Agenda of Prosperous Napier Committee - Thursday, 8 February 2024

Prosperous Napier Committee - 08 February 2024 - Open Agenda Item 1

Agenda Items

1. Direction for the Preparation of the Three-Year Plan 2024-27

Type of Report:	Legal and Operational
Legal Reference:	Local Government Act 2002
Document ID:	1730288
Reporting Officer/s & Unit:	Danica Rio, Senior Advisor Corporate Planning Stephanie Murphy, Programme Manager- Long Term Planning Jessica Ellerm, Deputy Chief Executive / Executive Director Corporate Services Caroline Thomson, Chief Financial Officer

1.1 Purpose of Report

Council has been providing direction for the preparation of NCC’s Three-Year Plan 2024-27 through a series of workshops over 2023 and early 2024. The plan is being prepared under the Severe Weather Emergency Recovery Legislation (SWERL) and replaces the Long Term Plan due to the legislation. This report summarises the following for formal approval and adoption:

· Direction on the financial and infrastructure information that will underpin the combined Finance and Infrastructure Strategy

· Proposed topics for consultation that is scheduled to begin on 25 March 2024

· Direction on Strategic Priorities and Community Outcomes

Officer’s Recommendation

The Prosperous Napier Committee:

a. Receive the report titled “Direction for the Preparation pf the Three Year Plan 2024-27” and confirm it as being a record of direction setting for the development of the Three-Year Plan 2024-27.

1.2 Background Summary

To enable the preparation of NCC’s Three-Year Plan, Elected Members have attended workshops over the course of the last year to set direction on a range of components that will make up the plan. The context and direction provided is summarised in this report for adoption before a Consultation Document is finalised where Council will engage with the community on the Three Year Plan.

1.3 Context and Challenges

As work towards the Three-Year Plan has progressed, officers have communicated several challenges that we are facing as part of this process at Council meetings and workshops. Below is an overview of the current environment we are working within and the challenges we face in the development of our Three-Year Plan.

Severe Weather Emergency Recovery Legislation (SWERL): Due to the impacts of Cyclone Gabrielle, SWERL was introduced. The legislation allows NCC to produce a three-year unaudited plan, in place of a Long Term Plan. It is important to note that the plan must be recovery focused.

Change in Government: In October 2023 the New Zealand General Election was held, which saw a change in Central Government. This has had an impact on key elements of reform due to policy direction change.

Water reforms: Over the past few years, central government developed new legislation and operating reforms for how drinking water, wastewater and stormwater would be managed throughout New Zealand. This was to address the growing pressure all councils were facing to deliver water services efficiently, safely, and affordably. With the recent change of Government, the reform programme has stopped, and a new Local Water Done Well policy will be introduced.

This will establish a national regulator to oversee water infrastructure. The regulator will ensure water is managed sustainably, with fair pricing and quality standards. Local Water Done Well will require all councils to submit alternative water service delivery models to the Government for approval. There is flexibility for councils to choose a model that works best for them. The new policy will also introduce financial rules to councils for managing water.

In 2019/20, before the nationwide reform programme was rolled out, Hawke’s Bay councils developed a regional model for jointly managing water services. This model proposed having a Council Controlled Organisation (CCO) owning Hawke’s Bay’s water assets. Now that councils have flexibility to choose their own operating model, Hawke’s Bay councils are currently discussing whether a CCO is still the best option for Hawke’s Bay communities, particularly considering the effects and challenges of Cyclone Gabrielle.

Until decisions are made about next steps, the Three-Year Plan 2024-27 will be prepared assuming that Napier City Council will continue to provide drinking water, wastewater and stormwater services to Napier residents.

Other Government reform: As at the time of writing, the new Government has rolled back the Natural and Built Environment Act 2023 and the Spatial Planning Act 2023 and has plans to replace the Resource Management Act 1991 with new resource management laws.

Impacts of Cyclone Gabrielle: Cyclone Gabrielle impacted the Hawkes Bay region and NCC in many ways. From the Wastewater Treatment Plant becoming inoperable and the loss of business our tourism sector experienced, to the resources Council had to make available to carry out recovery work that continues to this day. The cyclone impacted our ability to deliver, so it is as important as ever that we are realistic about what we can deliver in our Three-Year Plan by considering our capability and capacity.

Hangover from Covid-19 and November 2020 floods: Both events reduced our ability to deliver for an extended period of time. We continue to feel the resulting challenges of these events through carry forwards from undelivered capital work, reduced availability of resources, and reduced capacity.

Increasing inflation and affordability pressures: As part of the 23/24 Annual Plan development, it was noted that we are feeling the impacts of inflation and cost escalations through increasing insurance premiums and salary adjustments. The inflation rate factored into budgets in the LTP 2021-31 was 2.9%, whereas inflation was sitting at 7.2% when we set budgets for the 23/24 Annual Plan. To enable future financial sustainability, we need to live within our means and avoid setting budgets using unsustainable mechanisms such as borrowing for operating costs for extended periods.

Financial implications of historic decisions: Historically, Council have made decisions around a number of items that have resulted in financial implications that will need to be addressed as part of our Three-Year Plan. Loan funding the Housing Portfolio shortfall, the cost of servicing additional loans for the Aquatic Centre remediation, funding the shortfall between the initial and revised rates increase for the 23/24 Annual Plan, and bringing Ocean Spa back in house are a few examples of the unchangeable historic decisions that are contributing to the estimated rates increase for our plan. These along with other unchangeable decisions have essentially resulted in a minimum rates increase that is set in stone to some extent, meaning any additional decisions only add to the increase.

Discretionary activities and projects: Over the years the portfolio of services delivered by Council has grown. It includes ‘discretionary’ activities and projects, such as a number of those in the Business and Tourism portfolio. Given the current economic climate, a decision will need to be made in relation to whether we are prepared to continue funding the same number of discretionary activities, taking into consideration the impact this will have on rates.

Ageing infrastructure: To help keep rates low, we have previously taken a more risk-based approach to managing our infrastructure assets. However, we have reached a point where significant investment in our infrastructure assets is required to keep up with the growth of our city and enable us to continue to deliver standard levels of service to our community.

Investment in our people: To bring us in line with other local authorities and similar fields, we have committed to undertaking a Remuneration Project to implement true investment in our people. Significant investment is required in spaces such as training and developing leadership, salaries, and benefits.

Historical capital underspend and subsequent carry forwards: Year on year we continue to under deliver on our capital programme which results in significant carry forward amounts that add to the next financial year’s budgets. We received an Emphasis of Matter from Audit NZ for our LTP 2021-31 as they noted ‘there is uncertainty over the delivery of the programme due to a number of factors, including the significant constraints in the construction market. If the Council is unable to deliver on a planned project, it could impact on levels of service.’ It is important that this Three Year Plan is realistic and we have a high level of certainty over delivery. This has been a significant focus throughout the preparation.

Considering all factors, we are faced with the challenge of balancing a long list of competing priorities. We need to maintain a recovery focus, ensure the work we plan is in line with our Strategic Priorities, and strike the right balance between adequately funding the organisation and providing our community with a rates increase that will be manageable.

To provide transparency to the community, we must be clear about what we will achieve over the course of the plan and have confidence that we will deliver on all that we commit to. We need to take a back to basics approach to service delivery and focus on intergenerational equity to enable the affordability of key infrastructure investment now and in the future.

The direction that is outlined in the remainder of this paper has been given under the context of the above.

1.4 Financial Information Underpinning Development of Combined Strategy

Financial Strategies set out Council’s overall financial goals, and where Council wants to be positioned during, and at the end of the planning period. For this Three Year Plan, officers have recommended preparing a combined Finance and Infrastructure Strategy that includes information across ten years to provide the community with more transparency over the long term.

Approach to Budget Development

Officers put a lot of work into budget development over the backend of 2023 to pin down both capital and operational budgets for the next ten years. Budget managers submitted their budgets and ELT worked through all budgets using different lenses (such as grouping based on top 20 projects in terms of spend for each year and focusing in on operational increases over certain values) to get an understanding of the baseline (what we must do). Consideration was given to how proposed capital projects aligned with Council’s new Strategic Priorities, along with which of the following categories applied to them:

· Statutory – primary purpose is to ensure we meet legislative requirements.

