Case Study : Outstanding Results Achieved

Port companies around New Zealand are facing tough challenges. They need to increase revenues and profits just when shipping companies are moving towards fewer stops – using bigger ships, at larger ports. But there is one port company that is consolidating its strong position and will soon surge even further ahead.

Port of Tauranga is ideally positioned to accommodate larger ships because of its readily expandable infrastructure and strong balance sheet. With relatively low capital expenditure, more than 1 million containers a year could be handled at Tauranga’s container terminal. This is great news for exporters because larger ships have better fuel efficiency and lower operating costs per container unit.

Port of Tauranga has been measured by the Australian Productivity Commission as the most efficient port in Australasia. It is the obvious choice to lead this country’s ports in the investment required to handle the bigger container ships that will soon start to visit.

Finding itself in this enviable situation is no accident. For many years Tauranga has used its capital resources astutely to increase port volumes and efficiency – growing economic value for its shareholders in the process. Port of Tauranga has enjoyed spectacular success in achieving its return on capital objectives. It has delivered a 24% compounding return to shareholders over the last 10 years, compared to the 5.6% NZX Index average. In tandem, the Port has truely met its environmental responsibilities and the aspirations of the local community and its staff.

Interestingly, the mission statement of the Port of Tauranga states: “Leading through innovation and commitment”. However, as US-based, Boston Consulting Group’s global head of innovation, James P. Andrew says: “innovation without pay back, is just an invention, just an idea”.

The Port of Tauranga has supported innovative capital investment by rigorous economic and financial analysis for at least a decade now. Capital improvements are assessed on length of pay back (as Andrew advises) and discounted cash flow modelling is constantly used to compare different project alternatives. CFO, Steven Gray says: “Profit and loss forecasts using measures such as NOPAT, EBIT and EBITDA are not enough. They cannot track the true costs of capital expenditure because they ignore the cost of shareholders’ equity”.

Managing port infrastructure investment is complex; many capital expenditure proposals must be ranked and evaluated. The winners must be picked from countless alternatives and many lemons.

For 10 years now Port of Tauranga has systemised this important task, making sure all investment proposals are evaluated on a consistent and objective basis – against the same hurdles. Corporate discipline on this point is uncompromising; board and management know well that overall return on capital is determined by the success of each individual investment proposal. Notwithstanding this, they recognise the importance of “must-do” capex (capital expenditure) – to meet environmental, staff safety, regulatory, and compliance objectives.

Steve Gray knew capital investment involves make-or-break decisions. So in 1999 he rejected ad hoc spreadsheet building as inconsistent, time wasting and error-prone. “Back then we implemented Capex® Stratagio™ software to save time and increases confidence levels. It guards against poor investment by alerting us when business cases have faults. We find that testing assumptions, evaluating alternatives and analysing true value are crucially important parts of the capital management process,” he says.

As a well run business Port of Tauranga takes its capital expenditure process very seriously. “When deciding the best time to replace a piece of major plant – such as a pilot boat, for example, we make an assessment using Capex® Stratagio”, said Steve.

Shareholders and lenders should be delighted Port of Tauranga manages its capital expenditure programs professionally, and refuses to allocate scarce capital resources on “gut feel” or egos. No doubt they will welcome Tauranga’s expansion plans – knowing the port’s history of delivering on its capital investments.

International evidence backs the Port’s approach showing that good corporate governance achieves a triple win: attracting capital; increasing the share price, and reducing cost of capital. It is a powerful risk management safeguard for shareholders, a McKinsey and Co study of 200 institutional investors found. A stunning 75% of those surveyed said good governance practices (commitment to shareholder value, majority of independent directors and transparent reporting) were as important as financial performance when evaluating investments! Also it found that institutional investors are willing to pay a premium of as much as 20% for good governance.