Doing the maths on leasing out city’s port
Why not list Ports of Auckland on the NZX again, asks Greg Smith
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 have to keep subsidising 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 that the cash-strapped council is looking at options, including possibly 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 users, the move is also long overdue, given that outgoing mayor Phil Goff has now said the port has been underperforming for at least eight years.
The operating company/ property company model — “opco/ propco” — 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 a new operator doesn’t require a subsidy from ratepayers, or force the operator to hike charges to container terminal and other port users.
The landowner would presumably want a market rate, otherwise ratepayers are subsidising the operation.
Port sector observer 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,” said the observer. “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- to 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 first had to fix its productivity issues, including the costly container terminal automation project, started in 2016 and still not fully implemented.
The Weekend 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 timeframe. 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 import gateway, has put an extra burden on Tauranga, the main export port, during the pandemicfuelled consumer shipping boom. Congestion at Auckland has led to imports vessels being diverted to Northport, near Whanga¯rei.
With the Kiwi sharemarket set to say goodbye shortly to yet another blue-chip in the form of Z Energy, we’ve had cause to remember another departee of yesteryear — Ports of Auckland (POA).
The port company originally listed on the NZ Stock Exchange (NZX) in
1993, when the Waikato Regional Council sold its 20 per cent stake, and it remained on the NZX for 12 years before it was taken over by what is now the Auckland Council in a deal that valued the port at $848 million.
Over the past week it has emerged that the Auckland Council is running out of money to fund many services. The port is however “safe”, evidently, and is not going to be put on the block. However, this has raised questions once again — against the backdrop of a mayoral race in full swing — around the value destruction that appears to have occurred since councillor Mike Lee pushed for 100 per cent ownership by the Auckland Council and the port delisted from the NZX in 2005.
Modelling has shown that port ownership models do matter, particularly as they relate to the return on capital invested. Listed port companies have in recent years generated higher returns on capital employed than those with a mixed ownership model, while those under
100 per cent council ownership have performed the worst. The latter result has played out in spades with POA.
Full public ownership at Auckland appears to have not only coincided with a period of sustained financial underperformance, and questionable execution of capitalintensive projects, but also with an appalling safety record. Sadly, the latter issue has been added to, with another tragic death at POA over the past week, marking the fourth fatality since 2017.
The port company seems to regularly make the headlines for all the wrong reasons, and of course the attention always tends to intensify (as it has recently) around the time of local body elections. We believe this is explained in part by the somewhat sporadic governance oversight that appears to have been in place since the port left the stock exchange in
2005.
It has been well documented that a period of underperformance during full council ownership of POA has contrasted with a prosperous period for Port of Tauranga. Somewhat ironically, in 2007, POA had the opportunity to merge with its southern rival but chose to go in another direction, and in more ways than one.
Tauranga has since overtaken Auckland to be the largest port in the country by container volume, revenue, earnings and market value. Last financial year, Tauranga chalked up revenue of $338m, net profit after tax of $102m and container volume of
1.2 million TEUs (twenty-foot equivalent units). In contrast, the once-mightier Auckland delivered revenue of $226m, net profit after tax of $45.6m and container volume of
818,238 TEUs. This is while Tauranga’s port also has less debt. The relative comparisons are similar in the pre-Covid years.
The relative paybacks of late have been equally stark. Ports of Auckland has paid out $130m in dividends over the past five years, against the $555m distributed by Tauranga.
Looking at things from a wider and longer-term valuation perspective, POA had a valuation of $848m when it delisted in July 2005, versus around $630m for Tauranga at the time. The latter currently has a market value of $4.4 billion. Opinions vary over what POA is now worth, but its equity value today may not be much more than the port was originally privatised for in
2005.
Auckland’s port has been beaten to the punch on just about every measure by Tauranga, which at one point was considered to be a small regional port, with only modest expansion prospects. It is sadly ironic that in a City of Sails, Ports of Auckland has not had the wind in its sails for a long, long time.