· Recovery – primarily relates to Cyclone Gabrielle recovery work.

· Three Waters – primarily related to three waters services.

· Contracted – already in train and we are contractually bound to complete.

· External funding – external funding has been secured for the project.

· Discretionary – does not fall under any of the above.

· Renewals

There was an extensive review process undertaken within the organisation before draft budgets were taken to Elected Members in December for further direction.

While there is still further work to be done, this process resulted in officers receiving the following direction for preparing the financial section of the 2024 combined Finance and Infrastructure Strategy. Please note, all figures are indicative and may change as the detail of some elements are yet to be finalised.

· Council is in a strong financial position and is able to take on debt to fund the significant capital and renewal expenditure planned over the 10 years of the plan.

· Council has set an ambitious capital plan for the years covered by the plan. A significant component of the capital spend relates to the Te Aka and Civic accommodation projects (combined spend of $83.2m) and the construction of the Redclyffe bridge (NCC’s share being $50m).

· We start the plan with $82m external debt and reach a peak of $253m by year 3. Longer term we are projecting debt to peak at $542m by year 10 due to significant expenditure on infrastructure resilience and renewals.

· We are facing cost escalations and inflationary pressures across the board which makes the delivery of core activities and our ability to fund discretionary activities more challenging. For year 1 of the Three Year Plan we are looking at a 10% increase in the cost of doing business before we even start.

· At a workshop, Council discussed the rates increases needed to achieve the growth and project requirements for the Three Year Plan and discussed options to smooth rates for the first 3 years of the plan. Some of these rates smoothing options would require a mix of rates and debt, and would allow Council to gradually build up depreciation reserves over the remaining term of the plan. Following this approach would result in a rates increase in the low 20% range, but further elements need to be finalised before an indicative increase can be confirmed.

· Council have provided for a conservative allowance for growth in the rating base set at 0.3% per annum.

· Officers are working with Council to develop an Investment Strategy that maximises returns on assets with the intention that in the longer term, asset returns can be used to reduce the amount of funding that is required through general rates, or to fund key community priorities. If progressed, the financial benefits of this piece of work are expected to begin in year 4 of the plan and would be intergenerational, which supports Council’s priority of being a financially sustainable Council.

Further Detail on Capital Budgets

Please note that we are still in the process of refining capital budgets. The following aims to provide indicative figures around where we are currently sitting, with the understanding that budgets may change once all elements have been finalised.

The capital plan includes a number of significant projects due to commence in the first three years of the plan such as Te Aka $39.7m, Civic accommodation $43.5m and Redclyffe bridge $50m. Capital expenditure for other major projects such as the Ahuriri Regional Park $11.8m, the Aquarium $15.6m and the Aquatic Centre $75m, is budgeted in years 4 – 10 of the LTP.

The following table sets out Council’s capital plan by activity for the three years covered by the plan:

The following table sets out Council’s forecast capital spend for the remaining 10 years of the plan:

Council is forecasting total capital spend of $1.1B over 10 years (2024-34).

Projects that are high spend but require minimal officer input include:

Capex projects	Year 1	Year 2	Year 3	Notes
Vested assets	2,799,000	3,016,493	3,016,493	Acquisition via developments
Property purchases	2,961,375	5,000,000	5,000,000	Y1 MTG Storage
				Y2 Te Awa
				Y3 Te Awa
Omarunui	2,567,000	2,014,000	1,945,000	Landfill managed by HDC includes new land development & remediation
Parklands	13,902,267	9,322,960	6,608,547	Land development transferred to cost of sales
Grand Total	16,863,642	14,322,960	11,608,547

1.5 Infrastructure Information Underpinning Development of Combined Strategy

Infrastructure strategies tell a story about the factors that drive demands for infrastructure, when the big decisions need to be made and the financial and service consequences of these demands and decisions. For this Three Year Plan, officers have recommended preparing a combined Finance and Infrastructure Strategy.

Officers have worked with Elected Members to identify the following infrastructure issues. This information will form the basis of the direction that will be followed when preparing the infrastructure section of the 2024 combined Finance and Infrastructure Strategy:

· Balancing affordability and community expectations (what people want vs what they are prepared to pay for)

· Ability to borrow to fund significant projects (debt cap)

· Ageing assets

· Recovery of damaged infrastructure after Cyclone Gabrielle

· Preparing for climate change and increasing natural hazards

· Increased demand from growth on housing stock and municipal networks

· Demographic changes – ageing population

· More stringent regulatory and environmental standards, requiring significant investment in a relatively condensed timeframe

· Outdated systems and processes

· Limited knowledge of our assets and asset management maturity

· Limited capacity to deliver:

o Even outsourcing to consultants requires touchpoints and direction from officers

o Competition in the market

o Difficulty attracting and retaining the right professionals

o Striking the right balance between investing enough to have sufficient information to make informed decisions at the very initial gateways of a project vs not wanting to spend thousands/millions of dollars scoping a project that is not destined to ever progress

o Complex projects involving multiple stakeholders, iwi engagement etc – can be years between scoping a project and implementation, by which time valid questions arise about the continued relevance of original feasibility studies/business cases

o Lack of joined up systems means that information gathering, planning, scoping etc can take longer than necessary

· Wanting to unlock efficiency/economy of scale through partnership with regional neighbours, but that meaning we need to sacrifice some agility in our timing and funding

· Vulnerability of supply chain and limited ability to protect against major global disruptions

· Three year political term and priority shifts/swings from central government

1.6 Consultation Topics

The Three-Year Plan must be adopted using the special consultative procedure set out in the Local Government Act. This requires the preparation of a Consultation Document which seeks community input into the matters proposed for inclusion in the Three-Year Plan. As a result of the direction officers have received to date, the Consultation Document will focus on the following issues:

Subject	Options/Notes
Resilience rate	Implement a resilience rate of 2% to help NCC accumulate funds that can be used towards making the city more resilient (preferred)
Resilience rate	Do not implement a resilience rate
Investment Strategy and possible creation of a Council Controlled Trading Organisation (CCTO)	Further work to identify options will take place prior to adoption of the Consultation Document
Fees & Charges	Further work to identify options will take place prior to adoption of the Consultation Document, but a recommended increase in a range of fees and charges is expected
Revenue & Financing Policy	Further work to identify options will take place prior to adoption of the Consultation Document
Significance & Engagement Policy	Further work to identify options will take place prior to adoption of the Consultation Document
Business & Tourism - loan funding deficit of certain activities until they are commercially viable (maximum loan funding term of two years)	Fund deficit from loans (preferred)
	Fund deficit from rates increase
Office Accommodation	NCC led (preferred)
Office Accommodation	Developer led

In addition, the following topics will be included in the Consultation Document as inform items:

· Outcomes of Business & Tourism review:

o Kennedy Park, Ocean Spa, and the Napier Conferences & Events Centre to operate in a commercial manner.

o We will create a new Arts, Culture & Heritage Unit that will include Bay Skate and the Municipal Theatre.

o We will undertake further work on the McLean Park Strategy.

o We will undertake further work to understand the appropriateness of the current iSite location and opportunities for reimagining how the site is used.

o We will look to identify options for different uses of the current National Aquarium of New Zealand site and explore opportunities for reimagining how the site is used.

· Napier Aquatic Centre: We will develop a business case to explore options for building a new facility, with commencement of the project to begin in five years’ time.

· Te Aka (new library): Provide an update on where the project is at and expected work for the course of the plan.

· Te Aka (public realm): Provide an update on the plan for the development of the public realm.

· CBD development / Emerson Street: We will undertake further option and cost assessments.

· Faraday Centre: We will not buy the building as part of this plan.

· Te Pihinga: We will not begin construction within the next 10 years and will reconsider the project at a later date.

· Ahuriri Regional Park: NCC will still be undertaking stormwater treatment work over the course of this plan, but we have realigned the joint funding aspect of the project to develop the park so that the timing of funding remains in line with Hawkes Bay Regional Council.

1.7 Strategic Priorities and Community Outcomes

Council is required by law to identify a set of ‘Community Outcomes’ in its Long Term Plan (replaced by a Three-Year Plan this time due to SWERL). This involves identifying outcomes that Council is aiming to achieve to promote the social, economic, environmental, and cultural wellbeing of the community (in the present and for the future).

