Infratil

Infratil says it has no plans to sell its minority stake in Wellington bus operator Mana Coach, even though the High Court has ruled out a planned merger with its Wellington bus business.

Infratil subsidiary New Zealand Bus runs the scheduled bus services in Wellington and the Hutt Valley. Mana Coach operates mainly north of Johnsonville and has limited runs into Wellington. Infratil acquired its 26 per cent holding in Mana Coach through the purchase of Stagecoach New Zealand in 2000.

New Zealand Bus was fined $500,000 and costs of about $600,000 by the High Court in 2006 after it tried to buy the rest of Mana Coach without Commerce Commission approval. The Mana Coach vendors at the time, Kerry and Ian Waddell, were found guilty of being accessories to the transaction, but not fined. Their conviction was subsequently overturned on appeal.

The Waddell family sold its 74 per cent stake in Mana Coach to merchant bank Bancorp, which in turn sold it to British transport entrepreneur Brian Souter last December.

Infratil executive Paul Ridley-Smith said yesterday that he expected the ownership structure of Mana Coach to continue in its current form.

Mr Souter was an experienced bus operator as a founder and major shareholder of Stagecoach, he said.

Last week the Court of Appeal turned down an appeal by the Commerce Commission against the High Court's decision not to convict Infratil for its role in the transaction. But the judgment upheld the $1.1 million fines and costs for New Zealand Bus, which were paid in 2006.

Infrastructure investor Infratil has reported a 49 per cent fall in first half net profit to $12.5 million.

The reduction in the six months to September 30 compared to $24.6 million in the corresponding period a year earlier.

It followed a rise in interest costs to $68.9m from $31m, with Infratil saying today that $20m of the interest increase reflected the consolidation of TrustPower. Depreciation and amortisation was $35.9m, up from $19.8m.

Earnings for the six months before interest, tax, depreciation, amortisation, realisations and impairments, and fair value movements of financial instruments (ebitdaf), was $165m, from $69m a year earlier, Infratil said.

The operating surplus was $82.2m from $29.3m.

Infratil has a majority stake in power company TrustPower, owns Glasgow Prestwick, Kent International and Lubeck airports, two-thirds of Wellington International Airport and a small share in Auckland International Airport. It also has investments in NZ Bus and stakes in Australian power generators and retailers.

The company is to pay a fully imputed interim dividend of 2.5 cents per share.
Infratil said that as a long-term investor, it considered each of its core investment sectors would deliver attractive returns.

The global trend to renewable energy and public transport was only starting, air travel was increasingly within reach of the world's growing middle classes, and restructuring of the Australian energy sector continued, the company said. "Infratil's businesses are continuing to build long term value through efficient operations and providing excellent services in a manner which ensures widespread community support."

Developments during the half-year illustrated the disparate nature of its businesses and the relative complexity in measuring their performance, Infratil said.

As at September 30 debt comprised 42 per cent of Infratil's capitalisation. That reduced to 39 per cent if the proceeds of the October issue of partly paid shares was included.

The issue of new shares was undertaken to ensure Infratil was well placed to be able to take advantage of opportunities should current financial market volatility result in further deterioration. With that possibility in mind, the company had started to purchase hedges against equity market risk, with $1.5m of those hedges expensed during the half year, Infratil said.

Infratil shares closed at $2.93 on Friday, having ranged between $2.26 and $3.25 in the past year.

The company said today that from next June it would stop issuing quarterly reports and work to upgrade the quality and materiality of its monthly reports. Reporting had been done quarterly since 2004, but that frequency had attracted some negative feedback from share analysts and institutional investors. Investors and financial analysts interviewed said the two quarterly reports were not of particular benefit, given the ongoing information Infratil provided about its operations, Infratil said.

Infratil and the Commerce Commission go to the Court of Appeal today over the investment firm's frustrated attempt to buy Mana Coach Services.  Infratil was fined $500,000 with costs of about $600,000 last year, after its subsidiary New Zealand Bus tried to buy Mana Coach without the commission's approval.

