Should we relocate the Ports of Auckland?

Disclaimer: in professional life I have done some work on ports, including co-authoring the 2012 PwC report on future scenarios for Upper North Island ports. This post doesn’t reflect the views of my present or past employers or clients. It’s just a quick thought experiment, based on some data and a few assumptions.

The Ports of Auckland (POA) are back in the news due to their new reclamation plans. As usual, this has attracted both critics and proponents. POA’s plans have been criticised for their negative environmental impacts on the Waitemata Harbour, the loss of views of the Hauraki Gulf, and the fact that they will limit our ability to re-use port land for other purposes. On the other hand, they’ve been defended due to the economic role that POA plays in Auckland – it’s New Zealand’s largest port of import and also a significant port of export.

As this suggests, there are both pros and cons to having a port located right on Auckland’s front door. How should we weigh them up?

Here’s one way of thinking about the question of whether we should prefer having POA in Auckland, or whether we would rather close it down and move our freight elsewhere:

• The costs of moving the port would primarily relate to the added freight cost for Auckland’s imports and exports
• The main benefit would be that we could repurpose POA’s land for alternative uses, such as housing, offices and retail, or public spaces.

How large are these costs and benefits?

The costs of relocating the port

One realistic way to look at the cost of port relocation is to ask: How much more would we have to spend to get the same outcomes?

If we closed down POA and shipped Auckland’s imports and exports through the Port of Tauranga (POT) instead, we would have to pay more to move those goods by land between the two cities. This would represent a net cost to New Zealand’s economy.

We can get a rough sense of these added costs by looking at current land transport costs and port volumes. According to an NZIER report published last month, in the year ended June 2014 POA handled:

• around 968,000 twenty-foot-equivalent containers per year, 203,000 of which were trans-shipped to other ports in NZ;
• around 207,000 cars; and
• some other random stuff, like bulk cement.

Now, based on figures published in the 2012 PwC report (see Table 4 on page 76), the cheapest way to move goods between Tauranga and Auckland is by rail. It costs approximately $600 to move a single container by rail between the two cities. (Or around $750 to move a container by road.) While KiwiRail doesn’t currently ship cars by rail, rail operators in other countries do. Let’s assume, therefore, that it costs around the same amount ($600) to ship a single car.

Based on these land transport costs, we’re looking at an added annual cost of around $580 million. Yikes. A quite large sum. In reality, this is probably a bit on the high side, given that some of these goods will not originate from or be destined for Auckland.

In addition, we would forego the $66 million in annual dividends that POA pays to Auckland Council. So the total annual cost of relocating the port would be around $650 million.

The benefits of port relocation

Although the costs of moving POA entirely out of Auckland are high, we might be willing to bear them if the profits from land development were sufficiently high. So: How much would the land have to be worth to justify relocating POA?

Well, we know that, in order for it to be worth doing, repurposing the port land for residential and commercial uses, or public space, would have to yield at least $650 million per annum. That figure represents the minimum annual return that we would require from POA’s land.

Let’s assume, for a moment, that Auckland Council could get an average rate of return of 8% on its port land if it were put to other uses. This suggests that in order to obtain an annual return of $650 million, POA’s land would have to be worth a total of around $8.1 billion. (Calculated as follows: $650 million in annual profits / 8% rate of return = $8.1 billion.)

According to Wikipedia, POA has a total of 55 hectares of wharves and storage areas. If that were worth $8.1 billion in total, it would mean that the land would be worth around $15,000 per square metre. That’s roughly what it would take for moving the port to be a net benefit for the economy – city centre land values above $15,000 per square metre.

Now, this is in the range of current land values in the city centre – albeit on the high side. So redeveloping the port could, in principle, provide net benefits for Auckland. The case might get stronger if land values continue increasing and if the downtown revival continues at pace.

However, I don’t think this quick, back-of-the-envelope analysis proves much. For one thing, the benefits of port relocation are probably overstated due to the fact that it would be quite difficult to redevelop 55 hectares of downtown land quickly. It might take decades to realise the value of port land for alternative uses.

For another, it would be quite difficult to compensate the “losers” from the process – the firms and workers who would be worse off as a result of higher transport costs to their location in Auckland.

So, what should we do with the port?

As this analysis has (hopefully) shown, there are both costs and benefits to moving POA. And, for that matter, to leaving it in place or expanding it.

Moreover, the costs of moving POA are not infinite, which means that the benefits of doing so may at some point be large enough to justify the move. But they are very large, which means that we would have to be confident that we could actually redevelop port land in a reasonable timeframe.

It’s also important to recognise that there are other risks in moving the port, as well as uncertainty about some of the costs that I’ve cited. In my view, there are three main limitations to this analysis:

• First, I’ve assumed that there are no technical constraints to doubling freight volumes at POT. This is probably not realistic – expanding that port would be costly both financially and environmentally.
• Second, I’ve assumed that shipping lots more goods by rail between Tauranga and Auckland won’t drive up the price of rail freight. In reality, KiwiRail (or the government) would have to pay for quite a few track upgrades and purchases of rolling stock, which may drive up the costs of rail freight.
• Third, I’ve assumed that it would actually be feasible to redevelop POA’s land, and that redevelopment of port land would create added value rather than simply diverting growth from elsewhere in Auckland. This is not unreasonable, but it won’t be a rapid process. As the Wynyard Quarter shows, it can take over a decade to active and develop a substantial chunk of new land.

Lastly, there are likely to be problems with the timing of funds. In principle, land development profits could be used to pay for infrastructure upgrades. In practice, it won’t work so neatly, as infrastructure requirements will be front-loaded while development profits trickle in over a period of years or decades.

In other words, actually moving the port is likely to be a costly and risky enterprise. It will be difficult to overcome the risks and up-front costs associated with doing so – meaning that we should expect the port to stay in downtown Auckland.

Port location: What do you think?

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