Council’s Strategic Priorities were set by Elected Members to best support the promotion of community wellbeing, and so they are also our Community Outcomes. They guide decision making and will underpin the contents of our Three-Year Plan. Guidance from Taituara notes that the process of setting Community Outcomes can be outward looking or inward looking. Council’s Strategic Priorities are both outward and inward looking; Elected Members looked outwards to identify the needs of the community, while also looking inwards to identify what role council could play to help address these needs.

At the Council meeting on 31 August 2023, Council adopted our current vision and five Strategic Priorities as a replacement for any strategic direction previously set. The details of these priorities are included in Attachment 1 (which is the Council paper where the vision and priorities were adopted).

1.8 Significance and Engagement

Council must use the special consultative procedure in adopting the Three-Year Plan. This requires Council to prepare a Consultation Document which succinctly describes the key issues which will shape the final plan, and helps the community provide relevant feedback. The Consultation Document will be finalised early March with formal consultation planned over late March/April 2024.

1.9 Implications

Financial

The projects and initiatives set out in the Three-Year Plan have financial implications for Council in terms of both debt and rates. The long term planning process aims to balance the needs of the community against affordability.

Social & Policy

Preparation of the Three-Year Plan must meet the requirements of the Local Government Act 2002 and adhere to Council’s own Significance and Engagement Policy.

Risk

N/A

1.10 Options

The options available to Council are as follows:

a. Confirm the contents of this report as an accurate summary of direction to date for development of the Three-Year Plan 2024-27.

b. Clarify any aspect of this report as a matter of priority, to be incorporated in the Three-Year Plan 2024-27 Consultation Document.

1.11 Attachments

1 Council's New Strategic Direction - Thursday, 31 August 2023 (Doc ID 1734466)

Prosperous Napier Committee - 08 February 2024 - Open Agenda Item 2

2. Due Diligence Report of Civic Accommodation Business case

Type of Report:	Operational
Legal Reference:	N/A
Document ID:	1710275
Reporting Officer/s & Unit:	Darran Gillies, Strategic Programmes Manager Alix Burke, Strategic Programme Coordinator

2.1 Purpose of Report

To report on a robust due diligence process that ensures that the preferred option of Officer Accommodation Business Case continues to be the best course of action for council. This includes making sure that the work enables the best possible outcomes of the public-facing component of the programme, primarily the implementation of the design and construction of Te Aka - Library and Council Chambers.

Officer’s Recommendation

The Prosperous Napier Committee:

a. Receive The Due Diligence Report of the Civic Accommodation Business Case

b. Approve option 5a from the Civic Accommodation Business Case – The NCC lead Redevelopment of the library to be the preferred option within the LTP consultation; and to proceed into the next stages of the programme of work to support that option.

2.2 Background Summary

On 21 September 2023, the Future Napier Committee endorsed the Civic Accommodation Business Case and approved that Officers progress due diligence development of preferred Option 2, as set out in the business case: NCC sells the ex-Library Tower for redevelopment and leases space back for NCC’s own long-term occupation, with appropriate reporting back to Council.

Council also endorsed the Civic Accommodation Project Delivery Plan with the inclusion of Council decision-making gateways on the preferred option.

The due diligence entailed a wide range of areas. This included:

· Planning and Legal Obligations

· Structural

· Building Services

· Architectural Workplace Requirements

· Comparison between a new build and refurbishment option based on dues diligence information providing updated Quantity Survey estimates.

· Environmental Impact assumptions

· Whole of life cost comparison between the preferred business case option (2) and NCC owned and lead option (5a)

· An update of the Business Case assumptions, risks and opportunities.

· Consultation requirements

Summary of Preferred Option

The business case recommended option 2 where NCC sells the ex-Library Tower and leases back part of a redeveloped site for NCC’s long-term occupation as the preferred option. Scoring highest on both the best outcomes score and the best value for money score.

Key Assumptions

· Assumes a developer will likely demolish the building and construct new as the current library tower will cost $58+ million to refurbish.

· Complimentary relationship but no shared opportunities and efficiencies with Te Aka

· That the building and site is not a strategic asset, reducing the need for public Consultation.

· That a 90-year+ ground lease is needed to attract a developer

Preferred Option Indicative Timeline

The below, is a visual representation of what the programme timeline could be for successfully delivering the Business Case preferred option.

Development Advice – Planning and Legal Obligations

The Property Group (TPG) was engaged by NCC to provide advice around development options for the development of the preferred option on the site.

The report identifies that any ground lease in excess of 35 years is considered a subdivision of the land under the RMA. This could be achieved via a traditional subdivision or a process of setting apart the land under the PWA.

The images below from The Property Group’s report show the existing site configuration of two parcels and the proposed configuration following subdivision of the library tower site:

Subdivision process

The proposed lot configuration shown in Figure 2 above indicates a new boundary line around the existing library tower building, splitting the title with an additional land parcel of approximately 1,870m² and a balance title of 4,580m².

TPG provided advice on the basis that the site is vacant land (i.e. the existing ex-Library Tower building is demolished by Council prior to subdivision) and advised that while subdivision can occur around existing buildings, the RMA requires buildings remaining on site to comply with the provisions of the Building Code, including a compliant means of fire escape, disability access and fire protection from adjacent properties. A lack of current compliance in these areas may require upgrades to the existing Library Tower building.

To conclude the subdivision process, Council would need to ensure each new lot created is provided with access to a legal road. If vehicle access from Dalton Street is to continue as a right of way, an easement would be required. Each new lot will need to connect to a Council water main and to stormwater and wastewater networks directly, or via an appropriate easement.

Setting Apart

Currently, the site is held by Council for the purposes of a Civic Centre. TPG advise as an alternative option to subdivision, Council could consider a process to set apart part of the land for municipal purposes, with the balance of land held for the purposes of a civic centre. The decision to set apart the land is ultimately made by the Minister for Land Information NZ.

“Civic Centre” and “municipal purposes” are general purposes and are not significantly different from one another. Therefore, there is a risk that the purpose of the land is not considered significantly different from the current purpose, and LINZ may consider that a subdivision is being created and decline the application.

The estimated time required for either the subdivision or setting apart process is 6 – 8 months.

Given the assumptions made around the land being vacant, and the associated compliance risks with any building that remains on site, Council sought additional legal advice around their obligations with respect to s40 PWA and subdivision of the site.

Legal Advice

Council’s legal advisors, Rice Spier, was asked to provide further advice on:

a. If the land is leased under a ground lease to a developer (whether or not the building remains on the land), is sub-division of the title required?

b. Does a ground lease of 35+ years constitute a subdivision of the land (or what is the threshold, if any)? What is the effect of this?

c. Is sub-division/ separation of the title, or other similar mechanism needed in order to sell the ex- library tower building? i.e., can the building ownership change given the current title arrangement?

d. Can the building be sold in its current condition?

e. If the building remained on the site, ‘as is’ what extent of compliance with the NZBC would need to be met in order to progress with either sub-division or sale?

f. If a subdivision (or technical subdivision) is undertaken, does this trigger an ‘Offer Back’ process under S40?

g. How long is required for the ‘Offer Back’ process? Is this a definitive timeframe or subject to change? And what could or couldn’t be progressed until this process had concluded, i.e., can an RFP be put to market?

The following advice was received:

· Subdivision or separate title is required in order to sell the building or lease the land under a long-term ground lease.

· A ground lease in excess of 35 years for the library building site on its own would be a subdivision.

· Section 40 of the Public Works Act requires Council to offer back the land to previous owners prior to divestment of the land.

It was identified that Section 42 of the Public Works Act allows land acquired for public works to be disposed of, but only if it is not required for public works. By definition, a sale involving the lease back of the ex-Library Tower building may indicate the land is still required for public work.

It was further noted that given the precinct is a prominent site which has been and is proposed to continue to be the city’s civic centre, the site as a whole should be regarded as a strategic asset. Certain decisions, including a decision to transfer the ownership or control of a strategic asset to or from the local authority, cannot be made by a local authority unless the decision is explicitly provided for in its LTP, and the proposal for the decision was included in a consultation document.

Rice Spier’s advice is that Public Consultation is required for Council to sell or lease any Strategic Asset. The precinct site should be considered a strategic asset therefore it would be prudent for Council to undertake consultation on the proposed divestment and leaseback proposal.

