Infratil invests in infrastructure sectors where change is likely to create growth and where Infratil has management expertise.
The New Zealand bus sector fits both criteria.
Also, Infratil has developed expertise and experience in working with local government. All of Infratil’s investments have been undertaken in partnership with local community representatives, whether councils or community trusts. Public transport is inherently a partnership of private operators and regional and local authorities.
There is a global trend towards urban mobility through public rather than private transport. This is being reflected in developments in transport in New Zealand. For it to be really successful will require a change in the business model. A move away from single minded focus on cost minimization to much greater interest in what users want.
The new model will involve creating a service which users want to use and which offers excellent value for money rather than just the lowest cost. As Infratil has shown at Wellington Airport it is possible to be very efficient (Wellington Airport is rated as the most efficient in Australasia by Standard & Poors’) and to offer excellent services which provides a win/win for users, the regional and for shareholders.
Operators register services with the relevant regional transport authority. The authority monitors the quality and safety of services and can reject registrations if they would somehow counter the overall effectiveness of the network. For instance if a bus operator was to compete with a heavily subsidised train service during peak times the regional authority could bloc this happening on the grounds that the bus service was “cherry picking the good bits” making the train service even less commercial.
The regional authority has an overall network plan covering all the bus, rail and ferry services it wants to have running. To the extent services are not provided on a completely commercial basis by operators, the regional authority will look to fill in the gaps.
“Filling in the gaps” means specifying the required services and calling for tenders from operators. The operator who wins the tender will be contracted, usually for 3 years, to provide the service. At the end of that period the service will be retendered.
The subsidies a regional authority provides on these contracted services are funded 50/50 by rate and tax payers. For each $1 a regional authority applies to bus and ferry subsidies it will receive $1 from government care of Land Transport New Zealand.
Bus public transport faces three hurdles to being able to operate without subsidies:
1. Regional authorities’ priority is peak time services. It is during 7am to 9am and 3pm to 7pm that the road network becomes congested. During those hours it is crucial that people use public transport as without buses, trains, ferries there would literally not be enough road to fit under all the cars. The problem with this for a bus operator is that the bus and driver are only required for 7 to 8 hours a day. For 16 to 17 hours the expensive equipment and staff are idle or, at least, less fully employed.
2. Regional authorities have social as well as transport objectives. They want people in low density and remote locations to have access to public transport.
3. If some services get subsidies and draw patronage from unsubsidised services those previously purely commercial services come to need external funding support if they are going to be able to continue.
The problem with subsidies is that they tend to change the shape of the market and subsidised services crowd out those without a subsidy. It is hoped that as public transport gains popularity the need for subsidies declines. A more attractive model, which is used in the UK, amongst other places, involves bus public transport not having to pay fuel tax (if NZ Bus did not have to pay road user tax it would save $7 million per annum), pensioners use of public transport being paid for by government and there are schemes for commuters who use public transport to get tax breaks. Providing general financial assistance to the industry means that the need for specific route subsidies is markedly reduced.
In the UK if an operator wants to gain the benefit of lower fuel costs, pensioners who travel at no cost and commuters traveling at lower cost, they have to compete and provide the best value for money service, ie. provide a value for money good service.
In general the model is effective as evidenced by studies which show that New Zealand bus public transport has relatively low per-ride fares and relatively low per-ride subsidies. It is low cost.
Operators are encouraged to be efficient and to focus on getting people on their buses.
Regional authorities focus on the needs of their electorates and the overall network.
Government’s purse is protected as their funding is capped by being only at the same level as parsimonious, cash strapped, regional authorities. However, like any model that has been in place for a while, and which is facing changing priorities, change is desirable. In particular the current model absolutely prioritises low cost provision, which will cap growth.
The airport is on a small site (110 hectares) close to Wellington City.
Air services are mainly domestic (85%) with international links mainly to Australia. There are a small number of services to Samoa and Fiji.
Growth in services and hence use is dependent on airline activity, in particular on the activities of airlines willing to compete with the dominant local carrier.
Aeronautical charges are reset every 5 years via a consultation process between the Airport and its major customers.
The Airport has relatively little land not committed to aeronautical activities, but the development of this property provides a meaningful contribution to the Airport's income.
Wellington's main risk is from reduced airline services and competition.
In recent years AirNZ (the Airport's main carrier) has twice endeavoured to combine its operations with Qantas (the second largest carrier). These were stopped by the NZ Commerce Commission (confirmed by the High Court) and the Australian Competition and Consumer Commission.
Four material airline users of Wellington have also withdrawn over the last decade.
A second material commercial risk is in respect of ill structured regulation. While Government expressly rejected airport regulation in 2002, it has now initiated the imposition of new economic regulations from 2012. Wellington Airport has managed to ensure it does not warrant economic regulation, however adverse outcomes in this regard can not be ruled out, especially given the political interest.
Infratil usually has four appointees to Wellington Airport's Board and the City Council two.
At present Infratil's appointees are: Chairman, Tim Brown (Morrison & Co), Alison Gerry (infratil director appointed 2 February 2017), Jason Boyes (Morrison & Co) and Phil Walker (Morrison & Co).
The Council appointees are Andy Foster (appointed October 2016) and Keith Sutton (appointed 1 January 2010).
Diversification is not one of Infratil's goals. Infratil aims to deliver on its absolute return target of 20% per annum after tax on a long term basis.
Infratil's return goals can only be achieved in companies which can invest in their own activities. While cash generation is desirable, it as a means to an end with the goal being value growth through earning growth over the long-term.
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