Under-insurance could leave Wellington $2.6b short after major quake, council told

10:48 pm on 23 May 2024
A closeup of a seismograph machine needle drawing a red line on graph paper depicting seismic and eartquake activity on an isolated white background

A one in 1000-year earthquake could see Wellington City Council falling short of rebuild costs by more than $2.6 billion, council chief financial officer Andrea Reeves says. Photo: 123RF

Wellington City Council has been told its growing degree of under-insurance could leave the city billions of dollars short of rebuild costs if a significant earthquake should strike.

The dire state of the council's investment portfolio and insurance levels was outlined in a briefing centred around the proposal to sell the council's share in Wellington Airport on Thursday.

Chief financial officer Andrea Reeves said a one in 1000-year earthquake event - such as a 7.7 magnitude earthquake in the Wellington or Wairarapa area - could see the council falling short of rebuild costs by more than $2.6 billion.

She said the scenario was keeping her up at night.

Currently the airport makes up nearly 50 percent of the council's investments - valued at $278 million.

Reeves said Covid had shown the vulnerability of the council having too much of its investment "eggs in one basket" and the council's portfolio could not be relied on to be resilient in the face of unpredictable events.

Reeves said selling all the airport shares would help alleviate the risks faced by the council.

The funds from the sale of the shares could be used to fuel a perpetual investment fund (PIF) which over 50 years could grow to up to $6.4b (based on a 7.8 percent return) and over a 10-year period could generate a similar dividend for the council as forecasted from the holdings in the airport.

Reeves said a partial sale of the shares would water down the council's control of the airport and slow the growth of the PIF.

"It would be our very serious advice that you would need to really manage the council's debt because you would still face the same risks that you do now where we have such a significant under-insurance. The legal advice that we have suggests that no sale of any shares - without significant cuts to our debt - would not be prudent," Reeves said.

Without the sale the council would have to revise its long-term financial plan and reduce its levels of service as it needed to commit to reducing its debt by a minimum of $450m over the next 10 years, she said.

The community would need to be consulted again on where those savings could be drawn from and debt would need to be kept at low levels over the long term, Reeves said.

Council chief executive Barbara McKerrow said the council did not have enough borrowing capacity to address the risks it was facing without substantial changes to the long-term plan.

"There is a known problem and the problem has emerged significantly since the last-long term plan when we thought that the headroom we were maintaining in terms of our debt was sufficient to cover the insurance risk we face in the event of a major natural disaster for our city. We know now, based on revised estimates, particularly of the seismic risk our city faces, that that under-insurance risk is a significant $2.6 billion.

"We have to look at the solutions are available to us and there are very few when you look at a gap of that nature," McKerrow said.

The council was told public consultation over the sale had shown little more than a quarter of respondents supported the full sale of the council's share in the airport while over 50 percent favoured either no sale or a partial sale of the shares.

Unions Wellington convener Sabina Rizos-Shaw said the council officer's briefing lacked balance in its assessment of alternatives to the sale.

She said while much had been made of the potential to alleviate the council's financial risk, council officers showed little consideration for the impact of the sale on workers and the communities about the airport.

"A privatised airport means less accountability for the public in terms of the working conditions at the airport and the environmental impacts that it may have on the community," Rizos-Shaw said.

She said even a partial sale would give up the council's ability to protect the interests of Wellingtonians in how the airport was run and how it engaged with unions and the community.

"Once we sell the airport we're not going to just get it back because we want it. [Current owners] Infratil might be saying that they're not planning on doing certain things but they could change their mind about that - they could sell it - and there wouldn't be any kind of mechanism for the council - who is supposed to be looking after the well-being of the community that they represent - to have any say in that," Rizos-Shaw said.

Get the RNZ app

for ad-free news and current affairs