17 Aug 2009
Operating income last year was up by 13% to $356 million, and in March was projected to increase this year by between 5% and 12%. It now seems likely that the outcome will be closer to the lower end of that forecast range. TrustPower, Wellington Airport and New Zealand Bus are performing to forecast, while Infratil Energy Australia is at the lower end of its forecasts and the European Airports look likely to slightly under-deliver.
Given weak economic conditions these outcomes are satisfactory.
Paradoxically, given the finance sector’s well publicised travails, funding has not been an extraordinary constraint on Infratil’s investment programme. Nor have the financial difficulties of others thrown up extraordinary opportunities. Infratil is however benefiting from finance markets returning to “business as usual” care of the interest of prospective bidders for Energy Developments.
Improving capital allocation is a key focus for 2009/10 and is progressing. Capital spending has been tightened and capital is being extracted from low growth or low yield situations. To date that has meant the sale of Fullers and some bus depots and progress at the European Airports and Energy Developments.
Capital spending is also being influenced by regulatory developments. The National Government’s programmes of micro economic and regulatory reforms are moving the economy in the right direction, however at both NZ Bus and Wellington Airport legacy regulatory issues are consuming a lot of resource, are moving very slowly, and are impeding investment.
It is almost universally recognised that good infrastructure is required if an economy is to have long term sustainable growth and it is becoming recognised that public agencies are often not efficient or effective providers of that infrastructure. The central-plan model is process rather than outcome orientated and all too often the outcomes are not reflective of consumer needs. We see this illustrated in public transport. We are attempting to make the person on the bus our customer and are developing services accordingly.
Wellington’s Airport Flyer bus service and the Snapper ticketing system are examples of focusing on what people want and attempting to deliver accordingly with the aim of making a profit. In the meantime public spending on the sector often seems to result in large cost and small benefit and to almost never link the cost with the benefit.
Infratil’s healthy position and prospects reflect a conservative approach to funding and capital management and the propitious underlying trends driving its sectors. Energy is becoming less carbon intensive and expensive. The Australian energy sector is restructuring and deregulating. Air travel growth may be on hold right now but is being driven by market and demographic trends. Bus public transport is the quickest and cheapest way to enhance urban mobility in cities.
The economies of New Zealand and Australia are benefiting from government fiscal and monetary intervention. This type of support can only last so long and carries unwind risk. Both Governments need to make sure that the micro and regulatory reforms are progressed so that as their other interventions run their course the private productive economy can take up the slack.
While there are many reports that the recession is over, Infratil is taking a conservative approach by continuing to focus on capital retention and increasing returns to shareholders from the existing businesses.
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