New Zealand Bus trades as Stagecoach, operating most of the Wellington region's public bus network. It already owns 26 per cent of Mana Coach. Infratil is appealing against the decision stopping New Zealand Bus buying the 74 per cent of Mana Coach it does not own, and the High Court penalty it calls "grossly excessive".  The commission's cross-appeal says the fine is too low. It had sought $2.5 million in fines and costs.

Problems started for New Zealand Bus in January last year when it sought commission clearance to buy Mana Coach. It later withdrew the application before it was approved, planning to go ahead with the purchase without clearance.  That prompted a commission inquiry, a court injunction to stop the sale proceeding, and a High Court hearing in August last year.

Justice Forrie Miller found the bid by New Zealand Bus to buy the Mana Coach shares breached the Commerce Act when the offer went unconditional, because the deal was likely to substantially lessen competition in Wellington's bus market.  Though found guilty of being transaction accessories, vendors Ian Waddell and Kerry Waddell were not fined.

Infratil spokesman Paul Ridley-Smith said yesterday the fine was excessive given that Infratil had agreed with the commission to have the High Court decide if it was in breach of the Commerce Act, before the acquisition of Mana Coach occurred.  In late July last year, merchant bank Bancorp made a lightning raid, buying up 74 per cent of Mana Coach.  Mr Ridley-Smith would not say if Infratil had a deal with Bancorp to buy its shares if the appeal succeeded.

The appeal hearing is set down for three days.

The public transport reforms revealed today are hardly the revolutionary changes the Auckland Regional Transport Authority (Arta) has been pushing for. Indeed the proposed new purchaser-provider mode doesn't even restore the status quo, replaced in 1991 by the disastrous Thatcherite model that has subsequently dogged Auckland's bus system for 15 years.

But at least it's a start, and a sign that our latest Transport Minister, Annette King, means business. Also, the word from within Arta is that it can live with this watered-down version of its proposal.

The good news is that once the legislation is in place, Arta - and the other public transport authorities around the country - will again be able to impose some basic conditions of service on all their operators. Insisting that buses and trains and ferries keep to their timetables, for instance. And that rival operators join together to provide an integrated ticketing service that enables passengers to mix and match modes of travel using the same ticket. Transport operators will also have to open their books so the public authority can inspect just how much they need the subsidies they request.

The downside is that there'll be a time lag while old contracts run out, before the new controls can fully kick in. That's unless the private bus companies have a sudden rush of public spiritedness to the head, and voluntarily sign up before they are forced to. But given recent histrionics, it's hard to contemplate that happening.

In the speculative fever that built up before today's announcement, major operator Infratil indulged in some spectacular public foot-stamping and dummy-spitting, threatening to quit the industry at the thought that Arta's desired reform package might win the day. What Arta wanted was a simple contracting model, where it, the public purchaser of the service, on behalf of you and me, designed the most suitable integrated public transport network for the region and then called for tenders from operators to provide the service.

To Infratil, this proposition was "extremely unattractive".

Of course, to Arta and other local authorities it was the existing model that was extremely unattractive. They pointed to the fact that Britain was the only other country in the world employing such a system. That most civilised cities used the simple contracting model they were proposing.

The worst aspect of the existing system is that an operator can identify a certain popular route - or more often, the most profitable rush-hour timeslots on that route - trot off to the relevant authority and register it as a "commercial" service. Once done, this becomes the operator's own personal fiefdom. Unless the back wheels of a bus regularly fall off, or the driver does unspeakable things to his passengers, there's very little the authorities can do. They can't for instance, insist on buses keeping to a timetable. In Auckland, 26 per cent of bus services, carrying around 46 per cent of all passengers, are in these unpoliceable commercial wildlands.

Annette King's proposed reforms do bring these 46 per cent of Auckland passengers back under regulatory protection. Even though operators will still be able to register "commercial" routes, they will be forced to agree to and abide by the regulatory conditions imposed by Arta. Requirements, for instance, that they have to turn up on time every day. And that they agree to honour a valid ticket sold by a rival operator at an earlier stage of the passenger's journey.

