NEW LAW MISSES THE BUS COMPLETELY
2 October 2008
One of the last pieces of legislation rushed through under urgency in the dying days of this Parliament was the Public Transport Management Act.
This allows local body authorities to take control of commercial bus services that operate without public subsidies and to contract them out. Effectively the Government is renationalising bus services.
Chalkie can only wonder at the mindset of those who dreamed up this little gem. Transport Minister Annette King was quoted as saying it will prevent private operators from "cherry-picking" the best routes and leaving gaps in services elsewhere.
Rather than stopping private operators from cherry-picking, Chalkie reckons the Government ought to be encouraging them to pick as many of those cherries as possible.
The more cherries they can be encouraged to pick, the fewer government subsidies are needed. The only reason subsidies are needed is because there are bus services the community regards as desirable but which are uneconomic. Why would any private operator opt to run a loss-making venture unless they can see profits on the horizon?
The subtext of King's statement has to be there's something dirty about wanting to run a profitable business. That's about as sensible as saying bus drivers ought to be happy with slave wages.
The amounts spent on transport subsidies are large. For example, the Government and the Auckland Regional Council have budgeted more than $93 million to subsidise public transport in Auckland this year.
One company to be adversely affected by this new law is Infratil, owner of New Zealand Bus, which operates in Auckland and Wellington. One example the company trots out of a private-sector developed commercial service is its Flyer service between Upper Hutt and Wellington's airport, which has been operating for nearly eight years. It took seven years to break even.
Would the Greater Wellington Regional Council have even started such a service? Would it have broken even without the commercial imperative to stop losing money? In any case, Chalkie would rather Infratil bears such losses than the taxpayer.
Infratil managing director Lloyd Morrison wrote in the New Zealand Herald: "As a publicly listed company, Infratil's financial results are reviewed by numerous expert analysts. None has identified our bus business is a gold mine achieving high returns."
Indeed. One analyst practically became apoplectic last week when telling Chalkie how much he doesn't like Infratil's bus business.
Infratil bought it in November 2005 for $250 million. Last year, it poured $44.1 million into the business, up from $10.1 million the previous year. The bus company's operating earnings in the year ended March were $21.5 million, unchanged from the previous year, which is an underwhelming rate of return. Forget about the extra money Infratil has thrown at the business and that's an 8.6% return before interest, tax and depreciation. Infratil's NZX-traded debt is offering substantially higher returns without the equity risk.
NZ Bus collected $113.7 million in fares and an additional $83.4 million in subsidies during the year. Rob Bode at First NZ Capital estimates about 40% of NZ Bus's Auckland services are commercial, as are about 20% of its Wellington services.
Forsyth Barr analyst Rob Mercer says the possibility local body authorities may take back control "greatly undermines the value of its Auckland operation".
Bode and ABN Amro analyst Rob Foster think unless the new law is repealed, Infratil will not want to keep NZ Bus. Effectively, it will become an asset-management business with no incentive to increase bus patronage.
Foster values the business at $286 million, Mercer at the original purchase price and Bode slightly less at $240 million. Bode says the impact on earnings won't be known for some time, although "a lower-risk contracting business, assuming it is based around long-term contracts, is likely to attract a higher multiple than we currently ascribe to NZ Bus".
(c) 2008 The Independent Business Weekly
The Independent Financial Review
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