Napier Port IPO a win-win case study for local government

Tuesday, 27 August 2019

Approximately 20 per cent of the shares on offer in the Napier Port IPO went to groups prioritised through the IPO design: iwi, port staff, locals and non-resident ratepayers.

OPINION: The successful NZX listing of 45 per cent of Napier Port is a case study for local authorities struggling to balance the growing requirements for infrastructure investment with limiting demands on ratepayers and retaining control of strategic assets.

The minority listing of Napier Port on August 20 is significant not just because it's the first substantial new NZX listing in two years, but because it has successfully brought private capital into a public asset while protecting the things that matter most to a local community.

Hawke's Bay is far from unique. Many of the issues it faces, and which gave rise to the Napier Port IPO, are almost universal across local government: strategic assets requiring intergenerational investment, a lack of appetite from ratepayers to pay for it, a desire from locals to retain control of regional assets and for local authorities to stay within set debt parameters.

Just like Hawke's Bay, councils now also face the challenges posed by climate change on their infrastructure, lands and assets. There is a bow wave of required major infrastructure investment just around the corner – funding pressures on local government are storm clouds on the horizon.

* Port hopes to raise up $234m in an initial public offering

* Port to give workers interest-free loans to participate in share float

Hawke's Bay Regional Council consulted the local community comprehensively on the port IPO proposal, says Jonathan Hill.

* Port Napier share float and NZX listing given go ahead**

In 2018, local government held fixed assets worth $123 billion, with the provision of physical infrastructure dominating councils' spending. Debt held by local authorities has increased fivefold, from $2.7b in 2000 to $16.2b in 2018. While this level is debt is relatively modest, the trajectory isn't.

The option of using debt to provide funding to Napier Port was investigated and consulted upon before Hawke's Bay Regional Council decided on an IPO. This option would have seen debt gearing levels uncomfortably high, have led to direct and significant costs to ratepayers and could have reduced the balance-sheet flexibility to respond to unexpected events, such as natural disasters.

I don't support the sale of public assets for the sake of it, or for ideology. But now is the right time for local government to be thinking creatively and starting conversations with their communities about how to fund investment in ageing infrastructure which, in many cases, is already having to work much harder than was ever intended. Think flood protection schemes, waste and storm water systems, sewage schemes, coastal erosion protections, ports.

Where a minority IPO is the right solution, the Napier Port IPO has set out the conditions by which success should be measured. So what were they?

Let's start with the balance sheet. At the end of the 2018 financial year, Napier Port was valued at $291 million on Hawke's Bay Regional Council's books. In selling a 45 per cent stake, the council's new 55 per cent stake was, at the end of the first day of trading, valued at approximately $330m. Somewhat counter-intuitively, the balance-sheet value of its Napier Port holding increased materially through almost halving its ownership stake.

The main rationale for the IPO was to provide the funding that Napier Port needs to invest in its future – primarily a new wharf at a cost of up to $190m. In inviting private capital to partner in the port, the regional council was able to provide $110m to Napier Port. It protected ratepayers from having to foot that bill and realised additional proceeds of over $100m to invest on behalf of Hawke's Bay residents.

It has diversified what was an overly concentrated exposure on Napier Port for income and sensibly reduced its investment and asset risk profile.

The regional council consulted the local community comprehensively on the IPO proposal and put forward a range of options. Perhaps most importantly, it listened to feedback and designed an IPO structure that reflected it. Residents made it clear they did not want to fund the port's expansion but that they valued continued local ownership. A majority of submitters supported a minority IPO.

Approximately 20 per cent of the shares on offer went to groups prioritised through the IPO design: iwi, port staff, locals and non-resident ratepayers. Almost every permanent employee of Napier Port opted to own shares via an employee share scheme.

Today, Napier Port has the funds it needs to begin to invest in its future. It still has a majority council shareholder representing ratepayers, plus locals, iwi and investment institutions all owning shares. The regional council also retains a healthy level of commercial exposure to the port's financial performance.

This diversification of ownership will provide an opportunity for broader public participation in the port's operations. Having almost every member of staff owning shares can only be positive for the culture and the safe, profitable ongoing operation of Napier Port.

And then there's the capital markets. In harnessing some of the $6b that flows into KiwiSaver funds every year for regional infrastructure investment, New Zealand can also strengthen and deepen its capital markets.

The Napier Port minority IPO has demonstrated that, when community feedback is incorporated into transaction design, an IPO can meet multiple requirements. It can deliver success for a region and its ratepayers, for local investors and for local authorities facing increasing challenges in the funding of infrastructure investment and environmental management.

Communications and investor relations consultant Jonathan Hill advised Hawke's Bay Regional Council on the Napier Port IPO.