In the interests of the network at large, "commercial" operators will no longer be allowed to cherry-pick the most profitable rush-hour slots. They will have to service the slower middle-of-the-day and evening runs as well.

Given how slow transport reform can be - even under a Government which trumpets its commitment to the cause - the vagueness of the timetable for the changeover to the new regime is worrying. A briefing paper says "commercial operators will still be able to operate existing commercial services, but will, over time, have to comply with any regional passenger transport plan controls".

Given the ability of both local authorities and commercial firms under threat to prolong the inevitable, let's hope a more prescriptive deadline for the reforms kicking in is part of the final legislation.

Bus passengers are being promised sweeping law changes offering them better odds of getting picked up on time, and by clean and safe vehicles. 

 The Government intends giving the Auckland Regional Transport Authority, and councils elsewhere in New Zealand, wide powers to set standards for all urban bus and ferry services.  The tough new measures will be imposed regardless of whether the services are run commercially or with subsidies from the public purse.

Regional councils will be able to deregister commercial services which fail to keep to their timetables. Ministry of Transport officials are working on an incentive and penalty regime to apply before that happens. At present, councils can set standards only for subsidised services, and operators do not even have to provide them with patronage information for planning purposes.

Operators face no sanction other than passengers voting with their feet if buses or ferries fail to turn up.  Transport Minister Annette King plans to introduce the legislation within six months to encourage more New Zealanders to leave their cars at home.

Her mission has been given added urgency by the Government's new goal of making New Zealand a world leader in energy sustainability, and the fact that only 3 per cent of people caught buses to work on Census Day last March.  Ms King said boosting public transport was a major part of the push towards sustainability, and her aim was to remove disincentives for people to travel on buses and ferries.

"For example, there would be the ability to require integrated ticketing or to set standards for ease of access for passengers into vehicles."

The lack of tickets for passengers to use interchangeably when transferring between rival transport fleets is a particular bug-bear in Auckland.  Having to pay separate fares is seen as a major road-block to more people using public transport.

Ms King acknowledged the legislation would not go as far as the Auckland authority wanted, which was to give it power to pocket all bus and ferry fares, from which it would pay transport operators fees based on passenger numbers.  That is how the authority runs urban rail services, which will not be affected directly by the new legislation.

The Bus and Coach Association had warned of a dramatic rise in subsidy costs for ratepayers and the Government, and the minister accepted there might have been "some problems" from a potential withdrawal of investment by commercial operators.

But she said the new rules would enable transport authorities to obtain commercial information from operators for network planning, and to set minimum standards over all urban services to increase passenger confidence.

Association executive director John Collyns accepted last night that regional councils expected some influence over commercial operations, as well as those they subsidised, but he feared the legislation would tip the balance too far.  "What the Government is handing Arta is the ability to create a sort of master-servant relationship - and if we are not going to be equal partners taking equal risks, public transport is not going to be well-served in Auckland."

A particular fear was the potential for the transport authority to stop commercial bus services competing against subsidised trains, meaning passengers would have to transfer at railways stations rather than continue along more direct routes.  Mr Collyns denied there were any quality differences between commercial and subsidised services in Auckland, which were all run by the same fleets, and said performance standards in New Zealand were markedly better than in Australia and North America.

Infratil director Tim Brown, whose company owns the Stagecoach fleet, said it was encouraging that the minister was leaning to much more of a consultative model than feared and he was optimistic his team could keep working with councils to provide greater service frequencies.  Regional transport authority chief executive Fergus Gammie said the proposal would let his agency work collaboratively with operators to achieve an integrated public transport system with integrated fares.

Auckland Regional Council chairman Mike Lee said it was a step in the right direction.

Infratil's move to increase its stake in Trustpower and the sale of its holding in Port of Tauranga helped power a more than 200 per cent increase in the investment company's net profit during the nine months to December.

Infratil's net profit of $55.98 million for that period was 215 per cent ahead of the same period a year ago.

Though the company's operating surplus before tax was little changed at $17.76 million, it received a substantial boost from investment realisations and revaluations of $38.45 million against $239,000 a year ago.

