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Airfield Report Justifies Inquiry Into Marine Port

7 August 2002

Airfield Report Justifies Inquiry Into Marine Ports

The Captive Ports Customers Group (CPC Group) is calling for a Commerce Commission inquiry into port companies, following the results of the Commission’s inquiry into airfield activities released yesterday.

Paul Nicholas, CPC Group spokesperson, said the Commission’s findings were an eerie parallel of the same situation experienced by the marine transport sector with its own Ports.

“Marine ports and airports have very similar network dynamics, and raise the same monopoly issues for their customers.

“The Commerce Commission report into airfields found that airports ought to earn between 8-9% on their capital investment. An economic study into ports earlier this year found that four of the five ports studied had a rate of return double that benchmark.

“We want to see the Government convene an industry group made up of all parties, to develop a cost effective system to deal with the captive part of the port market,” Mr Nicholas said.

“We are not talking about whole industry regulation, but a way of stopping the monopoly abuse in a well-defined part of the industry, such as the Commission has recommended for one of this country’s airports,” Mr Nicholas said.

A research study in March this year by Simon Terry Associates (STA), commissioned by CPC Group, found that at least five New Zealand ports over-charged customers to the tune of $300m in the past decade. Four of the ports studied had secured a rate of return double or more the 8%-9% benchmark recommended for airports by the Final Report of the Commerce Commission Part IV Inquiry into Airfield Activities.

Paul Nicholas said the STA study results give a full picture of the extent of the monopoly abuse which had been identified, but not examined closely, in the Government’s own Port study report prepared by Charles River and Associates. The CRA report was a qualitative analysis that confirmed that ports do have monopoly power.

Mr Nicholas said the next step was for the Commerce Commission to undertake a quantitative analysis of ports profits, and in the meantime to convene an industry working group.

“An industry group would not look at whole industry regulation, but at stopping only the monopoly abuse in a well-defined part of the industry. The CPC Group will be looking for discussion around introducing a system for information disclosure in negotiations and a dispute resolution mechanism,” Mr Nicholas said.


STA Report Summary

The STA study revealed the following about ports it studied:

1. The Internal Rates of Return for four of the six ports were between 8.6% and 11.7% higher than the Commerce Commission’s Weighted Average Cost of Capital target (WACC).
2. These rates represented $30 million per annum extra revenue over 1989-2001
3. All excess over-recoveries totalled $304 million for five ports over the period
4. The over-recoveries were far more than needed to provide a full return on capital
5. The monopoly profits strongly suggest significant abuse of market power
6. By combining the future-oriented value with past over-recoveries the market power exercised is estimated at $600 million
7. The benchmark Weighted Average Cost of Capital (WACC) recently used by the Commerce Commission to assess airfield profitability was around 8%. Five of the ports were between 2 and 12 percentage points higher than the WACC. Only Wellington (CentrePort) was lower.
8. The equivalent return on funds if ports had invested their money in NZSE Top 40 sharemarket stocks over the period was 8.5%
9. Warranted profit given a WACC target versus actual, averaged across the six ports studied

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