To date the proposal to divest and leaseback the site has not been contemplated in the LTPs, nor has it been the subject of the type of consultation required by S93E of the LGA. To that end, any future consideration for site divestment and lease-back should be included in future consultation before Council commences the process to divest any part of the site.

Timeline Changes

With the development and consultation requirements contemplated above an updated estimated timeline is provided below.

Due Diligence on the Library Tower Structure

The diagram below illustrates the framework in which the due diligence work has been undertaken on the library tower. The framework reflects the criteria of the Officer Accommodation Business case and the interdependencies with Te Aka and the opportunities that could bring.

Building Structure

A subset of the Te Aka design team was engaged to complete preliminary investigations on the ex-Library Tower Building, with the following objectives:

1. Assess the current condition of the building.

2. Clarify NCC requirements for the occupation of the building.

3. Undertake high-level cost estimates for a potential redevelopment to test previous cost assumptions.

4. The exploration of appropriate design direction for redevelopment, which will help shape the redevelopment requirements for the procurement process to enable an agreement with a developer.

The building investigation process included reviewing previous structural assessments and proposed remediation methodologies intending to achieve a minimum of 75% NBS.

In brief, the building requires:

· Removal of precast façade panels.

· Tie slabs together with steel plates.

The team explored options to strengthen the building to 90% NBS, which would need the following additional interventions:

· Adding mass in the basement.

· Use of viscous dampers at upper levels

Below is an illustration of the structural interventions required to bring the building up to 70% plus NBS:

Building Services

Review the condition of existing services and associated compliance with current codes and define assumptions regarding the extent of building exterior upgrades required to meet a fit-for-purpose redevelopment. Our service engineer provider Beca has listed the baseline requirements and assumptions:

· Strip out all existing services, all at the end of life.

· Natural ventilation principles to align with Te Aka.

· Upgrade lifts to comply with the current Code.

· Upgrade fire protection to comply with the current Code.

· Opportunity to centralise Precinct building services from the three buildings on the roof / in the basement of the building.

Architectural Workplace Requirements

A process to test and explore workspace requirements that include office accommodation for up to 218 staff, based on an open-plan working environment. Based on expected space planning, NCC would occupy 3 of the 4 upper floors, with the ground floor being tenanted with complementary activity to Te Aka. This would allow the further floor to be made available to co-locate partner organisations.

In Summary:

· The structural requirement to replace the facade provides an opportunity to update the building and improve the connection to Te Aka.

· Upgrade fixtures and finishes, new gender-neutral toilets.

· Upgrade fire egress for compliance and to accommodate proximity to Te Aka.

· The redevelopment option aligns with Green Star objectives.

· Demolition of library annex including salvage of materials.

· NCC workplace requirements utilise 3 floors, with one floor available for lease to partner organisation(s)

Below are indicative illustrations provided by the architecture on how the library tower could be rejuvenated to provide fit-for-purpose office accommodation meeting the requirements of the Business Case. The illustrations also show how the building could be developed with a similar look and feel to Te Aka.

‘Apples for Apples’ Comparison

Below are the headline comparison points between a new build compared to a redevelopment of the existing structure. This is not a pros and cons list.

Redevelopment Option of Existing Structure

New Build Option

Structural upgrades are considerably more cost-effective than expected.

Allowance for demolition of East Core and Library Annex currently costed in the LCAP1 budget.

Overall cost estimate of $48.5M for redevelopment, compared with the previous estimate used by PWC of $69M

Based on a new build of equivalent area to the current building.

Based on $/m² rates only – no design detail.

Overall cost estimate of $53.7M for new building circa 5,000m².

Estimated figures used by PWC for new build $24M, but based on a smaller footprint of circa 3,000m²

Environmental Impact Comparison

An embodied carbon assessment for the proposed redevelopment was undertaken. This assumes a central services upgrade, façade replacement, internal fitout and structural upgrade. As a result of these upgrades, there will be a substantial initial investment in embodied carbon to deliver the refurbishments. The assessed range of upfront embodied carbon emissions for the redevelopment is largely dependent on the final scope of structural strengthening but is expected to be between 280-620 kgCO₂-e/m².

By comparison, the estimated carbon emissions associated with a new building, assuming demolition of the existing structure and replacement with a new building of the same scale and function as the refurbished building scenario. The likely range of upfront carbon emissions associated with a new building is from 500-1250 kgCO₂-e/m² indicating a significantly lower level of upfront emissions associated with the redevelopment option.

Testing the Business Case Assumptions

As additional and more detailed information has arisen through the due diligence process it is important to test the assumptions made within the business case, alongside updating the risks and the mitigation put in place to reflect the updated position.

As those key assumptions were tested and with the cost between a new build and redevelopment of the existing library tower becoming closer, alongside accessing the risks and opportunities, option 5a in which NCC leads that redevelopment and retains ownership came into play.

Key Assumptions

· Assumes a developer will likely demolish the building and construct a new building, as the current library tower will cost $58+ million to refurbish.

The updated estimate Overall cost estimate of $48.5M

· Complimentary relationship but non-dependant on adjacent precinct buildings/developments

As Te Aka has been developed it has become clear that there are multiple positive outcomes from greater integration such as:

Delivery of a high-quality integrated environment with clear civic identity and strong connections between civic-focused facilities, buildings, public realm landscape and adjacent parts of the city.

Implementation of a cohesive cultural design strategy integral to the identity and function of the Civic Precinct.

Establishment of a strong ‘civic presence’ with the range and critical mass of complementary civic functions and activities, particularly through the ground floors.

· That the building and site are not a strategic asset, reducing the need for public Consultation.

The advice received recommends that due to the nature of the site council should treat it as a Strategic Asset and conduct public consultations accordingly.

· That a 90-year+ ground lease is needed to attract a developer

This requires testing if council proceeds with the developer-led option

2.3 Implications

Financial

This due diligence exercise has tested the construction costs. Discussions around ROI would also extend to the minimum term of ground lease expected by a Developer, which is anticipated to be more than 35 years.

· The due diligence exercise indicates that a lower redevelopment cost of the existing Library can be expected, due primarily to the relatively simple structural remediation solution. Updated cost estimates for the redevelopment reduce the overall expected redevelopment cost by circa $10M, to $48.5M.

· That an average rental rate of Napier as $300-370/m2, indicating a difference in rental rates which has the potential to deter prospective co-location partners.

· Equivalent new build cost assessments total $53.7M, meaning it is expected to be approx. $5.2M cheaper to retain the existing building structure and strengthen/refurbish the building than to build new. Part of the additional cost in the new building option relates to the additional cost escalation which would be incurred due to a longer design and construction process.

· The whole-of-life cost analysis within the Business Case assumes a capital cost to NCC of $4M for the fit-out of the NCC civic accommodation leased space. This cost does not appear to consider the cost to fit out the ground floor, or any furniture, IT or AV costs, all of which would be required for a Developer-led solution.

· The quantity surveyor has estimated the total cost of NCC’s fitout to be $7M. In addition to this, the cost of subdivision and costs to procure, negotiate and document the Agreement to Redevelop and Lease need to be considered. On this basis, the capital cost of the developer-led option is likely to be closer to $8M.

Below is a table illustrating a whole-of-life comparison of the cash flow of the sale and lease back option compared to council retaining ownership.

The table expresses a high-level assessment and is conservative in its view of the potential rental income and the terminal valuation of the asset in a council-owned option.

1.6 Risk

Below is a list of risks identified within the business case along with additional risks identified through the due diligence.

· The proposal to divest and lease back the site has not been contemplated in the LTPs, nor has it been the subject of the type of consultation required by s 93E of the LGA.

· If NCC relinquish control or ownership of land, within the Civic Precinct then there could be long-term adverse impacts on the vibrancy and use of the heart of the city.

· If economic rental rates of new or redeveloped sites are unaffordable or at a level that might be deemed unacceptable then the preferred option may not be tenable.

· If the recommended way forward is not approved then a long-term solution to NCC’s office accommodation requirements will not be implemented, and NCC will continue to incur risks associated with the case for change highlighted in the Strategic Case.

· If a suitable developer partner cannot be sourced, then the preferred option cannot be implemented.