The company said its financial and operational results for the third quarter were in line with expectations but were "upstaged" by a series of transactions concluded toward the end of the period.

They included its acquisition of Alliant Energy's shares in Trustpower at a bargain price and a subsequent sell down on market, and to the Tauranga Energy Consumer Trust leaving it a 50.5 per cent controlling stake. Its sale of 5 per cent of Port of Tauranga also netted a gain of $38 million.

Over the third quarter Infratil secured its 48.5 million additional shares in Trustpower for $286 million - a net cost $5.90 a share.

Trustpower shares were trading at about $7 each at the time.  Meanwhile, Trustpower contributed $29 million to Infratil's earnings over the nine months against $24.2 million a year ago.  "The 20 per cent increase reflected higher than average generation output and excellent management of electricity price risk," the company said.

Chief executive Lloyd Morrison said Trustpower's "excellent result" surprised a few people "considering the difficult conditions" where a dry hydro year meant high prices on the wholesale electricity market.

Wellington Airport, in which Infratil holds a 66 per cent stake, lifted operating earnings by $2.2 million to $37.2 million despite relatively flat passenger numbers.  Infratil Airports Europe contributed a loss of $800,000 as against a $5.6 million profit a year ago.  Infratil Energy Australia contributed earnings of $7.3 million compared to a loss of $2.1 million last year.

During the third quarter its Victoria Electricity retail division had 147,200 customers against 77,000 at the end of March.

NZ Bus which Infratil purchased from Scottish company Stagecoach almost two years ago contributed $11.5 million to group earnings, a result Morrison described as "adequate".  Potential changes to the public transport sector by policy makers meant there was "uncertainty as to the future of that business".

Morrison said the recent disruption to Wellington bus services caused by a new computerised rostering service and driver shortages would cost the company hundreds of thousands of dollars, he said.  The "embarrassing" disruption last week saw rush hour services cut and drivers unfamiliar with routes literally lose their way.

Infratil shares closed a cent lower at $5.79 yesterday.

Buried deep in Helen Clark's speech from the throne earlier this week was a hint that Auckland's long fight to persuade the Government to electrify the suburban rail network could be won. Referring to the "increasingly important" need "to align central and regional strategies for Auckland transport", the Prime Minister added that "timelines around rail electrification will need to be agreed on ... "

This is the first time the Government has conceded electrification will take place. There have been hints, but never anything as definite as this.

The last came almost a year ago, in a letter from Finance Minister Michael Cullen to regional council chairman Mike Lee, where he effectively flushed the dream of electrification down the drain. Dr Cullen said, "The clear implication of this is that electrification would not be in place for, at the very least, the next eight years".

But even this was not a clear commitment to electrify, only notice that the issue could be relitigated sometime in the future. Presumably well after replacement diesel trains had been ordered.

Since then, the lobbying from Auckland only intensified. The Treasury responded with its favourite delaying tactic - consultation. This only increased Auckland's determination. Last November a report from the Auckland Transport Strategic Alignment Project informed the Government that every stakeholder and territorial authority in Auckland were united behind electrification.

The message seems to have got through with Helen Clark referring to it as a done deal, the only debating point being "timelines".

Perhaps a grateful Auckland could name the first electric locomotive in honour of defrocked minister Taito Phillip Field. For if there's anything likely to give the electrification programme a nudge, it's Labour having to rely on Green Party support to see legislation passed. And the Greens are great supporters of electrifying rail in Auckland. Indeed they're happy for motorway funds to be used.

The Government having to cosy-up to the Greens might also embolden proposed reforms to public transport procurement legislation which the Prime Minister also foreshadowed in her speech. The planned reforms, she said, had "the objective of enabling regional councils to get better value for money in their public transport". The Auckland Regional Transport Authority wants a reform of the contracting system between itself and private operators so it can design an integrated transport network that works best for the customer rather than at present, the operators.

Currently private operators can cherry-pick the most profitable routes, declaring them "commercial" services. ARTA is then left to call for tenders for subsidised services to fill the gaps. ARTA cannot impose or enforce performance standards on the commercial routes. Nor can it introduce integrated ticketing.

