How would leasing out Auckland's port work and who would pay?

Ports of Auckland, seen from Maungauika, North Head historic reserve. Photo / Michael Craig

There'll be no shortage of highly efficient operators lining up if Auckland's port is offered for lease - the trick will be ensuring ratepayers don't still have to subsidise it, or that freight costs don't go through the roof.

That's the word from the sector as port company owner Auckland Council mulls how to improve the facility's weak productivity and financial performance and get a better return for its investment capital.

News the cash-strapped council is looking at options for the port, including separating the CBD-based port from the land it sits on, requiring rent instead of dividends, and leasing out management of the port company, has created high interest in the sector and investment community.

But for many frustrated supply chain users, the move is also long overdue, given outgoing mayor Phil Goff has now said the port has been underperforming for at least eight years.

The operating company/property company - "opco/propco" - model is common in Australia and at other overseas ports, say sector experts, so experienced operators won't be hard to find.

Would NZX-listed Port of Tauranga, New Zealand's biggest and most successful port, put up its hand?

Chief executive Leonard Sampson would only say "we would be happy to assess any potential option but only on the basis of the best interests of shareholders, customers and the overall supply chain".

The real issue, said another experienced sector observer, will be getting the port's productivity and financial performance up so the market cost of the lease to the new operator doesn't require a subsidy from ratepayers, or force the operator to hike charges to container terminal and other port users.

Ports of Auckland delivered a $3.2m dividend to ratepayers in 2021. Photo / File

How the model works is that the landowner, in this case the Ports of Auckland company - of which Auckland Council is the sole shareholder - would retain the land and issue a concession or licence for a third party operator to come in and pay a lease.

"That lease is generally set on what the landowner could get for an alternative use. Terminal charges in Australia are much higher than here. So any attempt to put in the model here raises the fundamental question of what is the landowner going to want in terms of a lease return on the land?

"At the moment the landowner is getting nothing from the lease of that land. The landowner would presumably want a market rate, otherwise ratepayers are subsidising the operation. Which raises the question: why would ratepayers subsidise a third party coming in? They might as well keep it as it is now.

"If they charge a market rate [for the land lease] then the operator is going to be faced with a significant cost increase over what the current port operator is bearing. Anyone interested would be looking to recover the costs through additional charges to port users. If costs have to increase to reflect the market rate then users of the port - shipping companies and freight owners - would end up footing the bill."

One sector expert said for some quick cash the council might be looking to the overseas example of an operator paying an upfront capital lease payment for a 30-40-50 year lease on the port.

"We've seen some pretty eye-watering figures paid overseas."

Is now the right time?

All the commentators agreed that for the model to work the port had first to fix its productivity issues, including the costly container terminal automation project, started in 2016 and still not fully implemented.

The Herald asked mayor Goff if now was the best time to be thinking of a new operating/land ownership model when the port was underperforming.

"The work is at an early stage and it is premature to jump to any conclusions as to what the outcome might be," he said.

"The principal goal of council is to determine how best to improve the performance of the port. It makes sense to look at all options and to do so thoroughly, which will take some time.

"Having a port which operates optimally for Aucklanders - both businesses and consumers- is the most important consideration. Additionally, council will want to see the best return on investment in the port for its ratepayers.

"Over a longer time period, it will be desirable to relocate the port, preferably within the Auckland region. The first step is to determine where the port is relocated to, and government and council will work together on this. It needs to be done within a 20 to 30-year time frame. Relocation frees up land in the centre of the city for redevelopment and granting access to the harbour front and high-value use of the land."

Port of Tauranga's Sampson said it was "essential" that as an important part of the upper North Island supply chain, Auckland's port returned to full productivity.

"We need it performing well so all other parts of the supply chain do the same. The focus really needs to be on getting things fixed and resolved, and I'm sure they're on the way to doing that."

The underperformance of Auckland's port, the country's main gateway for imports, has put an extra burden on Tauranga, the main export port, during the pandemic-fuelled consumer freight shipping boom. Ship congestion at Auckland has also led to shipping lines diverting imports vessels to Northport, near Whangarei.