· If a suitable developer partner drops out during negotiations, significantly delaying or preventing implementation of the preferred option.

· Separate ownership will complicate the ability to physically connect between LCAP 1 and LCAP 2 buildings. This risk undermines the connectivity of the precinct, and particularly the Chambers, which would benefit from the direct interface with the ground floor of the Civic Administration building which would ideally be formed via a weather-protected connection.

Opportunities in option 5a, a NCC Lead Development

The business case assessment of options 2 and 5a against the Investment Objectives for the project did not identify any tangible difference, as all key investment objectives are met by the decision to consolidate staff within a new building on the Precinct. It was within the financial case that there was a substantial difference between the two leading options. As we have seen, as the due diligence progressed that differential decreased. It is also noted that all of the key risks listed above can be mitigated through an NCC-led redevelopment of LCAP2 as part of a wider Precinct redevelopment.

An NCC Led development could provide for the following benefits:

Centralised services. Te Aka concept and preliminary designs currently assume all three buildings on the precinct will be supplied with stand-alone central plant. This would result in a reduced central plant and associated capital and operational cost benefits and would involve developing a precinct-wide services infrastructure strategy encompassing electrical infrastructure, cooling and heating water infrastructure, and fire sprinkler infrastructure.

The procurement for construction of the entire Te Aka precinct. This is likely to attract greater interest from tier 1 construction capability, with the potential for higher quality assurance, and greater economies of scale through construction technology, materials, and supply chain aspects, resulting in reduced construction-related risk, and greater cost and time efficiencies.

On a long-term basis, Council would retain control of the precinct. This would enable the ability to execute the benefits identified in the Library Civic Area Plan:

· Delivery of a high-quality integrated environment with clear civic identity and strong connections between civic-focused facilities, buildings, public realm landscape and adjacent parts of the city.

· Implementation of a cohesive cultural design strategy integral to the identity and function of the Civic Precinct.

· Establishment of a strong ‘civic presence’ with the range and critical mass of complementary civic functions and activities, particularly through the ground floors.

Crime Prevention Through Environmental Design (CPTED)

As part of the resource consent process for Te Aka a CPTED report was commissioned. The overall objective of the CPTED is to ensure Te Aka within the receiving environment does not add to the security risk profile, and that the development addresses known CPTED risks.

The CPTED report highlighted the current library tower as a hot spot for a number of anti-social criminal activities. The report highlighted that even though Te Aka would address many of the issues any delay to the development of the tower would mean that many of the positive outcomes would be negated.

There are CPTED issues associated with unoccupied buildings which are challenging to

mitigate. LCAP2 is a key part of the wider Library Civic Area Plan and there are interdependencies which have an impact on the CPTED risks, especially directly adjoining LCAP2. Without the LCAP2 development, key community-orientated facilities (such as all-hours public toilets and bus lounge) do not have certainty of delivery.

Council delivering the two phases of the project as one would mitigate these challenges and would lead to an optimal CPTED outcome.

2.7 Options

The options available to Council are as follows:

a. Receive The Due Diligence Report of the Civic Accommodation Business Case

b. Approve to proceed with the business case option 5a – NCC lead Redevelopment of the library to be the preferred option within the LTP consultation for 2024 -2027 ; and to proceed into the next stages of the programme of work to support that option.

c. Approve to continue with the business case option 2 - NCC sells the ex-Library Tower for redevelopment and leases space back for NCC’s own long-term occupation to be the preferred option within the LTP consultation for 2024 -2027 and to proceed into the next stages of the programme of work to support that option.

d. Do not approve to proceed with either of the above options and pause the project.

2.8 Development of Preferred Option

The due diligence to date confirms that with the additional information provided, the cost differential between the preferred option 2 and option 5a has significantly reduced. This coupled with the multiple benefits and risk reductions outlined within the paper, it is thus recommended that we proceed with option 5a as the preferred option within the Long-term Plan Consultation 2024 -27, and to proceed with the supporting work.

In brief, the benefits of option 5a are it :

· Continues ownership and control of a strategic asset within the CBD.

· Maximizing opportunities with Te Aka.

· Has been previously consulted on in previous LTPs.

· Provides the most environmentally positive outcomes across the whole precinct.

· Enables shared services that will reduce overall build cost and ongoing running costs.

· The ability negotiate more competitive terms for the lead construction contract.

· Supports complete mitigation or reduction of risks identified in the business case option 2 such as risk to programme timeline.

The diagram below gives an updated estimate of the two options discussed throughout this memo. The key difference is the elimination of separate procurement and negotiation processes through a NCC led development.

On Going Programme

Below is a list of key tasks to support the development of option 5a to enable it to be the preferred option within the LTP. The tasks are not abortive if the council decides through the LTP process to choose option 2 of the business case.

· The continuation of the architectural design process up to the end of the preliminary design stage to establish in detail the council's accommodation requirements.

· Development of a Value Engineering approach to the precinct-wide integration opportunities and to define and cost potential programme and cost efficiencies associated with NCC retaining control of the entire precinct.

· Refine requirements for public consultation and include within the Long-Term Plan considerations.

· Continue construction market soundings around the benefits of precinct wide development.

· Further testing of costs is undertaken to capture the total capital cost to NCC, along with the cost of any delays to the procurement process and the additional costs to LCAP1 associated with subdividing the site.

· Consider the ability to access Capital to fund either a Developer-led option or an NCC redevelopment.

2.4 Attachments

Nil

Prosperous Napier Committee - 08 February 2024 - Open Agenda Item 5

5. Investment Strategy Next Steps

Type of Report:	Operational
Legal Reference:	N/A
Document ID:	1713691
Reporting Officer/s & Unit:	Richard Munneke, Commercial Director Garry Hrustinsky, Corporate Finance Manager

5.1 Purpose of Report

The purpose of this report is to obtain a decision from the Council on a proposal to establish a Council Controlled Trading Organisation (CCTO) to manage Napier City Council’s (NCC) core financial investments and to consult on its establishment through the 2024-34 Long Term Plan.

Officer’s Recommendation

The Prosperous Napier Committee:

a. Receive the report titled “Investment Strategy Next Steps”.

b. Explore the establishment of a Council Controlled Trading Organisation for the management of Council’s Investment Portfolio being Parklands development, development sites, commercial and residential leasehold properties, investment related deposits and managed investment portfolios.

c. Include the proposal to create a Napier City Council investments trading organisation within its 2024-34 Long Term Plan to fulfil the statutory requirements in creating a Council Controlled Trading Organisation.

d. Endorse Council building investment capability within it’s team to address immediate investment activity needs.

5.2 Background Summary

NCC has activities/assets whose sole function is to supply a revenue stream to offset rates. This includes a collection of investment assets for commercial return and property development.

There are other revenue generating activities within NCC, however they don’t have the single focus on generating financial return (i.e., do not share the same corporate intent).

It is common for councils to generate income from non-ratepayer sources. The Productivity Commission review of Local Government Funding in 2019^{^[1]} indicated an average of 6% of Council revenues across New Zealand comes from assets where the sole function is to provide a revenue stream, or investment income.

Council assets such as, Parklands, leasehold property are Council’s ‘family silver’. This paper looks at how Council can ensure that it both maximises the potential of these assets, and how the value of these inherited assets can serve as an endowment for both the current and future generations of ratepayers.

In this paper, Council’s investment assets for commercial return and development assets are referred to collectively as the ‘Investment Portfolio’.

Investment Assets for Commercial Return

Council holds a number of assets that are commercially focussed. The list includes land development sites, commercial and residential leasehold properties and term deposits.

The core of these revenue generating assets are the Parklands land development and the leasehold land portfolio.

These two assets were bestowed on the Napier City Council largely as a consequence of land created during the 1931 earthquake, and the 1989 reorganisation of local government; which dissolved the harbour board and vested leasehold land with Council in exchange for managing the inner harbour.

Current Situation

Council’s leasehold land portfolio earned $1.6 million (cash before expenses) on a $103 million asset value in 2023.

Legislative changes such as the Hawkes Bay Endowment Land Empowering Act 2002 gave Council greater discretion over its inherited land. However, Council process, and it’s own policies have not changed to allow Council to benefit fully from the assets it has. Management of investment assets within Council continue to be undertaken as a small part of broader responsibilities around delivering core council services and support functions.