ARTA wants a new contracting model, in which it sets up an integrated transport network and contracts an operator or operators to provide the service.

The outburst from Tim Brown, a director of Auckland's main bus operator, Infratil, over the weekend, suggests ARTA's submission may have fallen on receptive ears in Wellington. Mr Brown threatened Infratil would exit the industry if ARTA's proposals were adopted. Hopefully with the Greens now there to buttress Government resolve, Mr Brown's scaremongering will have no impact on the proposed legislation. We should know soon. Details are expected to be announced any day.

While the Greens' new influence in Wellington can only be helpful as far as Auckland public transport reforms are concerned, the same can't be said for those hoping for revolutionary changes to local government.

Helen Clark noted that "the Government is currently considering its response to the region's proposals for strengthening its governance". The word from Wellington is that the consensus agreed to by Auckland's local authorities last December was so bland that Government doesn't see the point of legislating. Instead of reducing the number of bodies running Auckland, the consensus model adds an advisory Regional Sustainable Development Forum to the mix. The regional council would gain a little more power.

Into the mix now come the Greens who regard calls by reformers for a supercity "an affront to democracy". They want more power for community boards. My guess is there'll be no governance reform this year.

Listed infrastructure investor Infratil could exit its $250 million bus and ferry services if radical transport proposals are pursued by local government.

Infratil director Tim Brown said the proposals would ultimately see the country's bus and ferry networks run by bureaucrats who would collect the fares and pay private operators a fee to provide the service.

They would also have the right to buy the business if it did not meet local authority targets.  "It is not a system Infratil would be willing to operate under," he said.

The warning comes after Infratil's ferry company Fullers came under fire for abandoning 120 people overnight on Waiheke Island, near Auckland, last weekend.  Brown said the incident was a very disappointing service failure, "and we will make sure it does not happen again".  But one shortfall in service did not mean the private sector did not have a role in public transport, he said.

The exact nature of that role is once again under the spotlight as central and local government undertake complementary studies intended to rejuvenate Auckland's decaying public transport network.

Scottish transport group Stagecoach put Stagecoach NZ, the country's biggest bus service, on the market nearly two years ago because it was unhappy with new ownership models put forward for public transport.  Infratil bought Stagecoach knowing changes were in the wind, but it believed it would be able to make a difference as a highly-regarded local infrastructure company which had good relations with politicians.

Brown said Infratil hoped that as new rules evolved they would be more sympathetic to private operators than was originally proposed. But the company's expectations were not being realised.  Brown said: "Some officials say extremely encouraging things to us like 'We are keen to work with you'," he said.

Competing with Infratil to buy Stagecoach were two Australian private equity firms, who typically take a position in a business with a definite exit strategy in mind.

Brown said Infratil was an experienced long-term infrastructure investor which took an active involvement in the investment.  "But if the nature of the business ends up dramatically different from what we bought into, then one of New Zealand's major public transport providers may not have a local (private) owner," he said.

Under proposals being considered, regional governments would also have the right to take over ownership of the business of private operators if they failed to perform.

Brown said such proposals were "extremely unattractive" to Infratil.  "We like to invest in businesses where our success is determined by our ability to satisfy customers - in this case bus and ferry users," he said.

Proposals being floated by officials within Land Transport NZ and the Auckland Regional Transport Authority (ARTA) would make bureaucrats the end-customer of a private bus or ferry operator. And that would remove a powerful driver for commercially-driven operators, said Brown.

The end result would be a public transport system run by public operators.  "But we have been there before, and public operators presided over periods of much greater decline in the use of public transport then when private operators became involved," said Brown.

Under existing laws, the Auckland Regional Transport Authority calls for tenders for bus services and relies on the free market to come up with the best price.  If an operator can run a service profitably without a subsidy, then the authority accepts and registers that service.  It then decides what fill-in services are required to complete the network and calls tenders for non-commercial routes.

ARTA has been concerned it cannot require any operator to adopt any performance or customer service standards on commercial services.  Under new proposals, ARTA would introduce integrated timetables, ticketing and fares.

