In New York City, a bottle placed on the curbside for recycling can find its way back into a convenience store, relabeled and refilled, within thirty days.

In Auckland City, a bottle’s destiny is not so enduring. Rather than being refilled it is liable to be reincarnated, and not just as a new bottle. Many of the bottles we put in our blue bins are also used to make glass, wool and, even less nobly, to make base course for footpaths (which means thousands of Aucklanders each day are quite literally walking over broken glass).

In any case, whether it is New York or Auckland, the principle remains the same. When we no longer need the bottle it is recycled to its next best use. And as a result both we and society benefit.

There are lessons in this when we think about our council’s capital assets. Could they benefit from recycling too?

Local and central governments through the ages have collected rates from property owners to provide a mix of social services and social infrastructure. Roads, rail, ports, airports, parks, libraries, and so on have mostly come about in New Zealand through the deployment of ratepayers’ capital that private markets were either not permitted or not able to deliver.

 But do we still need our councils to own these assets? Or are there now private funders who could step up off the bench to allow our councils to recycle some of their ratepayers’ capital into more needy areas?  These questions might not matter if there were no other use for the councils’ capital tied up in them – but clearly there is.

National policy statement on urban development at best a half measure

Last week’s national policy statement from the Government will provide something of a spur to Auckland Council to free up more land for the new housing Auckland desperately needs. But it will do nothing to help the Council meet the costs of the new roads and other horizontal infrastructure needed to service the newly built suburbs. Recent estimates put this cost as high as $17 billion.

Auckland Council’s current approach of pre-loading as much of the infrastructure costs as possible onto the developers only contributes to Auckland’s unprecedented affordability crisis. It is part of the problem, not the solution.

The Council also faces constraints with its other usual tools: rates and debt. Auckland’s ratepayers feel bruised enough with the rates hikes that have followed the formation of the Super City. They can be forgiven for this. The amalgamation has hardly delivered the promised savings. It may be super-sized, but it is also super-expensive.

Nor is borrowing an available option. Like many councils, Auckland City is pressing up against the debt ceiling imposed by a combination of the Local Government Funding Authority, Treasury’s Management Policy, and (in Auckland’s case) the Council’s desire to retain an A+ S&P long-term credit-rating.

The recent study commissioned for Auckland Council by accounting firm EY and investment bankers Cameron Partners concluded that the Council has headroom of only about $1 billion under its debt ceiling. Unfortunately, this is no more than the Council needs to give it the financial flexibility to manage unexpected financial events. It provides no solution to funding the infrastructure deficit.

It is no wonder therefore that Labour’s Housing spokesman, the Hon. Phil Twyford, along with The New Zealand Initiative’s Executive Director Dr Oliver Hartwich, have described the new national policy statement on urban development as ‘firing blanks’. Nothing will be built on the new land released if the infrastructure is not there to support it.

It is for this reason that The New Zealand Initiative proposed the use of infrastructure bonds in its 2015 report, Free to Build: Restoring New Zealand’s Housing Affordability. Infrastructure bonds are a mechanism that enables either a council or developers themselves to issue debt instruments (i.e. bonds) to pre-fund the infrastructure costs.  The bonds are then serviced by a special rate on targeted residents over a long term – usually 30 years. This funding technique is used in Houston, which has some of the most affordable housing in the world.

Labour’s Phil Twyford has become a convert to this approach to urban development funding. The government should follow his lead.

Time for some recycling…

But Auckland City also has other funding options, and this is where the recycling comes in. As the EY/Cameron Partners study reveals, Auckland City has an enormous balance sheet. The estimated value of these assets is $42 billion, split into three buckets: infrastructure assets ($23.6 billion), Community Assets ($7.6 billion) and Commercial and other Assets ($6 billion).

Many of these assets are legacy assets, and comprise social infrastructure originally developed by the Council’s predecessors – or by central government - at a time when private funding was not available to do this. These include the Auckland port, Watercare, and the Council’s investment in Auckland Airport.

The capital Auckland Council has tied up in these assets could easily be released by selling them to new owners. Private KiwiSaver funds and the New Zealand Super Fund are just some of the institutions likely to be keen purchasers.

No need for the Council to own risky commercial assets

Nor is there any compelling reason why Auckland Council should retain these assets. Indeed, there are real risks for Auckland’s ratepayers if the Council does. As we have seen with Solid Energy, commercial assets are risky. And even a quick review of the Council’s holdings reveals they are nothing like the diversified portfolio of investment assets a long term investor should want. Why should our council expose its ratepayers to this risk?

Of course, some might object that in recycling its capital out of these assets into new urban infrastructure, the Council would be losing the benefit of the future dividend stream the assets provide. There are three responses to this. The first is that on a sale the Council could expect to be paid the present value of those future income streams. Selling the assets would leave the Council financially neutral.

Secondly, the Council’s biggest commercial asset, Watercare, is prohibited from paying a dividend. So ratepayers get no return on the $8 billion of capital tied up in this business.

Third, the dividend stream is risky. In 2005, the Council earned a dividend of $34.2 million from its 80% holding in Ports of Auckland. Move on to 2012, with the port 100% Council owned, and this dividend had fallen to just $20.1 million. While the Port’s recent performance has seen this rebound (and then some), the fact remains that commercial assets are risky. When there are private investors willing to take those risks, we do not need our council to expose ratepayers to them.

A sustainable city needs to innovate. It also needs to recycle what it does not need. With some help from central government, Auckland City could be New Zealand’s first city to experiment with infrastructure bonds.

But beyond that, it should recycle, and there should be no sacred cows.

Auckland city has no need for its council-owned commercial assets. Let’s recycle the capital we have invested in them to sustain our city for future generations of Auckland ratepayers.