Therefore, the endowment assets that Council has are not benefiting from a commercial focus on returns and ensuring that Council has the right asset mix to manage it’s own risks and exposures - to provide both income and resilience for current and future generations.

Land Development

Council commenced land development activities in 2005 with the development of Area 1 of Parklands Residential Development. This land was received as part of the 1989 local government reorganisation.

Since 2009, over $94 million has been realised by Council through the sale of land at Parklands. Council has also incurred significant costs to develop this land and realise these sales.

Council has, since the commencement of Parklands, acquired other land blocks including Pirimai education land and the Mataruahou reservoir site; which may also hold future development potential.

The budgeted net benefit of land development to Council is estimated at around $3 million per annum.

Current Situation

Parklands development has commenced for Area 4. This is the final Area of the initial Parklands development, with all sections anticipated to be sold by 2028.

Council can, and has, successfully delivered infrastructure and development of the Parklands residential development through it’s own infrastructure and teams. Although Council has expertise in land development delivery, there is little development pipeline beyond the completion of Parklands Area 4.

A lack of commercial ownership within Council means that the returns achieved by Council for ratepayers on development is lower than that the commercial market would target.

Parklands is run as a finite financial resource, with the proceeds of sales being used at Council’s discretion, and little consideration given to reinvestment. This means that the legacy of Parklands benefits this generation of rate payers only.

Workshop Outcomes

Council’s investment assets are not geared toward sustaining or achieving growth of the asset base. The assets are also managed internally and individually.

NCC currently lacks a governance vehicle to manage core investments in a strategic and transparent way. Indicators to measure performance and assist with strategic decisions (either for individual investments or the portfolio as a whole) are also required. Developments such as Parklands are siloed as an activity, dedicated to developing a certain number of sections each year. The Leasehold land portfolio is treated as a fixed legacy of properties. Leases are sold periodically to occupiers meaning the leasehold asset base dwindles.

Council’s overall investment strategy is in transition. Two workshops focussed on strategic direction for Council’s Investment Portfolio. At these workshops Council indicated a desire for change – namely:

• In setting rates Council exercises an intergenerational view. Council’s commercial assets should realise a similar intergenerational benefit.

• To ring-fence commercial investments and manage them with a financial return focus (maximise returns). Ensure the best use of those assets.

This report concludes by recommending that the establishment of a Council Controlled Trading Organisation (CCTO) be considered in the 2024–34 Long Term Plan.

5.3 Issues

The leasehold portfolio and Parkland development are currently not managed in a focused way. Council is currently unable to make strategic decisions to acquire land or buildings, or maximise profits according to market conditions.

There are three main issues with the current situation:

1. Land development as an income stream is currently managed as a finite resource.

2. The return objectives from Councils investments is inconsistent and lacks a commercial strategy and an intergenerational focus.

3. Land development and investment assets for commercial return require greater commercial expertise to realise their full potential for Council.

The current approach to these revenue-generating assets does not recognise an inter-generational value that can sustain Napier City into the future. Both the Parklands estate and leasehold land were gifted to Napier City Council. The value of these assets is fundamentally financial (i.e. not social, cultural or environmental), and it follows that there is a legacy consideration to ensure that the financial benefit is felt by current and future ratepayers.

The Long Term Plan provides an opportunity for Council to address these issues and to provide a greater long-term benefit for ratepayers from it’s Investment Portfolio. This includes:

1. A review of Investment Policy, to enable Council the flexibility to derive appropriate returns from it’s commercially-focused Investment Portfolio.

2. A review of Council’s Strategic Assets under it’s Significance and Engagement Policy, to ensure the right assets are protected under the Act. This may include any position Council wishes to take on protecting the value of the Investment Portfolio for future generations.

3. Determining how to best achieve the commercial objectives associated with Council’s Investment Portfolio. This paper recommends accessing commercial expertise through the establishment of a Council Controlled Trading Organisation (CCTO).

5.4 Significance and Engagement

The Local Government Act 2002 provides guidance as to the steps that are required to form a CCTO. The approach recommended within the report will satisfy those requirements.

5.5 Implications

Council is required to give effect to the purpose of local government as prescribed by Section 10 of the Local Government Act 2002. That purpose is to meet the current and future needs of communities for good quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost–effective for households and businesses.

To be cost-effective, Council seeks to sustainably maximise returns from financial investments so that services can be delivered for current, and future, generations.

Council investments are not currently geared toward growing the asset base. Financial returns from investments will dwindle over time and provide a declining rates offset for future generations. This is best illustrated by the Parklands development which is being developed as a finite resource, and forecast to be completed by 2028. Council has used revenue from Parklands as it has been generated – this benefits the current generation of ratepayers only.

A prudent approach would encourage financial growth of the overall asset base. Increasing financial return would enable Council to continue in delivery of it’s social, infrastructural environmental, and cultural agenda.

In order to achieve a positive outcome for Council, the expectations (Statement of Intent) for financial performance of the asset base need to be clear and free from any potentially conflicting social or environmental objectives. The assets need to be tradeable (as required) within a strategy that grows the financial asset base.

The Office of the Auditor General has identified the benefits of a holding company as follows:

“A holding company can be effective for monitoring the performance of operating subsidiaries. In our view, essential elements of an active and informed monitoring function are:

· consideration of draft Statement of Corporate Intent by the boards of operating subsidiaries;

· detailed analysis of quarterly, six-monthly and annual reports from operating subsidiaries; and

· regular strategic reviews of individual investments and of the local authority’s trading portfolio as a whole.

· regular reviews are essential for proper management of a local authority’s investments in commercial trading enterprises. Holding companies are well placed to perform these reviews on behalf of the local authority parent.

The value of the holding company role was well illustrated in the case of one local authority we visited. The local authority had made a commitment in its Borrowing Management and Investment Policy to periodically review the rationale and status of its equity investments against strategic and financial parameters. The holding company was:

· acting as the investment vehicle, responsible for managing the local authority’s investments in a professional and commercial manner; and

· commissioning regular valuations of its three subsidiary companies, measuring movements in value over time.

Estimates of market value provided the local authority shareholder with a valuable benchmark against which to assess the ongoing costs and benefits of each investment, including alternative investments or opportunities for expenditure in the community.

Effective monitoring and liaison requires analysis and support. The holding company may have this expertise or may employ a contractor. Each holding company we reviewed had access to resources to perform these tasks. Two of the three holding companies used parent local authority staff for advice and support, reflecting the local authority’s close working relationship with its holding company. This arrangement can also provide a useful means of integrating the financial strategies of the holding company and the parent local authority.”^{^[2]}

Introducing a CCTO structure can:

· Preserve the operating autonomy of the local authority’s commercial investments;

· Apply business disciplines to the professional management of the local authority’s commercial investments;

· Act as a channel of communication between the local authority and the subsidiaries/partners;

· Promote best practice in corporate governance; and

· Provide a source of information and analysis for local authority review of investment options.

For Napier City Council, provided the CCTO has the scope and associated Statement of Corporate Intent, a CCTO can assist to:

1 Maximise land endowments

· Further land developments

· Actively manage the leasehold land portfolio

2 Develop Income streams

· Managed funds

· Mclean Park housing

3 Expand on core strength of Parklands

· Land development

o Residential land

o Commercial land

· Vertical builds

4 Collaborate with Investors for the benefit of Napier City

· Mana Ahuriri

· HBRIC

· Other

Financial

As discussed, the financial implications of continuing with the current approach mean that the Investment Portfolio is likely to shrink.

The current investment management and governance system has opaque objectives, and lacks the agility and single financial return focus to realise opportunities within the Investment Portfolio. For these two reasons the status quo is not considered tenable.

The financial modelling of returns assumes that some existing land assets may be sold and reinvested into other investment assets as part of the management on the Investment Portfolio. This continues a current practice, where both land at Parklands is sold, and some leasehold land is sold annually as part of Council operations. Assets that are deemed Strategic under the Local Government Act are not proposed for any type of asset sale but will be subject to greater commercial oversight.

The financial model for the Investment Portfolio is based on the following Council assets, leasehold land, Parklands, land development, residential rental properties (not social or pensioner housing), and selected undesignated bare land sites. The assets are currently valued by Council at $160m.

