The way to get the Ports of Auckland back on track is for the Auckland City Council to step back, change its expectations and take the long view. As it stands, two key assumptions about the port are dragging it down

All the detail and distraction in the Ports of Auckland dispute make it look like a complicated industrial mess. And on one level, it is. Depending on your point of view, it's all about who controls the port, or work-life balance or bad faith bargaining. But the two central points for me come back to the Auckland Council's ownership of the port.

Ports of Auckland Ltd (POAL) is 100% owned by the council via Auckland Council Investments and those owners have made two assumptions that lay at the heart of this dispute; assumptions that are questionable at best and foolish at worst.

First, the Council last year told POAL that it wanted it to double its return on equity within five years, from 6.3% currently to 12%.

Was that a reasonable expectation? We put this issue front and centre on Q+A this Sunday, and it's prompted a battle of the spreadsheets.

The union says it's a ridiculous expectation. Over the past five years - according to the CTU's numbers and based on what it says is the Council's unusual ROE measure - POAL has never done better than 7.4%. What's more, the Australasian average ROE since 2007 is 6.3%.

In fact, only two ports in Australasia have hit 12% in the past five years - Lyttleton in 2007, due to a large tax credit, and Freemantle in 2008. Since 2007, Melbourne's average ROE is 3.1%, Otago's is 4.7%, Sydney's 6.7% and the much-lauded Tauranga's is 6.8%.

So where on earth does the 12% figure come from? Is it just pulled out of the air?

The Council has finally answered that this morning, through a press release. I'm going to take a decent chunk out of it, because it's quite a statement:

"Each year between 1999 and 2003 POAL earned an ROE of between 13.2 per cent and 17.8 per cent, excluding extraordinary items," says Auckland Council Investments Limited Chief Executive Gary Swift. "Even in 2007, PoAL earned 11 per cent and this was after excluding the gain on the sale of the Wynyard Quarter.

 “On that basis, claims that the ports cannot earn a return on equity of 12 per cent are absolute nonsense. Auckland Council accepted the target based on advice from both ACIL and PoAL. It is challenging but achievable.”

Mr Swift said the target is not based on benchmarking against other ports as each company is quite different and such comparisons are not valid. He also noted that the target is a return on equity and is not a dividend return, return on assets or a return on investment.

The PoAL board identified four key strategies to boost the ROE; increasing revenue earned per container, labour flexibility, the review of all operating processes, and freeze on non-essential capital expenditure. After implementing these strategies, the ROE is targeted to reach 12 per cent by 30 June 2016.

First NZ Capital figures show a number of companies expecting to achieve ROE higher than 12 per cent, including Briscoe Group 19.5 per cent, Fisher and Paykel Healthcare 19.3 per cent, Freightways 20.3 per cent, Mainfreight 18.5 per cent, Restaurant Brands 29.4 per cent, Sky City 18.1 per cent and Telecom 18 per cent. 

 “The target was set to drive performance, and is not a forecast or estimate...

“It is also incorrect to say that the 12 per cent target has caused the current labour dispute. The target was set last year in the months before the recent labour dispute at the port."

Which raises a number of important points.

  • 1999-2003 are all boom years well before the credit crunch and the worst global recession since the Great Depression. Even now, Europe is a mess, the US is well below par and even China and Australia are cutting growth expectations. It seems to me the union's more recent comparisons are much more useful when determining expectations and if Auckland Investments Ltd can't see that glaringly obvious point, you've got to wonder about their business nous. Assuming they're not idiots, this can only be spin.
  • Mr Swift says it is "not valid" to compare POAL's performance with other ports. Yet two paragraphs later he attempts to justify the 12% target by comparing it against seven other companies, all of them blue chip firms and none of them in even remotely the same business. Which seems hypocritical and, well, daft.
  • Mr Swift says the POAL identified "labour flexibility" as one of four key strategies to raise the port's ROE; the very "labour flexibility" at the heart of the current dispute. Then later in the statement he claims that the 12% has not caused the dispute, because it was set months beforehand. Except that, as the port keeps saying, the dispute began last August. And, at the risk of stating the obvious, if the port was using "labour flexibility" to meet its Council-imposed targets, er, doesn't the evidence in this very release suggest the 12% does have some bearing on the dispute?
  • Mr Swift says "recent" labour dispute - past tense. Which is optimistic thinking, surely. Has he not noticed the picket? Or the fact the mayor, his political boss, is still offering mediation?
  • POAL Chair Richard Pearson said on Q+A that the 12% figure was "aspirational". Swift says it is not a forecast or estimate. So it seems either the council's not made its expectations clear or POAL is not listening.
  • Oh dear.

