HBRC Capital Requirements and Resources Review
Capital Review Background
Hawke’s Bay Regional Council has three clear responsibilities: restoring and enhancing our environment, supporting Hawke’s Bay’s economy and building community resilience. Council needs to ‘raise the bar’ in all three of these interdependent areas but that will require significant investment.
In the environmental area, Council faces increased public demand and legislative requirements for better protection of the region’s water - the aquifer, our rivers, lakes and coastal environment - and strengthening the region’s biodiversity. As well as increasing demands on ‘business-as-usual’ operations, Council, in partnership with Central Government, has committed to a series of intergenerational environment enhancements.
Preparing for and protecting our region from natural events, such as earthquakes, flooding and coastal erosion, is equally important.
Through Hawke’s Bay Regional Investment Company, HBRC owns Napier Port – the region’s largest economic enabler. It enables 51% of the region’s Gross Regional Product and is associated with 27,000 full and part-time jobs.
The Port is facing significant growth in cargo volumes and needs to develop its facilities to handle that growth on behalf of the region. Those developments, including a new container wharf and the replacement of the existing container wharf and supporting infrastructure, will likely cost around $275M over the next 10 years.
Currently, Council’s largest income generating asset is Napier Port. Napier Port provides Council an annual dividend ($10M planned for 2017/18), which significantly subsidises rates for the region.
Due to steady growth and the need for investment in recent years, Napier Port’s debt for the year ending FY2017 will be approximately $83M. Even with the forecasted growth, Napier Port cannot fund future development on its own without capital investment or dividend relief from Council.
In addition to this, the Kaikoura and Christchurch earthquakes have highlighted the risks for Council having all its capital investment in one physical asset, most notably a port.
Both the increasing financial demands on council and the risks of having ‘all its eggs in one basket’ have necessitated a re-think on how Council attracts external capital investment to fund its three responsibilities.
The Capital Structure Review Committee is looking at a number of options for how to better utilise its limited resources and fund these interdependent objectives, while retaining a control of Napier Port.
Capital Structure Review Updates
Wednesday 29 March: Capital Structure Review Panel established
Hawke’s Bay Regional Council appointed the panel, which includes representatives from Council, Hawke’s Bay Regional Investment Company (HBRIC), Napier Port and independent advisors.
Members of the panel are:
Chris Tremain (Capital Review Panel Chair): Chair of HBRIC Ltd, Chair of Bank of China (NZ). Previous CE of Tremain’s Real Estate. Previous MP and Cabinet Minister.
Rex Graham: Council Chair, Director and Trustee of several private companies and trusts involved in horticulture, intellectual property and community interests. (Rick Barker as designated alternate as required).
Neil Kirton: Councillor, Chair of Council Corporate and Strategic Committee, Chair of Council Finance, Audit and Risk Sub-committee. Current Business and Marketing Manager of Hohepa Homes Trust Board. Previous MP and Cabinet Minister.
Alasdair MacLeod: Chair of Port of Napier Ltd. Also serves as Chair for other commercial enterprises. Retired Partner of Deloitte.
Jim Scotland: Director, HBRIC. Former Chairman of Port of Napier Ltd, with extensive national and local commercial governance experience.
David Shand: Previous directorships/chairs including Director of Meridian Energy Ltd. Has also worked as a Financial Management Advisor and Acting Director for The World Bank in Washington DC.
Wednesday 13 December: HBRC Council Meeting
The Capital Structure Review Panel presented a report to Council, outlining how to make Council’s commercial investments work harder and spread its investment risk. This includes nine options (see below) to support Napier Port’s growth. The report investigates a range of options but shows that some of the options to fund the port development would result in less than optimal outcomes.
Council has resolved:
- Not to provide further capital to meet Napier Port’s growth needs;
- Not to increase debt to imprudent levels on Napier Port’s balance sheet; and
- To maintain dividend income from HBRIC and Napier Port.
The Council also resolved not to sell strategic assets to fund business as usual operating costs.
Council has requested that the Capital Structure Review Panel undertake further work with Napier Port and HBRIC on:
- Option Three: The Port increases its prices or introduces a levy on Port users to fund Port Developments;
- Option Six: Council charges ratepayers a special levy to fund Port developments;
- Option Seven: Introduce a minority investment partner to the Port;
- Option Eight: The Port is listed on the NZX, with Council retaining a majority ownership;
- Option Nine: The Port is leased to another party, with Council/HBRIC maintaining ownership of Port assets.
Nine options have been identified by the Review Panel and explored in the Capital Structure Review report.
Questions & Answers
Q1: Will the community have a say on options for Napier Port?
Yes. Ensuring the community is consulted on the future of Napier Port is a top priority for Hawke’s Bay Regional Council.
The options will be consulted on during Hawke’s Bay Regional Council’s 2018-2028 Long Term Plan process in March – May 2018. The community will get information about the benefits and challenges of the options and get a chance to give their views on each.
Once Council has taken all that feedback on board, it will decide on a preferred option. The community will then be consulted again, through a Special Consultative Process, so that option can be refined further.
Q2: Could Council ask Government for funding for Napier Port instead of adopting one of the options presented in the report?
The Review Panel is speaking to Central Government ministers about the options, and any other opportunities to fund Council activities and the Port’s development.
However, even if Central Government was to invest, through the Regional Development Fund or another mechanism, that still doesn’t address the risks around Council having a single-asset portfolio, as outlined in the report.
Q3: Will any of the options mean we “sell Napier Port”?
No. All the options being considered further for Napier Port retain control and protections for the Hawke’s Bay community to varying degrees.
For example, if Council listed shares (Option 8) or sought investment for one or two external parties (Option 7), it would retain majority ownership.
Or, if the lease (Option 9) was chosen, the land the port sits on would be retained, while the operation of the port would be leased for a fixed period, with conditions, and then returned to Council to either retain or re-lease.