Social & Policy

There are a number of consequential amendments required dependent to some degree on whether or not the community supports a CCTO approach to the management of Council’s core financial investments. These are (among others):

Investment Policy: at present the policy primarily allows Council to invest for strategic purposes. Additional amendments are required to expand the type of property Council can own (i.e. investment property and development property), and emphasise holding investment for the purpose of deriving income and capital returns.

Significance and Engagement Policy: the assets listed in Schedule 2 are too broad. Relabelling and providing additional sub-categories will allow the treatment of some assets without triggering a review of the whole asset group (e.g. housing broken down into housing sub-groups).

Investment Property Portfolio Policy: a change in the approval process is required to reduce the burden on Council. Changes in delegations for Council officers and Council-owned entities (i.e. CCOs/CCTOs) recommended to streamline the process. Further due diligence and reporting will be required once an approach has been agreed.

Risk

Ratepayer Risk

The risk of eroding an intergenerational endowment asset by continuing the current approach to investment management is high. Moving to an intergenerational approach will ensure benefit to ratepayers of both current and future generations.

Asset Risk

Council currently holds most of it’s Investment Portfolio in single investment asset classes (such as leasehold land). As an example, through the sale of some leasehold land and reinvestment of the proceeds into other investment assets, Council can retain investment value, create alternate sources of income, and lower it’s overall risk exposure (concentration risk).

Focus

The current piece-meal management approach lacks commercial focus. There is a high risk that opportunities to increase revenue are not being realised.

Mixed Governance objectives

Governance is currently structured within the general Council framework and community well-being agenda. There is a risk that this governance arrangement places greater emphasis on well-being over revenue generation for investment assets.

Risks associated with a CCTO

There is a risk that a CCTO operates in a way that is misaligned to Councils objectives for the assets that it holds. Clarity of purpose through a Statement of Intent (SOI) is essential to ensure both parties remain on the same page.

There is a risk that assets placed under the responsibility of the CCTO have different objectives and different management needs. Whilst this can be addressed through specific provisions in the SOI, the risk is best mitigated by ensuring that the activities and assets held reflect a single SOI as much as possible.

Mixing elected members with a professional board also poses a risk to the success of the CCTO. Because the CCTO will be focused on inter-generational financial returns, it will require independence from Council, and an ability to attract the right expertise to the board.

5.6 Options

Status Quo Council (i.e. NCC today)

· Resourced in-house on a “part of role” basis.

· Each investment is managed separately within an unintegrated long term plan framework.

· Few available levers to grow the overall asset base.

· In-house governance through general committee structures and reporting

· Revenue from investments used for social returns.

· Dwindling asset base and inconsistent returns

· Mixed commercial returns, strong social returns

Enhanced Status Quo

· Resourced in-house, with focus on commercial returns.

· LTP provides an integrated framework to manage core investments for financial return that can be sustained over time

· In-house dedicated management, integrated reporting.

· Passive diversification of asset base

· Unlikely to be fully mandated to protect the value asset base, or provide a consistent return to Council over time

· Average commercial returns and some social returns

Independent Operations CCTO

· In-house resource (active and commercially driven)

· Mixed majority independent governance with a financial performance objective

· Active diversification of asset base to enhance returns and manage overall risk

· Fully mandated to protect the value asset base to provide a consistent return to Council over time

	Analysis
Strategic Considerations
Strategic focus on inter-generational financial performance	· Assets are looked at on an asset-by-asset basis, not as a portfolio. · Approach to asset management is reactive. · Limited likelihood of replacement of Parklands revenue stream when Area 4 development is completed. · Council policies target protecting the status quo, rather than seeking opportunities. · Core financial investments have not been clarified for single focussed financial performance. · Council ownership and wellbeing objectives often override commercial objectives. · Mixed objectives and influences make Council an unlikely partner.
Risk Management	· Current SIPO is balanced, potentially resulting in lower long-term return outcomes. · Council current risk appetite for reinvestment in new assets is contrary to its risk view on inherited assets. · Passive and unconsolidated performance monitoring · The lack of a portfolio approach means little consideration is managing risk through building resilience through diversifying leaving an over reliance on Napier property as the core investment
Ownership and Controls	· Council has 100% ownership of all Investment Assets · Council has 100% ownership of all Development Assets · Controls in LTP are functionally restrictive and insufficiently flexible or agile to enable decisions to buy sell or reinvest. · Council through policies and delegations influences control over asset management.
Operating Considerations
Governance Skillset	· Councillors have ultimate decision-making authority. · Councillors’ greatest collective strength is in the delivery of community services, not strategic investment decision-making. · Role of Councillor is wide ranging, and often involves competing priorities.
Operating Skillset	· Council management of investment assets and development assets is spread across the Executive Leadership Team and based on service delivery. · Parklands has been delivered to plan by experts in service delivery. Limited commercial oversight is applied. · Management of investment and development assets are a small part of a wider service or operational role. · Conflicting objectives result in higher social benefits at the expense of commercial income for Council.
Net Operating Income	· Investment assets provide an indicative cash return of 1.3% to Council. · The operating cost to derive this return is unknown; given the method of delivering services. · Development income is focused on sales rather than development margin.
Other Operating Considerations	· Development income has significant volatility, ranging from $0m to $20m per annum. · In NCC’s 2022 Annual Report, the greatest income and expenditure variances were related to investment assets.

Enhanced Status Quo

	Analysis
Strategic Considerations
Strategic direction on inter-generational financial performance	· Assets are reviewed individually, not as a portfolio. · Approach to asset management is reactive · Limited likelihood of replacement of Parklands revenue stream when Area 4 development is completed. · Council policies reviewed as part of LTP to ensure that Council can take opportunities. · Core financial investments have not been clarified for single focussed financial performance. · Council ownership and wellbeing objectives often override commercial objectives. · Potential for mixed objectives and influences make Council an unlikely partner.
Risk Management	· Renewed SIPO permitting risk reward commensurate with Council’s position as an intergenerational investor. · Passive and unconsolidated performance monitoring · Greater risk management awareness, but limited skillset to change. · The lack of a portfolio expertise means little consideration is managing risk through building resilience.
Ownership and Controls	· Council has 100% ownership of all investment assets. · Council has 100% ownership of all development assets. · Council, through policies and delegations, influences control over asset management. · Investment committee and internal financial oversight reports to Council.

Operating Considerations
Governance Skillset	· Councillors have ultimate decision-making authority. · Investment committee would have some independent representation but would likely be a minority influence and remain subject to Council politics and process. · Councillors’ greatest collective strength is in the delivery of community services, not strategic investment decision making. · Role of Councillor is wide ranging, and often involves competing priorities.
Operating Skillset	· Greater awareness of investment assets will bring focus. Greater use of internal committees and projects to manage value and costs. · Council management of investment assets and development assets is spread across the Executive Leadership Teams based on service delivery. Oversight may change. · Parklands has been delivered to plan by experts in service delivery. Increased commercial oversight will add initial value. · Current operating structure with no single owner creates and influencing role, rather than a specialist managing role. · Some management of conflicting objectives result in higher social benefits at the expense of commercial income for Council.
Net Operating Income	· Investment assets return will grow, but slowly. · Additional operating costs likely to compensate for lack of specialist skills. · Development income is focused on development margin, not just land sales.
Other Operating Considerations	· Development income volatility will reduce with a focus on returns not just sales.

