Talking Point: Port options lack the right balance

The Napier Port Have Your Say Document. The options on offer aren't quite right, says Martin Williams.

It's not very often I find myself agreeing with Bruce Bisset.

But there is some truth in his statement that the proposal to sell up to a 49 per cent share in the port is not about building a new wharf (Left Hook, October 19).

No one is debating the need for the port to be able to raise capital for its $320 million to $350m of planned investment over the next 10 years, of which the new Wharf 6 development is a major part.

What is being debated, and rightly, is how that capital investment programme should be funded, and whether any part of the council's 100 per cent stake in the port should go on the block for the purpose.

As chief executive James Palmer stressed in his presentation at the A&P Show, this issue needs to be seen in the context of the regional council's primary role as environmental steward of the catchments of Hawke's Bay.

To meet the council's ambitious environmental programme adopted under the 2018-2028 Long Term Plan, some $70m of borrowing is planned.

Any borrowing to fund port development would be on top of that, and could take the council close to its "comfort zone" level of debt, with nowhere left to go if any additional resource was urgently required to fund core functions or respond to a natural disaster.

I note this argument doesn't seem to cut it for some, who feel strongly that the cost to the average ratepayer of $950 over 10 years (ie about $2 per week) to service further council borrowing under Option A, is worth the price of retaining full ownership.

In considering this conundrum, the first thing to be clear about is that the council is not proposing to sell shares in the port to fund port expansion, at least directly.

This is instead about raising some $86m of capital to clear the port company's balance sheet so the port itself can borrow to fund its planned investments within prudent levels.

The second thing to understand is that the solution cannot be all about money. If it were, the Option D lease alternative would be preferred as providing the greatest capital return by a substantial margin, which would then available for an even more ambitious environmental stewardship campaign, and with full ownership in the port retained.

The broader issue raised is really about resilience.

The stronger argument for any sale of a stake in the port as I see it is the "eggs in one basket" point that the port asset comprises 76 per cent of the council's commercial investment portfolio, presenting a "highly concentrated geographic and commercial risk" (to quote the March 2018 Capital Structure Review Report).

In the event of a major earthquake, for example, insurance may cover wharf damage and business interruption, but not damage to land or shipping channels, nor the current dividend payment, and premiums are on the rise.

For this reason alone, it seems, the report recommends selling at least 33 per cent of the current port holdings and reinvesting the proceeds into a higher return "Future Fund", generating more than the 3-4 per cent return received from either the council's $5m term deposit investment, or the port itself.

This same report however reveals two risks of this proposal, which I don't think have seen enough daylight in the public conversation to date. The first, and said to be a "major risk", is that the public share offering would not reach NZX 50 (Top 50) status on the sharemarket, and so be subject to a significant price risk up front.

Put simply, the council may not get what it plans in selling the shares, and so the strategy fails from the beginning.

The second risk is that of loss of control of the port itself.

If up to 49 per cent of the shares are sold from the outset, there is a risk the council could ultimately lose its majority shareholding position.

For example, if the port directors resolved to invest further capital in port growth, the council would have to keep investing as well to avoid dilution of its majority holding.

Where this all leaves me, in my humble opinion, is that the council should be very wary about leaping straight to a 49 per cent public share offering.

The council does not need the full $180m projected return from the share float to clear the port's current debt, less than half of that in fact.

The lesser option of a 25 per cent share float (or the minimum 33 per cent recommended in the Capital Structure Review Report) would raise enough capital to enable the port to get on with its investment programme, including Wharf 6.

It would reduce if not avoid the risk of loss of majority control in the longer term. It would reduce exposure to natural disaster, and to the major risk that a greater 49 per cent stake does not meet the expected price.

If a greater return beyond that achieved by a 25 per cent or 33 per cent float was desired for Future Fund purposes, a suggestion I make is a block share sale to a co-operative or consortium of Hawke's Bay primary producers with a direct interest and stake in the port's future, instead of simply letting that additional stake loose on the open sharemarket as proposed under Option B.

A similarly targeted parcel option to relevant or iwi or hapu Treaty settlement entities would be another possibility surely worth considering.

There is no completely right answer here, except perhaps that as Rex Graham has said, doing nothing is not an option.

But within the range of options on the table, I do believe the right balance can and must be struck. As they stand, in my view, none of the stark options A to D being put to the public yet strike that balance.

• Martin Williams is a barrister specialising in local government and resource management law, based in Napier.