But Brown said that would effectively return public transport to public ownership.  Being paid a fee by bureaucrats rather a fare from an end-passenger removed a huge driver for a private enterprise.  "We would also be giving another party a call-option over our business," he said.

Rival bus companies were not given the chance to bid for prized Wellington bus operator Mana Coach Services, which merchant bank Bancorp bought this week.

Christchurch-based Ritchies Transport, which also runs urban bus services in Auckland, said yesterday that it would have bid for Mana if it had been given the opportunity. "We would definitely be interested in that business and we always have been," director Andrew Ritchie said. "Certainly it is something we would look at in the future."

Buying Mana would have been the easiest way for Ritchies to enter the market, he said. "It is a good business and it has been well run in the past."

Bancorp bought 74 per cent of Mana from the Waddell family for an estimated $24 million. The other 26 per cent is held by Wellington investment firm Infratil, which also owns the Stagecoach buses. Infratil's attempt to buy all of Mana was rejected by the High Court this month after the Commerce Commission opposed the deal as being anti-competitive. Infratil is appealing against the decision and if successful said it would try to buy Mana again, using its first right of refusal.

Family member Ian Waddell said Bancorp managing director Craig Brownie had made a direct approach to buy the company.

Mr Ritchie said Mana's value would diminish if Bancorp tried to sell its stake to any company other than Infratil. He questioned the price Bancorp paid given that $24 million would buy a fleet of 90 new buses.

Ritchies had considered setting up in Wellington, as it had done successfully in other cities. "Something like this possibly makes us feel like we should be considering it in a little bit more detail."

The Commerce Commission is comfortable with the sale as it "preserves the potential for competition".

Mana Coach Services is being eyed by at least four transport operators, including three from Australia, keen to enter the Wellington bus market.

The High Court at Wellington stopped New Zealand Bus, which owns Stagecoach in New Zealand, from buying Mana last month because the deal would substantially lessen competition. Mana and New Zealand Bus had not competed for contracts in each other's patch.

Mana's owners, mainly associated with the Waddell family, told the court they would sell the company to another operator if the acquisition by New Zealand Bus was barred.

Mana operates a fleet of about 110 buses, including urban, and touring and charter buses. Stagecoach Wellington has about 370 buses under several brands.

Three Australian companies gave evidence during a two-week trial --Transdev-TSL, Veolia Transport and Swan Transit. All said they would look to enter the market by acquiring an existing operator. Bidding for individual contracts was too risky because of the small size of the contracts, and the lack of information about passenger numbers, revenue, costs, depot locations, and staff availability.

The director of Christchurch-based Ritchies Transport, Andrew Ritchie, told the court that the company had been in the Wellington market for a long time. However, the contracts for subsidised bus services, typically for between 10 and 15 buses, were too small to come in as a new operator.

Ritchies is New Zealand's largest privately owned bus operator, with a fleet of more than 600 buses. It operates urban bus services in Auckland, Timaru and Marlborough. It also has charter, tour and long distance services, including the Intercity brand. Mr Ritchie said Ritchies would not necessarily compete with New Zealand Bus if it bought Mana.

Transdev-TSL executive general manager, Ross Mackiggan said that, if it bought Mana, its strategy would be to compete with New Zealand Bus and take market share. French-owned Transdev operates trams in Melbourne, buses in Sydney and ferries in Brisbane. It unsuccessfully tendered to form a joint venture with the regional council to buy Wellington's urban rail service from Tranz Rail in 2002.

Veolia Transport director Peter Lodge told the court that it would look to buy an existing operation with about 150 buses to enter the New Zealand market. Mr Lodge said the New Zealand market was characterised by high entry barriers, but those became an advantage once the company was established. Veolia was Australia's largest private transport operator, including buses and trains in Australia's main centres.

It also operates the Auckland rail services in partnership with the Auckland Regional Transport Authority.

Swan Transit director Neil Smith said his company was interested in the New Zealand market, but it would require a contract substantially larger than the maximum existing contract size of 22 buses in Wellington. Swan Transit operates 283 buses in Perth, 560 buses in South Australia and ferries in Brisbane.