The Port Companies Act defines all port companies as "public entities". Photo / NZME
The Port Companies Act defines all port companies as "public entities". Photo / NZME
Stranded assets, underperforming capital and low returns or asset writedowns could be ahead for port companies in the absence of a robust supply chain strategy for freight logistics, the Auditor-General has warned.
In his first formal report about port companies, John Ryan said there was considerable risk to investments being considered by some of the country's 12 ports. The ports are not identified.
"As port companies look to the future, many are considering significant new investments ... To deliver their investment strategies, port companies must have robust and realistic business cases," the report said following an audit of port companies.
"There is also a risk that, without a comprehensive supply chain strategy for the freight logistics sector, port companies will anticipate growth that competing port companies might have also factored into their business cases. Stranded assets, underperforming capital, and low returns or further asset write-downs are a likely consequence of this.
"In our view, the lack of a comprehensive supply chain strategy for the wider freight logistic sector heightens the risk of excess investment by port companies."
The report encouraged port boards and their shareholders to robustly assess the merits of significant capital investments before approving them, to ensure the assumptions were realistic and the best use of shareholder capital.
It said New Zealand was a small country with a proportionately large number of ports. It was not feasible for every port to cater for larger ships. Several ports were planning to. Because of the proximity of ports, there was considerable competition between them.
The economy could generate only so many ship and freight movements with variable expectations of future rates of growth in freight.
"Given this uncertainty, port companies ... should be realistic about how much growth they assume. The example of Lyttelton Port Company illustrates the loss of shareholder value that can come from investing for growth that does not occur."
The report encouraged ports to consistently apply fair value in the valuation of property, plant, and equipment. This would help provide up-to-date relevant financial information and enable better comparison and transparency of financial performance.
Some port companies' investment strategies had not delivered as expected. This was most notable for Lyttelton Port where $290m of assets were written down over the past five years, in part because the expected revenue associated with the investment did not eventuate.
The report said ports as a whole reported increasing revenue and profits from 2015 to 2019, with companies providing increased dividends to shareholders.
But this trend changed in 2019-2020. While revenue increased by less than $2m compared to the previous year, net profit after tax fell by 37.5 per cent or $148.5m.
Dividends dropped by $87.5m or 30.4 per cent.
The change was not primarily caused by Covid-19. Instead, significant one-off events affected individual port companies and in turn the port sector.
Auckland and Christchurch's ports were significant spenders in the past five years. Photo / NZME
In the past five years ports had invested about $2 billion in their assets. One of the main reasons was because ships visiting New Zealand are getting larger.
Since 2014 the percentage of visiting ships that can carry between 4000 and 6000 containers increased from 34 per cent to 62 per cent.
Most of the capital expenditure was by a few companies.
Ports of Auckland and Lyttelton Port spent more than half of the capital expenditure incurred by port companies in the last five years.
Lyttelton had to rebuild its port after the 2010 and 2011 Canterbury earthquakes. This rebuild led to a wider expansion project. Ports of Auckland has been working on improving its productivity by automating certain operations.
However, it had also invested in complementary areas, such as inland ports and commercial property.
In 2018 the Auditor-General wrote to port leaders, saying it was difficult to form a view about whether capital expenditure was a good use of shareholder funds. This was because of the different valuation measures used by companies.
"Our view has not changed.
"We expect port companies making significant investment decisions to prepare a robust business case that outlines the risks and opportunities of the investment decision. We also expect senior management, the board, and, as applicable, the shareholders to approve the business case before the investment goes ahead.
"Given how the increased uncertainty from Covid-19 is affecting the wider freight logistics sector, business cases should actively consider and reflect that uncertainty.
"Although reporting progress against their business cases might be considered commercially sensitive, port companies should look at ways to describe their progress so their shareholders can understand how their investments are being managed.""
