Ports of Auckland Ltd – THAT magic 12% figure!
Much has been made of Port of Auckland Ltd being required to make a 12% return to it’s shareholder and owner, the Auckland City Council.
As recently as last Sunday (11 March), Len Brown confirmed the figure (albeit in a roundabout way), in an interview with Paul Holmes,
LEN And by that, I mean that we are the 1.5 million Aucklanders, we own the shares, and as a consequence of that, I’m looking after their interests. I want that port to be successful. I certainly want a greater return on our investment-
PAUL Let’s talk about that shortly, but I wondered about your position because you have said and I quote you, ‘We deserve a port that’s competitive, a decent return for ratepayers and a settlement that is sustainable.’ That sounds like the port’s position, Mr Mayor.
LEN No, it sounds like our position – our position, the council’s position and the position of any Aucklanders. Look, my commitment during the campaign was not selling the ports; we will hold the port shares. Secondly, we wanted the ports to be more commercial and present a much better return for ratepayers.
PAUL And that return, of course, the figure that you’ve come up with is you want an increase from 6.3% I think it is at the moment.
PAUL After tax.
LEN 12% over five years in terms of return on investment.
PAUL Where did you get the 12% from? Pluck it out of the air?
PAUL There’s not a port in Australasia, Mr Brown, making 12%.
LEN So our view was, though, that the port was not performing as well as it was. Now, you’ve heard Mr Pearson say it’s an aspirational target. What we’re saying to the port is this is our view. We believe as a consequence of the assessments that we’ve done within the council-
PAUL Well, how firm are you on this? Have you laid down the law on the 12%?
LEN We have given it to them in our statement of corporate intent. Right at the start of the year, I went down to the port, met all the workers and the employees and the company directors down there and said, ‘Right, this is what we’re expecting from the port.’ And we had an hour’s Q & A-
PAUL This is what we’re expecting. Is this-? I mean, were you laying the law about the return you want in five years – 12%?
LEN We were laying down the law in terms of what we expected from the port in terms of its return and in terms of its performance generally.
PAUL Where did you get the 12%?
LEN So, the 12% was an estimate, a view that certainly I’ve been working on for right through the last sort of 18 months, two years. It was view that was discussed our own table with the officers, with our own council-
PAUL So it’s a guess? It’s a good guess?
LEN No, it’s an estimate.
LEN This is what we think we should be aiming to achieve. And so we went back to the company and said, ‘Okay, this where we think you should be. What is your advice back to us?’ Their advice was, ‘Give us five years and we believe that we can receive that.’
PAUL Well, excuse me, look at this. Okay, 12%, that’s your estimate – guesstimate. Tauranga returns 6.8%, Lyttelton 8.6%, Sydney 6.7%, Melbourne 3.1%, Auckland 6% — 6.3% after tax.
LEN So not just about return either-
PAUL Where’s the 12% being made anywhere?
LEN It’s about competitiveness against other ports. So we are losing share against Tauranga. We are competing flat out against Brisbane, in particular, and Sydney. It was our desire that we wanted the port to be much much stronger in terms of its-
PAUL Do you endorse what Mr Pearson was saying about he cannot believe the waste of resource at the Ports of Auckland?
LEN Look, there’s a whole lots of things that we cannot believe about the performance of the Ports of Auckland, so it just was not about-
PAUL Can I just say to you again-?
LEN a stronger return on investment.
Yet, at a meeting of the CCO Strategy Review Subcommittee, held on 21 April last year, a motion was passed to the effect;
Chairperson Mayor Len Brown, JP
Deputy Chairperson Deputy Mayor Penny Hulse
Councillors Cr Ann Hartley, JP
Mr Tony Kake
Cr Richard Northey, ONZM
Cr Sir John Walker, KNZM, CBE
Cr Penny Webster
Councillors Dr C Casey
S Stewart [until 11.25pm, part item 11]
12 Shareholder Comments on the draft 2011-2014 Statements of Intent/Statement of
Corporate Intent of Substantive Council Controlled Organisations/Watercare Services
MOVED by Mayor Brown, seconded Cr Hulse:
Auckland Council Investments Limited
ii) Replace the proposed shareholder comment on page 135 “Add a series of
performance measures/targets to measure port productivity and profitability.
This should include lifting the rate of return investment (from 6%-12% over
three years)” with
“Immediately following completion of the long-term strategy for POAL add to
ACIL’s statement of intent, a series of performance measures and stretch
targets to measure port productivity and profitability. The targets should
require a significant improvement in the performance of POAL, including the
rate of return on investment.”
So it seems evident that Auckland City Council no longer demands an outrageously high rate of return from Ports of Auckland. The target now requires “a significant improvement in the performance of POAL, including the
rate of return on investment” – which could be anything; 7%, 8%, 9%, etc.
I believe that there is evidence (more in a moment on that) that what we’re seeing here is Auckland City Council/Ports of Auckland in a war of competition with other local ports – Tauranga to be specific. Since corporatisation of New Zealand ports, there has been a steady drive to increasing profits; returns to shareholders; and “efficiency”. This involves aggressively attracting new clients to use port facilities.
Considering that there is only a limited number of shipping coming to New Zealand at any given moment, ports can only increase business at the expense of other ports. In essence, they are “cannibalising” each other.
A New Zealand Institute of Economic Research (NZIER) report entitled “Port Performance and Ownership
An assessment of the evidence Report to the Local Government Forum 9 August 2010” makes the following observations,
“On the other hand, Maersk undoubtedly extracted significant discounts from Auckland to secure its business. Its standard business practice is to play off competing ports aggressively against one another in terms of price and the facilities they provide, such as fixed berth slots and equipment for loading and unloading. It cannot be criticised for its approach; it is operating in a very competitive market and needs to have as cost competitive a port service as it can find and negotiate. As Figure 8 shows, Port of Tauranga’s net profit after tax for continuing activities has been significantly better than Ports of Auckland’s since the Maersk decision in 2006.”
“…there is some evidence that Ports of Auckland, and possibly Lyttelton Port Company, have in recent times succumbed to local pressures to retain and grow the volume of trade through their port by agreeing to provide international shipping lines with levels of service at charges such that the services may not make a full economic return.”
This seems to be born out by data, such as presented by the (NZIER),
The graphs above show that despite having a higher a higher container volumes at Auckland than Tauranga (1995 to 2009), Port of Auckland’s net profit after tax still dropped.
As NZIER stated,
“It is extremely unlikely, therefore, that the commercial realities of the Maersk decision supported any change in the relative values of Tauranga and Auckland to the significant favour of Auckland. Indeed, the evidence suggests the impact was probably exactly opposite to this.”
With this in mind, the ongoing competition between NZ ports to attract business from shipping companies such as Maersk appears to be a self-defeating process; a race to the bottom.
In which case, POAL’s agenda for “greater productivity” (ie; more profits) is now impacting on port worker’s incomes. Driving down wages and casualising the workforce has the natural consequence of reducing the wages bill for the company.
This is what it’s all about; aggressive competition between ports.
And Maersk benefits.
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Cathy Casey, Auckland City Councillor