Auckland Council (Auckland Future Fund) Bill

Members, we come now to Part 2. This is the debate on clauses 7 to 12, “Auckland Future Fund”. The question is that Part 2 stand part.

Thank you very much, Mr Chair. It’s great to come into Part 2. I’ve got questions relating to clause 7, which is around the governance and management of the Auckland Future Fund (AFF). My first question relates to clause 7(1), which requires the council to “put in place structures for governing and managing the AFF.” I’d be interested if the member Dr Carlos Cheung could just clarify what specific structures Auckland Council currently has potentially in mind. Could this potentially be a trust, a council-controlled organisation, or another entity? I think it would be helpful for the committee to understand the practical implementation. While the bill, rightly, provides flexibility, understanding the council’s current thinking would help us assess how these provisions will work in practice.

My second question is on clause 7(2)(b), which allows structures to be implemented either internally, within council, or externally, through trusts or other entities. Could the member please explain how this works if the council initially establishes the fund internally but later decides to potentially move it, say, to an external trust? What would the process be to require that change to potentially happen? The flexibility in this part definitely seems sensible, as best practice evolves over time; however, I’m keen to ensure and understand the implications of shifting between internal and external management, particularly regarding staff contracts and continuity of investment strategy.

My next question comes to clause (7)(2)(b)(ii)—so I’ve done 7(1), I’ve done 7(2)(b), and now we’re on 7(2)(b)(ii). If the fund is managed externally through a trust or other entity under that clause, how will accountability to Auckland ratepayers be maintained? External management might bring in expertise and independence, which I definitely support; however, Aucklanders will rightly expect to maintain visibility and accountability over their fund. Can the member explain how this balance would be achieved in practice?

So my questions were relating to clause 7(1), 7(2)(b), and 7(2)(b)(ii). I welcome the answers from the member.

So Auckland Future Fund is a separate council-controlled organisation (CCO), in which they actually receive direction from the council, but they actually work independently. So the council basically will select the board member, the three board members. They’re selected based on their experience, based on their track record as well, but also they will try to prevent any conflict of interest and also any political influence as well.

For example, board members can’t be the family members or the members of a councillor or the mayor, to keep it more independent as well. But at the same time, the fund itself is also subject to an external audit by the Auditor-General of its financial and service performance as well. So it makes sure the fund and its performance is accountable to the council and must comply—

Hon Carmel Sepuloni: I love how he’s got all his answers written out for these questions from his colleagues!

Dr CARLOS CHEUNG: —with the CCO accountable policy, including quarterly, according to the statement of intent.

I think this is not called an answer, but to answer the member on the other side, I think this is called preparation. We want to make sure, and I think this is something that on that side of the House they’re not very good at! You know, because for me, one thing I want to know as the chair is I want to provide as much detail as possible to the member to make sure I give them confidence that this legislation is benefiting people, not like the other side. They just like to write essays or give us 11 pages of document or pictures, and I think this is not the way to actually do things.

I think that also refers to the member’s previous statements as well: “Oh, I don’t think the member actually does anything” or “I think it’s just the council that gives him the bill to carry.” This is a perfect example of a member of Parliament, how to work hard together with the council to make sure we clear all the concerns raised by the other side of the House as well.

Thank you very much, Madam Chair, and thank you to the member for answering my questions relating to clause 7. I want to move on to clause 8, which is around the principles for governing and managing the Auckland Future Fund. Clause 8(b) states, “with the intent of maintaining or increasing the real value of its capital over time.” I’m keen to understand from the member how “real value” will be defined and measured. If I put myself in the shoes of the ratepayers, I would be keen to know how I could see that the fund was being managed “with the intent of maintaining or increasing the real value of its capital over time.” How will “real value” be defined and measured?

My next question is around clause 8(b) as well, which is the phrase “over time”. It’s important for giving the fund appropriate flexibility, which I appreciate, but could the member just clarify what time frame is envisaged? Is this measured annually, potentially over a rolling five-year period, or potentially even a longer term? I ask because investment markets, as we know, can be volatile in the short term, and I want to ensure that the fund has appropriate flexibility to weather market downturns without being in a technical breach of the Act. A long-term investment approach requires the ability to ride out short-term volatility.

Clause 8 also sets out principles but doesn’t specify consequences if the principles aren’t followed. These principles are at the heart of the bill’s protection for future generations. While I’m confident that both the member and the Auckland Council will follow them, it would be helpful to understand what happens if a future council or fund manager doesn’t comply. Is this a matter for the courts, for the Auditor-General, or another body? What mechanisms exist to enforce compliance with these principles?

Thank you, member, for the questions. So in order to retain the fund, I think it’s relatively related to the inflation numbers as well. So as the proposal has been proposed, the expected return of the Auckland Future Fund is 7.42 percent, and within that, 2 percent will be used to retain the fund value to make sure the fund can keep growing as well.

Also, as I mentioned before, as a council-controlled organisation (CCO), they are actually subject to external auditing by the Auditor-General for its financial and service performance as well. So most of the data and most of the investment value will be reported quarterly, and also every year they have actually got an annual report as well.

I think the member actually raised a very good point as well, because this is core investment. There’s no guarantee that everything will go accordingly, especially during some financial downturn or some economic crisis as well. There’s no guarantee that the fund will always perform as it has been described. But in saying that, the 7.42 percent is based on the calculation for the long term, and we have already put a lot of different factors into the consideration, and we want to make sure all this investment will be managed—the risk will be managed. Also, I think this is all another layer of safeguard as well.

