Part 4: The effects of Covid-19 on port companies during 2019/20

Results of our 2019/20 audits of port companies

In this Part, we summarise the main effects Covid-19 had on port companies during 2019/20. We set out how:

Covid-19 affected port companies' revenue

When the country entered a nationwide lockdown in response to Covid-19, the Government identified most port operations as "essential services". This meant they could continue operating during the lockdown. Port company staff were also considered essential workers, allowing them to participate in daily port operations.

In Part 2, we set out port companies' main financial results for 2019/20 (Figure 1). Excluding one-off effects relating to earthquakes, the total revenue of the port sector decreased by about $80 million (6%). When analysing port companies' annual reports, we were unable to determine how much of this decrease was directly related to Covid-19.

A port company generates revenue by facilitating the transfer of goods to or from ships. Therefore, a change in the quantity of imports or exports going through a port will generally affect revenue. Many port companies' annual reports described a decrease in the exports and imports they facilitated, and some of these decreases were because of Covid-19.

For example, exports of logs and related forestry commodities reduced by 10.3%, which affected almost all port companies. These exports were significantly affected by reduced international demand in the early days of Covid-19, as well as an increase in the number of logs exported from Europe. Forestry operations were not considered an essential service during the Alert Level 4 lockdown.

Some imports also decreased, especially vehicles (decreased by 23.2%) and minerals, such as fuel (by 25%). These decreases occurred because of a drop in demand as a result of lockdown.

Not all port companies were affected by the reductions in these imports to the same extent. For example, Ports of Auckland was most affected by the decrease in vehicles, because most vehicles imported into the country come through that port. Port of Tauranga was most affected by the reduction in imports of minerals.

A decrease in trade through New Zealand ports is broadly consistent with what is happening in other countries. The United Nations Conference on Trade and Development estimated that international trade decreased by 5% in the first quarter of 2020, with decreases also expected to occur in the subsequent quarters.25

Several port companies reported that the cruise ship season finishing early also caused them to lose revenue. Cruise ships could not enter New Zealand after the maritime border was closed.

Port Marlborough and Northport (the joint venture operation of Marsden Maritime Holdings and Port of Tauranga) were more affected by Covid-19 than other port companies, so claimed the Government wage subsidy26. Marsden Maritime Holdings (in its own right) and Port of Napier also claimed, but subsequently repaid, the wage subsidy.

Port companies had to change how they operated, which led to additional costs

In 2019/20, port company expenditure increased by about $45 million (5.1%), excluding the one-off effects of earthquakes described in paragraph 2.16. When analysing port companies' annual reports, we could not determine how much of this increase was directly related to Covid-19.

Keeping ports operational during lockdown came at a cost for port companies. Given the increased health and safety risk, port companies had to adjust their operations and working practices. They also had to implement aspects of their business continuity plans (including new sanitary protocols and processes). These changes reduced productivity levels during the first weeks of lockdown and at least until the revised procedures and protocols became normalised.

Many port companies have kept these new protocols in place under all Covid-19 alert levels.27

Some of the biggest ports benefited from having well-established business continuity plans for emergencies. However, others had to prepare new plans to meet the lockdown's requirements.

Some port companies also put in place other measures to control their expenditure, although some of these will have a flow-on effect on 2020/21. These measures included:

  • reducing director remuneration for a specific period of time;
  • instituting wage or salary freezes or deferring salary increases; and
  • deferring non-urgent maintenance.

A change in tax rules had a minor benefit for port companies

In response to Covid-19, the Government changed the tax rules to allow certain taxpayers to deduct the depreciation on certain buildings from their taxable income. Taxpayers have been unable to do this since the 2011/12 tax year.

This change in tax rules benefited all port companies. In 2019/20, the estimated benefit of this change led to the port sector reducing its income tax expense (and the related deferred tax liability recognised by port companies) by $15 million.

Assessing the carrying value of property, plant, and equipment and investment property

Port companies owned property, plant, and equipment valued at $4.8 billion as at 30 June 2020. Seven port companies also owned investment property (land and buildings) valued at $0.8 billion as at 30 June 2020. These two classes of assets make up most of port companies' assets, which are recorded at $6.4 billion in total.

