Gaynor: Councils should exit port business

By BRIAN GAYNOR

On the eve of the Knowledge Wave conference it is appropriate to ask why so much public equity is tied up in well-established private commercial enterprises.

Why do our local authorities continue to hold major shareholdings in port, airport and other companies when these stakes could be sold and the funds used to foster economic growth?

Auckland City and Manukau City own 35.4 per cent of Auckland International Airport, with a market value of $525 million. Two local authorities and Infrastructure Auckland have stakes in Northland Port, Port of Tauranga and Ports of Auckland worth nearly $1 billion.

These shareholdings could be sold in full or in part to New Zealand investors and the proceeds placed in dedicated funds used to foster business growth.

Such a bold move may produce far more benefits for regional economies than the continued ownership of infrastructure assets by local authorities.

Another alternative is for the publicly owned assets, particularly the port companies, to focus on high-dividend payouts and regular capital repayments.

These receipts could also be lodged in dedicated funds and be used to encourage private-sector business formation and expansion.

For this to happen, the port companies would have to desist from full frontal competition and find ways to use their assets more effectively through cooperation and strategic alliances.

There is little doubt that port reforms and sharemarket listings have had a positive influence on the three major ports at the top end of the country. Northland Port, Port of Tauranga and Ports of Auckland are efficient and well-run companies that have delivered better than average returns to investors.

But the industry is at a crossroads. The introduction of new superships, which will raise vessel capacity from 2900 to 4100 containers, may see each port company spending money to cope with these giants with no guarantee of an adequate return on their investment.

Northland Port was listed in October 1992 after the sale of 10 million shares by the Northland Regional Council at $1.25 a share. The council's present shareholding is 72.3 per cent, with a market value of $60 million.

In recent years, the engineering division has hurt northland's performance but this has been wound up.

The group now has a very strong balance sheet with no long-term debt and cash of $23.7 million at March 31. Since then, it has paid a 15 cents a share special dividend that has reduced the cash resources by $6.2 million.

Northland believes that it can pay out further special dividends of nearly 60 cents a share between now and 2008.

Port of Tauranga, under the dynamic leadership of Jon Mayson, has been the most successful port company from a sharemarket perspective.

In April 1992, the company issued 20 million new shares at $1.05 each and the Waikato Regional Council sold its 12.6 million shares at the same price. The Bay of Plenty Regional Council is the controlling shareholder, with a 55.1 per cent stake now worth $300 million.

Port of Tauranga traditionally focused on commodity exports, particularly forestry products, but in recent years it has taken exports away from Auckland and has dramatically increased its import trade.

This has been achieved through the establishment of Metroport, a dry port in South Auckland that allows import cargo to be unloaded at the Tauranga Container Terminal and moved by rail to Auckland.

This facility has allowed Port of Tauranga to increase its high-yielding container trade from 77,100 units in 1997 to 236,000 last year.

But the company has not stopped there. It has formed a 50:50 joint venture with Northland Port to build a deepwater facility at Marsden Pt. The port, which will cost $65 million and be completed next year, is to be managed by the joint-venture company and Carter Holt Harvey on a 67:33 basis.

Carter Holt, as a big forest owner in Northland, has agreed to provide the new port with annual revenue based on 1 million tonnes of cargo over the first five years. The facility will mostly handle forestry products but it has the ability to berth container ships after additional expenditure.

Marsden Pt also has the ability to receive the new 4100-container vessels after minimal dredging.

Ports of Auckland was listed in October 1993 after the sale of 39.8 million shares by the Waikato Regional Council at $1.60 a share. In 1995 it had a one-for-three capital repayment at $1 a share and Infrastructure Auckland now owns 80 per cent with a market value in excess of $600 million.

On the one hand, Ports of Auckland is a successful well-run company. But on the other, it is a problem child.

It sits on a prime site on the water's edge and its presence has retarded the development of the city along the eastern end of Quay St. If the city was built from scratch the port would be located somewhere else.

The port has also contributed to Auckland's traffic problems.

A study commissioned by the company in 1999 showed that it accounted for 4000 of the 220,000 daily truck movements across the city.

This is not a huge percentage. But trucks coming to and from the port tend to be larger and slower than average. The growth in tonnage through the port continues to add to the city's traffic problems.

The irony is that Infrastructure Auckland, the port company's major shareholder, is a principal financier of the region's road system. Thus, Infrastructure Auckland benefits from increased tonnage through the port but it may then have to pay more on the roads because of higher truck movements.

If Infrastructure Auckland and the controlling shareholders of Northland Port and Port of Tauranga want to maximise the return on their investment they must either sell their holdings or receive a high level of dividends and capital repayments.

The biggest threat to the latter is that the three companies will spend large sums of money developing facilities for the new 4100-container ships and not get an adequate return on their investment.

Auckland is planning to spend nearly $150 million on the expansion of its Fergusson Wharf from 330,000 to 500,000 container capacity and dredge the Rangitoto Channel for larger ships.

Why doesn't Ports of Auckland lease berths from Port of Tauranga or convince the Commerce Commission that it should be allowed to acquire Northland Port?

Although these strategies would allow better use of assets, reduce pressure on Auckland's traffic and facilitate large capital repayments, the preferred outcome would be for the port companies' controlling shareholders to sell their shareholdings to New Zealand institutions and individuals. Private sector investors would then carry the risk of any new investment.

Although it would take a change in legislation as far as Infrastructure Auckland is concerned, the proceeds from the sales could go into dedicated funds to be used to boost business formation and growth. These funds would open up several options, including the establishment of dedicated business parks, a programme to attract overseas direct investment and the ability to give tax breaks and incentives to productive enterprises.

The key message from this week's meeting of Competitive Auckland is that we need to take bold and innovative steps to develop and nurture sunrise industries. The same calls are bound to be made at the Knowledge Wave conference.

As there is little money available from the central Government, the regions will have to find ways to fund their developments - the sale of shares in the port companies and other commercial enterprises is an obvious source.

Christine Fletcher and Sir Barry Curtis, who both spoke enthusiastically to the Competitive Auckland meeting, have the opportunity to take major leadership roles.

They can start the ball rolling by selling the Auckland City and Manukau City shareholdings in Auckland International Airport. This would create a $500 million fund that would go a long way to kick-starting the Auckland economy.

* bgaynor@xtra.co.nz