Lessons for Auckland’s port
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 was 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 capital-intensive projects, but also with an appalling safety record. The port company seems to regularly make the headlines for all the wrong reasons, and of course the attention always tends to intensify around the time of local body elections.
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 (20-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. 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. 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. 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.
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. 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.
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 has seen 21 actions completed but the remaining 24 are still “in progress”. The focus on “volumes” for what is a landconstrained operation has also been part of the problem.
The long-term question of where the port should be based also continues to bubble away. Options for relocation include moving to Northport, Manukau or elsewhere. The port occupies 77ha of prime waterfront land, and many Aucklanders would like to see activities moved and a revitalisation of the waterfront. 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 question would then be whether any potential buyer could make the port work commercially if it had to pay rent.