Every three years, councillors will look into the appointment of the board members as well. If they are not performing well, they will look into it and see whether they want to reappoint other board members to make sure the fund continues to grow.

In relation to the governance of the Auckland Future Fund, very good discussion—thank you very much for your questions, Tom. My question is around the words “council-controlled organisation” (CCO), which you’ve used—and although this is not decided completely as yet, we do note that the Auckland Council has had a predilection just recently of pulling all CCOs into council. This, to me, presents an issue, because what we’re trying to do here is create a fund on behalf of Auckland’s shareholders—citizens of Auckland—and if this is close to and controlled by council, I fear for the future of the fund.

However, if there are enough governance rules in place in terms of separating this organisation to be able to return the 7.2 percent per annum or greater, to give them the freedom to do so without interference of the councillors that come in from time to time and/or the mayor—can you give us some assurance around those governance arrangements?

Thank you, members, for the questions. Yes, I think this is the reason why we set up the legislation here, to make sure the fund will not be affected by political environment changes. We made sure the fund will have the initial initiative to keep benefits to Auckland as a whole, because we know that, like you say, every single time there’s a local election going on, we may have a different councillor into the Auckland Council. They may think differently, they may have different priorities, but for this we want to make sure the fund is going to be used long term. I think, as referred to before, without this legislation—like the one we talked about, the financial assessment portfolio, which was set up by a previous council before—because without the legislation, that fund wasn’t performing well or they were being mismanaged or being misused, and they need to be disestablished. So I think it is important we’re here. We set up a very high bar for the council, to make sure they can change the initiative or change the use of the fund only when they have a super majority, which means only 75 percent of the councillors have agreed to it.

Madam Chair, thank you very much. I want to ask a question on clause 9(1)(c) in Part 2, which says, “acting independently of members of the Council and those members’ personal or political interests”. It’s around the investment decision-making.

My concern doesn’t lie so much about the independence of that investment decision-making being sufficiently far enough away from, say, elected members. My concern lies with the amount of the dividend expectation that may be put on them, overtly or subconsciously, and whether the entity, the Auckland Future Fund (AFF) board, or its designated investment wealth manager is protected enough to make the right decisions around dividends and around the timing of dividends that are in the best interests of the fund and not in the best interests of the local body politicians—if I want to be straight with you. It is so that this fund is not under pressure and so that the chair, Christopher Swasbrook, who has got a lot of respect and experience and integrity up in Auckland and who is chairing the AFF board—that they are not under a lot of the pressure that we might have seen from the Port of Auckland in previous years to deliver a dividend, and there is this “This is how much we want.”

As we know, we’ve got some reasonably lively and unpredictable local body politicians in and around the Auckland Council chamber, and I just want that assurance that there’s not going to be the pressure to deliver so much dividend every so often. I say that because it started on a high: a $38 million dividend was paid out from the June to December period in this year alone, making that period 13 percent higher than forecast. I suspect that the incoming council, which will be revenue short and capital short and up against its debt ceilings, will be like: “Well, when’s the next $38 million coming? Why can’t we make it $338 million?”

So I say yes to clause 9 in Part 2 around the independence of investment decisions, but I’m more interested in whether we’re covered in this statute, I say to the sponsoring MP. Are we covered so that this entity chaired by Chris Swasbrook is not going to be under any political pressure as far as paying out dividends, how often they get paid out, and how big they should be?

That’s a very, very good question. I think that this bill basically is about focusing on the growth of the fund. There are a few further terms: is this setting the right percentage of return? Will it be too aggressive or too conservative? Obviously, during the economic good times when you go for aggressive, you’ve got a high return, but you’ve also got a high risk as well. On the other hand, during economic uncertainty, you obviously want to go for a more conservative approach.

So most of the investment guidelines are based on Responsible Investment Policy released by the Auckland Council as well. [Holds up document]

Hon Carmel Sepuloni: We’ve already had you hold that up. Thank you for holding it up again.

Dr CARLOS CHEUNG: So, basically, I just want to tell people—well, just to let you know, not everyone in front of the TV has been watching this debate since, like, 3 o’clock. I think it’s very important to tell people in front of the TV or who have just recently turned on the TV to look at the parliamentary debate, to make sure they know what’s going on and all the detail as well.

So I just want to read out what council has actually called responsible investment policy.

Hon Carmel Sepuloni: Don’t read out from the document, please. It’s not the bill.

Dr CARLOS CHEUNG: I know that the member on the left-hand side doesn’t really care because they don’t really care about the future of Auckland, but I think most of the people involved with the TV would love to know what’s going on, what’s happened to my rates and my fund as well. So I just want to read it out: “The council recognised that there are challenges in the implementation of a responsible investment policy when investing globally. For efficiency, operational, and cost reasons, the council fund may be invested in pooling funds known as collective investment vehicles. Where this is the case, there will be limits on the ability to exclude securities from the investment portfolio. In such an instance, fund governance will ensure the manager of the collective investment vehicle is aware of the council’s responsible investment policy and should be satisfied that there is a broad alignment with the policy applied in the management of the collective investment vehicle.”

I hope that that actually gives us a little bit of information or gives a little bit more public confidence to people in front of the TV, rather than you just turn it on and the other side just says, “Shut up and sit down.” and they just don’t really care. I think this is our job as MPs, as parliamentarians: to make sure our general public know what we’re going through, what is the detail of the legislation, and give them the confidence as well.

I move, That debate on this question now close.

Motion agreed to.

Part 2 agreed to.

Clauses 1 and 2