Investment and Development Assets Managed Through a CCTO:

	Analysis
Strategic Considerations
Strategic Direction on inter-generational financial performance	· Strategic focus and core financial investments articulated in a Statement of Corporate Intent (SCI) · Investment assets are managed as a collective portfolio for return and risk management. · Approach to asset management is proactive. · Land development focus moves to an enduring workstream, seeking new development blocks from new land investment and existing Council land. · Council policies reviewed as part of LTP to ensure that Council / CCTO can take opportunities. · CCTO provides a degree of independence from Council and clarity of mandate for management of assets.
Risk Management	· Renewed SIPO permitting risk reward commensurate with Councils position as an intergenerational investor. · Staggered diversification of non-strategic assets to grow both income and lower overall portfolio risk. · Focussed performance monitoring as per SCI and board · Strategic approach to building resilience through asset management and consistency of income.
Ownership and Controls	· Council owns 100% of CCTO. · Letter of Expectation and Statement of Intent define mandate and parameters for CCTO. · Ability for CCTO to acquire its own commercial assets in time. · Council through policies and delegations (to CCTO) influences investment management, including status of strategic assets. · CCTO interface into Council through Council, Deputy CEO and Council presentations. · Board of CCTO delegated decision-making responsibility.
Opportunity for partnerships	· Partnership and co-investment potential with iwi, developers, or similar organisation through commercial CCTO interface. · Future expanded partnership if CCTO eventually owns assets directly.
Operating Considerations
Governance Skillset	· Councillors have ultimate decision-making authority through delegations, Letter of Expectation, and Statement of Intent. · CCTO often have a governance structure targeting a majority independent board, and bringing in commercial (specialist) expertise. · Clear separation of Council function and investment function.
Operating Skillset	· Commercial investigation, decision, and ability to procure specialist resources as required · Commercial decision process leads development and sale of Parklands Area 4 and future developments. · Council staff continue to deliver function services, as requested. · Focus of investment assets is in growing and diversifying the investment return.
Net Operating Income	· Investment assets targeted towards long term cash return of 3% per annum to Council. · Development assets moved towards profit target (preserving the value of the inherited land asset) and annual growth over life of Long Term Plan (including beyond 2028). · Establishment costs and operating costs provide net annual cash benefit from year 3, steadily growing net revenue to Council by a targeted 60% over the LTP.
Other Operating Considerations	· Development income smoothed through reserving to ensure Council has steadily growing revenue stream. · Portfolio approach creates size and scale to attract skilled staff, governors, and partners. · Existing assets continuance of Council ownership retains current taxation status.

5.7 Development of Preferred Option

The preferred option has been developed through workshops with Councillors, assistance from external specialists, research into the operations of other councils around New Zealand, and Government reports concerning local government funding streams.

The preferred option is to include the proposal to establish the CCTO within the 2024-34 Long Term Plan for consultation.

Given the issues and risks around the financial implications for Council, status quo is not seen as a viable option; meaning that enhanced status quo and CCTO options may be pursued in tandem.

5.8 Attachments

Nil

Prosperous Napier Committee - 08 February 2024 - Open Agenda

Prosperous Napier Committee

Open Minutes

Meeting Date:	Thursday 7 September 2023
Time:	11.02am - 11.08am (Open) 11.10am - 12.20pm (Public Excluded)
Venue	The Ocean Suite East Pier Hotel 50 Nelson Quay Napier
	Livestreamed via Council’s Facebook page

Present

Chair: Councillor Crown

Members: Mayor Wise, Councillors Boag, Browne, Chrystal, Greig, Mawson, McGrath, Price, Tareha and Taylor (Deputy Chair)

Ngā Mānukanuka o te Iwi representative – Joe Tareha

In Attendance

Chief Executive (Louise Miller)

Deputy Chief Executive / Executive Director Corporate Services (Jessica Ellerm)

Executive Director City Services (Lance Titter)

Executive Director City Strategies (Rachael Bailey)

Executive Director Infrastructure Services (Russell Bond)

Executive Director Community Services (Thunes Cloete)

Manager Communications and Marketing (Julia Atkinson)

Pou Whakarae (Mōrehu Te Tomo)

Programme Manager – Long Term Planning (Stephanie Murphy)

Corporate Finance Manager (Garry Hrustinsky)

Administration

Governance Advisors (Carolyn Hunt and Anna Eady)

Prosperous Napier Committee – Open Minutes

Table of Contents

Order of Business Page No.

Karakia. 3

Apologies. 3

Conflicts of interest 3

Public forum.. 3

Announcements by the Mayor 3

Announcements by the Chairperson. 3

Announcements by the management 3

Confirmation of minutes. 3

Agenda Items

1. Long Term Plan FY24-27 Update. 4

Minor matters. 4

Resolution to Exclude the Public. 5

Order of Business

Karakia

Apologies

Councillors Mawson / Tareha

That the apologies from Deputy Mayor Brosnan, Councillor Simpson and Ngā Mānukanuka o te Iwi representative (Evelyn Ratima) be accepted.

Carried

Conflicts of interest

Nil

Public forum

Nil

Announcements by the Mayor

Nil

Announcements by the Chairperson

Nil

Announcements by the management

Nil

Confirmation of minutes

Councillors Mawson / Greig

That the Minutes of the meeting held on 15 June 2023 were taken as a true and accurate record of the meeting.

Carried

Agenda Items

1. Long Term Plan FY24-27 Update

Type of Report:	Information
Legal Reference:	Local Government Act 2002
Document ID:	1690580
Reporting Officer/s & Unit:	Stephanie Murphy, Programme Manager- Long Term Planning

1.1 Purpose of Report

To provide the Committee with an update on the Long Term Plan FY24-27 preparation.

At the meeting

The Programme Manager – Long Term Planning, Ms Murphy took the paper as read. Ms highlighted the key attachments to the report being the “Plan on a Page and the Schedule” a high level programme to illustrate the independencies of lots of different aspects across Council leading into the work plan for the Long Term Plan.

One of the key aspects is the Financial Strategy, with quite a lot of work currently underway which needs to be completed prior to commencing the LTP.

Ms Murphy confirmed that the Order in Council was made on Monday, 4 September 2023.

Committee resolution

Councillors Browne / Taylor

The Prosperous Napier Committee:

a. Receive the report titled “Long Term Plan FY24-27 Update” dated 7 September 2023.

Carried

Minor matters

There were no minor matters.

Resolution to EXCLUDE the Public

Councillors Tareha / Mawson

That the public be excluded from the following parts of the proceedings of this meeting, namely:

1. Request for Rates Remission for Special Circumstances

Carried

The general subject of each matter to be considered while the public was excluded, the reasons for passing this resolution in relation to each matter, and the specific grounds under Section 48(1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution were as follows:

General subject of each matter to be considered.	Reason for passing this resolution in relation to each matter.	Ground(s) under section 48(1) to the passing of this resolution.
1. Request for Rates Remission for Special Circumstances	7(2)(a) Protect the privacy of natural persons, including that of a deceased person	48(1)(a) That the public conduct of the whole or the relevant part of the proceedings of the meeting would be likely to result in the disclosure of information for which good reason for withholding would exist: (i) Where the local authority is named or specified in Schedule 1 of this Act, under section 6 or 7 (except 7(2)(f)(i)) of the Local Government Official Information and Meetings Act 1987.

Mayor Wise left the meeting at 11.08am

The meeting adjourned at 11.08am and reconvened

in Public Excluded at 11.10am

The meeting closed with a karakia at 12.20pm

Approved and adopted as a true and accurate record of the meeting.

Chairperson ......................................................................................................................

Date of approval ...............................................................................................................

[1] The New Zealand Productivity Commission. Local government funding and financing. November 2019. Chapter 3. p.44.

[2] Internet article: Office of the Auditor General. Local Authority Governance of Subsidiary Entities, Part 7: Commercial Trading Enterprises. 2001. https://oag.parliament.nz/2001/local-auth-governance/part7.htm (Accessed 2024-01-18)

Meeting Date:	Thursday 8 February 2024
Time:	9.30am
Venue:	Chapman Room Level 1, Chapman Pavilion McLean Park Latham Street Napier
	Livestreamed via Council’s Facebook page

Committee Members	Chair: Councillor Crown Members: Mayor Wise, Deputy Mayor Brosnan, Councillors Boag, Browne, Chrystal, Greig, Mawson, McGrath, Price, Simpson, Tareha and Taylor (Deputy Chair) Ngā Mānukanuka o te Iwi representatives – Joe Tareha and Evelyn Ratima
Officer Responsible	Deputy Chief Executive / Executive Director Corporate Services
Administration	Governance Team
	Next Prosperous Napier Committee Meeting Thursday 28 March 2024

Chairperson	Councillor Crown
Deputy Chairperson	Councillor Tayor
Membership	Mayor and Councillors (13) Ngā Mānukanuka o te Iwi representatives (2)
Quorum	8
Meeting frequency	At least 6 weekly (or as required)
Officer Responsible	Deputy Chief Executive / Executive Director Corporate Services