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The governance model for the country's freight gateways is leaking profit, writes Murray Sherwin, chairman of the Productivity Commission.

Throughout New Zealand's history, we have battled against our geographic isolation and distance from markets. New Zealand's livelihood is deeply enmeshed in the world economy - both as an importer and an exporter - and freight costs are intimately linked with trade. Though freight costs, as a proportion of freight value, fell over the years 1989 to 2009, they are beginning to rise again.

That's why the Productivity Commission was asked to look at international freight transport services - to analyse the efficiency of these services and to explore opportunities to improve.

Ports and airports are our largest freight gateways. Any disruption or delay acts as a "chokepoint" or potential bottleneck in the supply chain and this can lead to hefty costs for those relying on freight, whether for imports or exports.


The commission has looked at a number of aspects of the freight system, but one that strikes us as key is the governance of council-controlled ports and airports. The quality of governance ultimately determines how effective organisations are.

Our ports and airports are mostly owned, in whole or in part, by local government. They are subject to a range of legislative influences (Local Government Act 2002, Port Companies Act 1988, Local Government (Auckland Council) Act 2009, Airport Authorities Act) each with a different statutory purpose statement.

Compare that with state-owned enterprises, where the SOE Act requires them to be "as profitable and efficient as comparable businesses that are not owned by the Crown". This is a clearer objective than to be "a successful business" as stipulated in the Port Companies Act, or a "commercial undertaking" as specified in the Airport Authorities Act.

Beyond commercial performance, local government owners may have a variety of other objectives in mind as they consider their interests in ports and airports. Mostly, they relate to regional economic development, or future options for the use of the land occupied by ports and airports.

The Productivity Commission's work has indicated many regulatory and other mechanisms exist by which councils may pursue non-commercial interests in these entities, without requiring ownership. Pursuing those non-commercial interests through ownership influence carries risks - including introducing conflicts of interest into the governance of the organisations concerned.

Recognition of these potential conflicts is not uniform across councils. A variety of rules on whether councillors or council staff can sit on the boards of council-controlled companies exists - some permitting or even requiring councillor or council staff representation on boards, others precluding direct representation.

Given the obligation of directors to act in the interests of companies of which they are directors, it would be preferable, and would lessen the risks of conflicting objectives, if councils adopted a standard rule that councillors and council staff members not be represented on the boards of these companies.

Strong governance is especially important for publicly owned enterprises since they are subject to less scrutiny than comparable privately owned companies where shareholders and their representatives have very strong incentives to monitor performance. The commission's research indicates that the earnings of most of our major port companies are insufficient to justify the capital invested in them.


In the case of state-owned enterprises, an independent division of the Treasury is responsible for monitoring their performance. The Productivity Commission proposes that a comparable monitoring function for ports, and potentially other large council controlled companies, would be a useful means to boost scrutiny.

Of course, the introduction of private capital would lessen many of these governance concerns. But the commission's view is that the prior question for councils is to be clear about exactly what objectives they have in relation to companies such as ports and airports, and to think carefully about how those various objectives may be best pursued.

Apart from outright ownership, councils may be able to satisfy their interests through their regulatory roles and through decisions on the scope and shape of the companies concerned (for example, should they separate ownership of land from port or airport operations).

Beyond these factors, it's clear that some of our ports and airports face large investment needs in the future, and councils face substantial pressures on their own financial resources.

The challenge for councils is how to best deploy their scarce resources - and how to ensure that pressure on their balance sheets does not impede development of key infrastructure assets such as ports and airports, nor impede effective commercial operation of those vital entities. Are we on the right track? Let us know what you think.

* The draft report is at www.productivity.govt.nz.
* Submissions are invited by February 27, 2012.
* Deadline for the final report is April 1, 2012.