This is an updated version of the previous post “If asset sales are no longer an option, how about asset allocation?” . Frankly, it didn’t take much work as not a heap as changed with the state of Red Bus
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All appearances suggest that asset sales are not being considered by the Christchurch City Council (CCC). This will please many as there are good reasons for keeping publicly owned assets. However, advocating for council ownership should not prevent sensible discussions about asset allocation.
Simply put, are CCC assets performing well, or should they swap them for something else? If we are going to keep the family silver, shouldn’t we make sure what we have is in fact silver!
For example, consider Red Bus. Is it worth the CCC owning this asset, or could it do better?
The annual report for Red Bus is freely available so we can get significant insight into this company’s performance. So what does this reveal?
With publicly owned companies it is inadequate to focus only on financial performance as there are often important, but more intangible, valuation considerations. They may be a monopoly provider, or they may provide some form of public good that the private sector would not deliver.
A useful thought experiment is to ask, “what would happen if this company ceased to exist?” What would be lost that the numbers do not show?
With Red Bus the answer is pretty clear, not much!
Despite appearances, Red Bus is not responsible for providing public transport in Christchurch. ECAN is. Red Bus simply tenders to provide bus routes along with other companies.
And they often lose. Currently only 30% of routes are performed by Red Bus with private firms like Go Bus delivering the rest.
If Red Bus stopped providing bus services your average bus user wouldn’t notice the slightest difference.
So why does Red Bus exist? It exists because the CCC believes it can operate a bus company profitably and receive a healthy dividend. Therefore, we can largely ignore any intangible benefits and focus primarily on its financial performance.
So how did they do?
Last year Red Bus declared a pre tax operating profit of $303,000 on turnover of just over $20.5 million. Better than last year but still a very skinny margin around 1.5%.
“running to stand still” is the phrase that comes to mind.
Of more concern is the amount of resources used to get this small profit. The accounts list net assets at a shade under $38 million, implying a return on assets of 0.8%.
If Red Bus was sold, and different assets purchased, what return could we expect from $38 million? As a comparison we could:
- Put the money into a bank deposit. With interest rates currently around 3.5% this is worth $1.35 million per year.
- Buy some industrial property. A 7% return should be possible so this is worth $2.6 million per year.
- Attempt to mimic the performance of Ngai Tahu’s commercial arm which made around 15% a year since settlement. This is around $5.5 million a year.
None of these options would compromise the provision of a public bus service. ECAN would simply contract to another company. In each case we would get the bus service PLUS the extra money.
A 7% return via option 2 is not an unreasonable expectation. What does Red Bus aim for? Apparently it has a target of $300k. Although they have achieved this “heroic” goal, 8 times this could have been achieved with far less effort!
Some conclusions can be drawn:
- Red Bus is inefficient as even with its thin margin it can’t keep private providers (who tend to be very rational about profit) at bay.
- Red Bus is very asset rich but makes virtually no return on those assets.
- If the council wants a dividend from assets there are far easier options than owning this bus service.
- Owning this company effectively wastes around $10 per ratepayer annually.
It would seem that selling up, letting others provide the bus service, and buying better assets is a reasonable alternative.
Red Bus is a tiny component of the CCC asset portfolio. However, even reallocating these resources could significantly improve the life of ratepayers. Even if only used for transport in the city an extra $2.6 million per year could be used to:
- Give away 1 million free bus tickets to encourage more users.
- Give 7000 bikes away.
- Give 1500 E-bikes away.
- Provide 86,000, $30 taxi trips.
- An additional 3% more bus routes could be provided
These are just some options available, and they would be additional to the existing bus system.
Get creative. What would you do?
It is not unreasonably that all CCC owned companies should receive the same attention (hint, City Care deserves a look for starters). As ratepayers we should ensure that they are achieving even a basic level of performance so we are able to enjoy the benefits. As demonstrated with Red Bus, not doing so could be leaving our community significantly worse off than it could be.
Rough against rough 