So where did it all go wrong for the Ports of Auckland?
Whereas the mixed ownership model has been a huge success for Tauranga, the period of council ownership has been hugely problematic for Auckland. The port’s management team appear to have been largely unaccountable to anyone (including the council), it seems. Arguably, management have focused on building assets, rather than any imperative to focus on the return on capital employed, at the ratepayers’ expense. Rising property values have only highlighted the underlying situation.
Governance at the port would appear far from satisfactory. A
number of major initiatives have not gone according to plan, including the multi-year container terminal automation project. This has come at a real cost and meant the port hasn’t been able to operate optimally and has effectively exacerbated supply chain blockages which have arisen due to Covid-19. The new carpark building is just one project that doesn’t appear to have made anything like a commercial return.
Publicly listed companies tend to be held to greater account than those in most other spheres, and since delisting, the port appears to have been run with an increasing lack of accountability. Problems also appear to be repeatedly pushed down the line.
The chair and chief executive’s review at the interim report in February reflected on how tough business was due to “the challenges
of Covid-19” and said “traffic light settings were putting pressure on the automation timetable”. Planning on the initiative began back in 2016.
In contrast, Port of Tauranga’s interim statement at the half-year was headed “POT improves performance as Covid disruption continues”, with the chair reflecting on the port’s resilience over the period. The differing tones in language are telling.
Ports are dangerous places, and governance issues at POA appear to have contributed to a poor record on safety. An independent safety report last year (which ultimately hastened the departure of CEO Tony Gibson, who has been replaced by Roger Gray) has seen 21 actions completed but the remaining 24 are still “in progress”. Again, the lockdowns have been cited as having contributed to the delay, despite the port quite clearly being an essential business.
The focus on “volumes” for what is a land-constrained operation has also been part of the problem. This has also arguably compounded a strategic mis-step in Auckland seeking to compete with Tauranga on price (as opposed to any notion of profit maximisation). This was never a fair fight, even allowing for some reclamation, as Tauranga has always had much greater capacity to expand its geographical footprint. Running a higher-value, lower-volume model would have appeared to have been a far better call for the port to make.
While commanding much political attention at the moment, POA appears to have been mismanaged for multiple local government election cycles. The long-term question of where the port should be based also continues to bubble away and has been the subject of conflicting, and often parochial, reports. Options for relocation include moving to Northport, Manukau or elsewhere. The Auckland Council has already said it has no equity to invest in infrastructure for a relocated port.
The port occupies 77 ha of prime waterfront land, and many Aucklanders would like to see lowervalue activities moved and a revitalisation of the waterfront for future generations. The waterfront could be regenerated in the manner that the Viaduct was developed and the removal of heavy traffic from central Auckland would also be welcomed. A financial windfall could also be forthcoming. Based on Viaduct-style square metre rates, the land alone has a value of billions more than an operating port company.
The latter also highlights the extent to which the port has failed to generate an adequate capital return. Even going on the approximately $50m in annual dividends that were paid out in the pre-Covid years, the return on current market values likely equates to a paltry yield of around 1 per cent on the true value of assets, including land.
If the port stays, something clearly needs to be done. A separation, whereby the port is sold but the council keeps the land and charges an economic rent, is one potential solution. The rental income would be at a market rate and would clearly deliver a better rate of return than the current structure. The question would then be whether any potential buyer could make the port work commercially if it had to pay rent.
Another option? How about going back to where it all started to go wrong, and partly relisting POA on the NZX? Publicly listed companies demand greater investor scrutiny and greater management accountability, and POA could well perform much better if thrust back into the focus of stock market investors.
Selling the story of underperforming business that can be turned around may be one angle. Relisting POA on the stock market would go against the current Government’s opposition to asset sales, but is certainly not the craziest of ideas, and one that could be well received by the NZX. It certainly hasn’t worked out that well under 100 per cent council ownership.
In a City of Sails, Ports of Auckland has not had the wind in its sails for a long, long time.