Council ports still making ‘parochial, emotional’ investment decisions

Local government owners of New Zealand ports are still inclined to make "emotional and parochial" investment decisions even though the Ports Act requires them to manage port facilities so they return more than their cost of capital, says Port of Tauranga chair David Pilkington.

He was talking at a ceremony to mark the port's milestone of handling 1 million containers in a year, which was reached this month. Port of Tauranga is one of only three ports that have shares held by the public, with both Auckland Council and Christchurch City Council having delisted their port businesses.

Pilkington said the arrival of larger vessels meant it was inevitable there would be fewer hub ports in New Zealand, supported by "second-tier feeder ports" because the amount of capital and freight volumes required meant it wasn't feasible "to replicate in 13 regional container ports across the country."

"Unfortunately there are ample signs that this is not yet fully grasped," Pilkington said. "Ports in general sit in local government ownership and are viewed emotionally as essential to regional development. We continue to see plans to pour ratepayers' capital into ports that has little chance of returning the cost of that capital."

"While the Ports Act specifically references the need to manage port facilities to achieve a return over and above the cost of capital, emotional and parochial behaviour threatens to prevent good strategic long-term planning around regional infrastructure to support efficient feeder services," he said.

Port of Tauranga is 54 percent-owned by Bay of Plenty Regional Council through a holding company, Quayside Investments. Pilkington said that has allowed the port to pursue its economic growth while keeping the politicians "half a step away".

But the council had also recognised the regional benefits of the port, an asset that has grown from $60 million to $80 million when the old harbour board system was replaced by the Ports Companies Act in 1988 to today, when its shareholding is worth almost $1.5 billion.

New Zealand's port sector generated earnings before interest, tax, depreciation and amortisation of about $500 million in 2016, according to advisory firm Rockpoint. At the same time, operating cash flow exceeded $300 million and capex almost reached $300 million, leaving free cash flow at about $25 million. Port of Tauranga chief executive Mark Cairns says there is a real prospect that free cash flow will turn negative again, as it did in 2006.

Local authority-owned ports are still intent of their own 'think-big' plans, according to Pilkington. Wellington's Centreport has major plans to dredge Wellington harbour once it has recovered from the Kaikoura earthquake damage. Port of Napier has plans for a $100 million upgrade. Christchurch's Lyttelton port has a $56 million project to upgrade its facilities for cruise ships, which mayor Lianne Dalziel had said wouldn't return its cost of capital but would provide economic benefits for the region.

"We're not averse to councils improving their companies," Pilkington said. "But duplicating a whole lot of big ship-capable ports is clearly going to be a financial disaster."

(BusinessDesk)