Every year, port companies are required to assess whether the carrying value of their property, plant, and equipment needs to change. This usually involves considering whether an asset value needs to be reduced because the asset is impaired.

For assets measured at fair value, port companies also need to consider whether the asset value has changed.28 Additionally, port companies are required to value investment property at the estimated fair value at each balance date.

These requirements meant that the port companies needed to consider whether their largest asset values had changed. By necessity, this consideration took into account the effects of Covid-19.

No port company directly decreased the value of its property, plant, and equipment or investment property because of Covid-19. However, Lyttelton Port Company noted that its consideration of Covid-19 in future years affected the growth forecasts it used to estimate the fair value reduction referred to in paragraph 2.11.

Covid-19's economic impact significantly affected the level of uncertainty in the assumptions port companies made when assessing the value of land and buildings included in their property, plant, and equipment, and investment property.

Valuers engaged by port companies identified that, although land and property prices had not changed significantly, there had been limited market information available since the lockdown. This made it difficult to predict what the short-term and long-term effects on values would be. Affected port companies appropriately disclosed the risks identified by their valuers in their 2019/20 financial statements.

Port companies met their reporting deadlines

As a result of Covid-19, the Minister of Transport extended the statutory reporting deadline for when port companies needed to adopt their audited financial statements by two months. Listed companies have a different statutory reporting deadline, although the Financial Markets Authority also extended this by two months for companies with a balance date up to and including 31 July 2020.

All port companies met their revised statutory reporting deadlines, which is five months after their financial year-end.

Emphasising the impact of Covid-19 in our audit reports

We issued unmodified audit opinions for the financial statements of all port companies. However, almost all of our audit reports on the port companies referred readers to the disclosures those port companies made about the impact of Covid-19 on their operations.29

We did this because we felt that the readers of port companies' financial statements would be interested in the how the port company was affected by, and responded to, Covid-19.

Our audit reports for listed companies (Marsden Maritime Holdings, Port of Tauranga, and South Port) included a description of the key audit matters in those audits. This was required because these port companies are listed entities.

In describing the key audit matters, our auditors summarised how Covid-19 affected those matters. More often than not, our audit reports emphasised areas of uncertainty from Covid-19, such as the valuation uncertainty referred to in paragraph 4.24.

The medium-term impact of Covid-19 on port companies

Looking to 2020/21 and beyond, it is unclear how Covid-19 will affect port companies. The nature of any economic recovery remains uncertain because it is unclear how Covid-19 will evolve and what capacity the world economy has to recover from lockdown measures other countries have used to slow the spread of the virus.

Currently, Covid-19 still affects international shipping, which is leading to delays in moving freight through ports in New Zealand and internationally. In New Zealand, this has particularly affected Ports of Auckland in 2020/21. However, there has been a subsequent flow-on effect to the other port companies.

Consequently, shipping companies are reconsidering what ports they visit and how often. Exporters are facing a shortage of shipping containers to transport some of New Zealand's exports.

No cruise ships will visit our ports while New Zealand's maritime border remains closed to passengers. This will result in a loss of revenue for most port companies.

These factors will continue to adversely affect port companies' profitability. The continuing effect of Covid-19 should remain a focus for port companies' boards, management, shareholders, and wider stakeholders.

25: United Nations Conference on Trade and Development (2021), Covid-19 and maritime transport: Impact and responses, page 12.

26: In response to Covid-19, the Government's economic priorities shifted to preserving jobs and protecting people's livelihoods. One of its responses was to introduce a wage subsidy scheme to support workers. The wage subsidy scheme was paid to employers, who were required to pass it on to employees.

27: In response to Covid-19, the Government put in place a four-level alert system. Each alert level introduces more-stringent measures to protect people from contracting or spreading Covid-19.

28: The applicable accounting standard, NZ IAS 16, requires that "revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period". When revaluing, an asset value can go up or down.

29: We did not refer readers to Port of Napier's Covid-19-related disclosures in our audit report.