 billion. He also has made no case for emergency asset sales to deal with some sort of fiscal “crisis”, given Auckland Council’s blue-chip-level AA credit rating is stable and its interest costs are forecast by Standard and Poor’s to be around 10% of revenues for the next three years.

Brown’s case for selling the shares in Auckland Airport cannot be justified by:

• The current financial outlook, given the council itself sees its main debt-to-revenue forecast falling well below its self-imposed limit over the next five years, its borrowing requirements are scheduled to fall over the next five years and it has ample resources to roll over its existing debt.
• The alternative investment case for asset sales, given selling the council’s golf courses would reduce the ongoing losses from running the courses of over $160 million per year and raise north of $4 billion in an asset sales process, which would lift the combination of avoided losses and interest savings to over $320 million a year.

Meanwhile, here are two good reasons not to sell:

• The alternative long-term investment case for keeping the council’s 18% share in the airport is compelling, given airport traffic is rising fast back towards pre-Covid levels and the shares generated returns of 22.6% per year in the five years to 2019, which dwarfs the cost of debt at around 4-5%.
• The alternative investment case for using the sale proceeds to invest in public transport would generate much higher returns to Auckland’s ratepayer than 4-5% per annum through reduced congestion and lower carbon credit costs in future.

So why is the mayor talking as if there is a fiscal crisis that “demands” asset sales? And if there is such a crisis, why isn’t he proposing selling the golf courses to residential property developers to build tens of thousands of new homes and open up the courses’ green spaces to the public? Or proposing to invest any share sale proceeds in public transport rather than debt reduction?

The logical conclusion is that Brown’s arguments obscure an ideological view: that the public shouldn’t own shares in publicly listed companies or commercial operations and should wherever possible reduce public debt. The plan to sell shares and cut debt is also part of an ideology that the role of government in providing services and investing in infrastructure should be limited, and progressively reduced over time to allow more tax cuts and to increase the privately-owned share of activity and resources in the economy.

However, I think it’s simpler than that. Wayne Brown is actually expressing a view held by most asset owners and investors in Aotearoa’s economy, or as I call it, a housing market with bits tacked on. That deeply held and and so-far-extremely-profitable investment strategy is that owning shares or investing in businesses in Aotearoa is vastly inferior to owning land, especially leveraged residential land, and even better if it is residential-zoned land that remains banked and undeveloped. The comparative after-tax returns on equity over the last 30 years are spectacularly higher for land bankers and residential land owners and occupiers than for investments in shares or even privately-held businesses. There’s no contest. It’s not even close and that has been by design and omission through government policies endorsed repeatedly in local and central elections since 1984.

Wayne Brown is being exactly what he is: a property developer who has made most of his personal wealth from price appreciation on land made valuable through rezoning and paying for water connections at a lower-than-full cost. Here’s more detail on that in the auditor general’s report on Brown’s development project near Kerikeri. Brown was eventually forced to pay the council he was mayor of $75,000 in unpaid development contributions.

Ultimately, the role of government in this scenario, where the main aim is to preserve and accelerate leveraged and tax-free gains on residential land values for land owners, is to ensure more demand for housing from migration and lower interest rates, and less supply of housing through restricting land supply and the ability of others to rezone land for housing.

There are a few ways to do this through government policy, including:

• Restricting central and local government investment in infrastructure that would open up new land supply for residential housing, thus limiting the total supply.
• Reducing council and government debt to lower interest rates by more than would otherwise be the case, which in turn automatically lifts asset values and has the benefit of both stopping new investment in infrastructure for housing and pressing down on council appetites to rezone other land for housing.
• Reducing public spending on public transport infrastructure that would allow more brownfields housing development closer to CBDs and therefore reduce the relative value of residential-zoned land banked on the edges of cities.
• Ensuring no introduction of capital-gains or new land-value taxes to ensure the tax advantages of holding land relative to shares.
• Encouraging strong population growth through migration of lower-wage labour that both expands demand for housing and lowers wage inflation, which creates the double-whammy benefit of lower inflation and interest rates than would otherwise be the case.

Wayne Brown’s proposal to sell shares and cut council debt is completely in tune with the strategy above, which has been the dominant one in central and local government governance for 30 years. Many politicians and officials running both councils and big ministries see their role as containing and reducing the scale of government services, involvement in the economy and debt, which creates the low supply/high demand conditions for further tax-free, leveraged and spectacular gains in residential land values.

Charitably, it is because they don’t trust politicians to do the fiscally responsible thing over the long run and believe in these cultural and unapproved (but very real) constraints on public debt and the size of government. Actually, the playbook of fiscal conservatism, debt reduction and limits on tax/GDP and net debt ratios serves the purpose of starving the public sector and those voters without resources who would benefit, while further enriching landowners.

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Wayne Brown’s plan to “sell the shares and keep the land” is a perfectly natural instinct for a land banker and is broadly popular with the 60% of households (and more like 80% of local election voters) who own residential land. This policy embeds the settings in our economy and creates a future where only those with parents able to help with deposits can hope to join the land-owning class and be able to raise their own families in the land they were born in. The rest can look forward to a future as permanently poor renters who both pay and serve the land-owning class.

The rest who have a few personal resources, such as education, can only aim to emigrate to join the other one million compatriots who work, live and build their families overseas. It also embeds in Aotearoa a population growth machine that sucks in ever-larger numbers of overseas and often temporary workers to replace and augment the locals leaving. That is possible because there are at least 100 million richer people in India, the Philippines, China, the Middle East and Southern Africa who want to move to a relatively (and literally) cooler, “cleaner” and more stable country.

Brown’s plans are not about some sort of fiscal crisis that requires emergency action. There is no emergency.

This article was first published in Bernard Hickey’s newsletter The Kākā.