Christopher Niesche: Joining forces on the waterfront makes good sense

There is an inevitability about the proposed merger between Port of Tauranga and Ports of Auckland. It was always a case of joining forces or survival of the fittest.

Even if the plan is part of a larger game to create room on the Auckland waterfront for a new football stadium, it still makes good economic sense. New Zealand has an astounding 13 commercial ports - far too many for a country this size.

Ports require huge amounts of investment in equipment to remain competitive, and this investment is needlessly being duplicated around the country. It is a waste of millions and millions of dollars that could be put to better use elsewhere.

For instance, Port of Tauranga's cost of capital - the minimum return investors should be able to expect from a company's assets - is estimated at around 8 per cent. However, its actual return on assets is just 5.25 per cent, according to Bloomberg data. Figures aren't available for Ports of Auckland, but they're unlikely to be much better.

Also, having ports compete against each other for business doesn't make sense; all it does is let the giant global shipping companies drive down prices and take profits offshore that could remain here.

It does little to improve New Zealand's export competitiveness.

Indeed, the world's largest shipping line, Maersk, has pitted Ports of Auckland against Port of Tauranga in its review of which ports it will favour with the majority of its business.

It was due to announce the results of its review later this week or early next week, but the merger - should it proceed - would tip the balance of power back in favour of the ports.

The big unknown is the Commerce Commission and the Government.

One of the main principles of the Commerce Act is to ban mergers that "substantially lessen competition". There is no doubt this is what the merger would do: The combined entity would control around 38 per cent of all shipping to and from New Zealand and about 61 per cent of the container traffic.

But as always, there's an out clause. The commission could allow a merger that lessens competition "if the public benefits resulting from the acquisition are found to outweigh the detriments".

Also, the Government has power to override any commission objections if it decides the benefits - or the need to hang on to the Rugby World Cup - are strong enough.

Expect to hear a lot about the benefits of port consolidation over the next few months.