The best that can be said is that the 1999-2003 figures give a fuller picture. They also make the point that 12% returns can be made with a unionised workforce, something I'm sure the unions will make (even though they too could then be accused of ignoring the fact that the world has changed post-2007.).

If you consider all those numbers - plus the Ministry of Transport's Productivity Report, which spelled out that Auckland is doing ok, if not brilliantly, in terms of its unloading and loading rates - the sense you get is that there's no great problem, no crisis, here. At least, not until the Council demanded more.

Was the POAL planning to take on the union anyway? Don't know. Did the union over-reach at the beginning when it rejected a roll-over of the old contract plus 2.5% in an attempt to win back four driving jobs that had been contracted out? Perhaps. Certainly, if I was a wharfie I'd rather have had that deal than no job.

But the point is that as of last year we Aucklanders owned a productive, profitable port. It's only real concern was a loss of market-share to Tauranga and Northport.

Which gets me to the second big point: So what? Maybe losing market share was inevitable, even a good thing. The other ports much more land for expansion, both are closer to our rural production base and both have the potential for more rail.

From what I've been told, I don't think there's any doubt that demand justifies three ports in the top half of the North Island. It seems natural that Auckland will remain the key import port for New Zealand, given importers will want their goods dropped off on the doorstep of over a million people.

But why not let the other ports grow and grow? We don't want POAL to take, or create, any more waterfront land. So why not let Auckland become a niche port?

The answer, of course, is that the port is a cash cow for a Council under immense pressure to keep rates and debt down. So it's looking to make its assets work harder.

That's understandable, but as it turns out the pain is greater than the gain, both financially and politically. The money is tempting, but a better decision for Auckland would be for the Council to back off its demands for more from the port, give it a new, down-sized mandate, and find other ways to compensate for less revenue.

That's not just a response to the industrial dispute, it's the right thing to do for Auckland and the world class city it's trying to become. It's a big picture strategy decision that only councillors can make. So it's over to them now to learn from this and show the leadership required.

Comments (7)

by Andrew R on March 15, 2012
Andrew R

Can someone tell me who appointed the Council Investments Company and the board members of Ports of Auckland.  I haven't seen that anywhere.  

And how direct is the Council's ability to set returns for companies such as Ports of Auckland -- can councillors just pass a resolution directly instructing the board to do this or that? or must they have some sort of contract with Council Investments Comapny about big picture goals and leave it to Council Investments to  translate that into specifc performance targets for the companies under their wing?

 Thanks 

by Tim Watkin on March 15, 2012
Tim Watkin

Hi Andrew,

Someone can correct me if I'm wrong, but the ACIL appoints the board of POAL. The board of ACIL were appointed by the government; or at least the relevant minister, Rodney Hide.

You can read the ACIL explaining the governance modle here.

As that release says, the Council sets a Statement of Intent for the ACIL, which in turn sets a Statement of Intent for POAL. It's an arms length arrangement, but ultimately the buck stops with the Council, which owns the place.

So what conclusions do you draw from that?

by John72 on March 16, 2012
John72

It is encouraging to read a comment that quotes facts and details. It enhances respect for the reader and the author. When will all these emotional critics learn that they so often destroy their case by stooping to incomplete or inaccurate statements and personal abuse. Regarding the 12% return, it sounds like an accountant running the place, not a manager who cares for his staff. Word-of-mouth report is that the manager (owner?) of Main Freight gave his staff a $1000 bonus each on his 70 birthday. I understand that he has a happy, loyal 5000 strong staff, working shifts. This is open to correction but it sounds like a manager/staff relationship with mutual respect. Is there a message there? 

by Nigel Haworth on March 16, 2012
Nigel Haworth

I think that this is very helpful in the serach for sensible explanations of what is happening in this dispute. The discussion of the recent material on whence came the "12%" is particularly useful and begs the obvious question about when and why the account offered was prepared.

by John72 on March 16, 2012
John72

 Nigel, What I was saying is that the account offered was prepared because the people "pulling the strings" are accountants concerned about money, not managers concerned about people.  Is that what your comment was about?  Regards, J72

by Nigel Haworth on March 17, 2012
Nigel Haworth

I was wondering about the sequencing issue. When both Mr Brown and Mr Pearson were asked before the publication of the material discussed in the above post about the origin and justification of the "12%" figure, there was, as I understood it, little concrete justification provided. We then have an understandable focus arising in media commentary about the 12%, in the context of both comparative data and a sequence of reports that, in general, suggest the port is doing OK (also a view taken in the POAL annual reports). We then have a detailed explanation offered, as discussed  above.

by John72 on March 22, 2012
John72

Mathew 7:6

Give not that which is holy to the dogs, neither cast ye your pearls before swine, least they trample them under their feet and turn again and rend you.

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