Infratil boss Lloyd Morrison

By Jenny Ruth

Saturday 12th July 2003

Infratil is a specialist investor in infrastructure and owns 67% of Glasgow Prestwick International Airport, 66% of Wellington International Airport, 35.2% of TrustPower, 10% of Port of Tauranga and other investments.

SC: Was your investment in Australia-based Energy Development a mistake?

Infratil managing director Lloyd Morrison: No, not yet. There's no doubt that it's been a disappointment that we paid too much to enter the business, but that's looking backwards. At this point, we only own 12.7%. it's clearly a question of where we go from here, whether we buy more or buy into other similar companies. I don't feel at all uncomfortable about our exposure. I do feel disappointed that we didn't purchase more favourably.

SC: Why haven't you written down your investment in Energy Development to market value (Infratil paid nearly $56 million for a 12.9% stake in Energy Development a year ago, an average price of A$3.17 a share. They are currently trading at A$1.66)?

LM: We obviously believe the underlying value is still there. Plus we have an objective of moving forward. It's also fair to say that a lot of the investments we've made haven't performed early on. If everything was hunky dory there would be a lot of other competing interests to get involved and the valuation would be different.

SC: How much influence does Infratil have over Energy Development?

LM: We're very happy with our board representation with Bruce Harker. It's given us a much greater appreciation of the waste part of the energy sector and of the waste sector. It ties in very well with a green, environmental-type focus. We've spent a lot of time thinking about issues such as methane emissions and Kyoto.

There have been changes in management. We're only a minority player in those changes. We only have the influence of good ideas and common sense and credibility. We can't demand change or force change. All we can do is contribute.

SC: Has your "good ideas and common sense and credibility" been appreciated by Energy Development?

LM: I would say there's a growing appreciation. Frustratingly, it hasn't been appreciated to the degree it perhaps could be.

SC: Infratil seems prepared to spend a lot of time on investigating things which may not pay off?

LM: We're prepared to spend quite a lot of time finding opportunities. When we get it right, we regret not having more of the business. When we get it wrong - with Tranz Rail, it would be a lot worse if we had 20%. (Infratil owns 7% of Tranz Rail and wrote the stake's value down by 5 million in the year ended March).

If you had asked me 15 months ago what position we would be in at the end of March 2003, I would have said I would be disappointed if we didn't own one or two more airports in Europe. We've missed opportunities for a range of different reasons. It's part of the frustration of trying to get yourself well-positioned.

SC: Is the lesson of Infratil's experience in investing in Tranz Rail and Energy Development that owning such small stakes in companies isn't a good idea?

LM: Our preferred position is to be influential. We like to get into businesses where we can add value, but there's no cookie cutter for any deal. In many instances, you need to ease your way into the investment. The people involved in the investment don't know us and are cautious about our involvement. And in many instances we don't know enough about the investment either.

SC: Is the idea of turning Whenuapai into a commercial airport a dud? (Infratil has formed a partnership with the Waitakere City Council aimed at developing the current airforce base into an airport.)

LM: It's understandable people think that because it's been politicised. There are entrenched interests that don't want it to go ahead. Look at it purely from the point of view of a disinterested outsider and ask, does it make sense. Local authorities will need economic growth, Waitakere and the North Shore. For people who live in the area it makes enormous sense, it's a no brainer.

From an Infratil shareholder's point of view, it's not clear whether it makes sense yet. The question I have is whether we will actually get customers there who are willing to pay the price that the development would cost.

The scepticism is rightly there. There seems to be a lot of people unwilling for it to happen. At the moment there are over 20,000 take-offs and landings with very noisy aircraft. If they don't go ahead with it, there will never be another airport in Auckland.

SC: You've been selling down your stake in Port of Tauranga. Does that mean it's a mature investment to which Infratil can add little further value to?

LM: It's not mature in the sense that the business itself has good growth prospects, but I don't think we see ourselves as being able to add material value to it. We're reluctant gradual sellers. We don't have unlimited resources and we've had to review our holding at various stages. Does it seem inevitable that we would sell out of it? I would say it does, but they keep delivering the goods.

SC: Infratil and partner Alliant now control TrustPower. How much further value can be added there?

LM: We feel we can contribute very well. The company's in a very good growth phase at the moment. It's very well placed for an increasing focus in renewable energy.

SC: Will that include more wind power stations (in May, TrustPower announced a $60 million expansion to its Tararua windfarm)?

LM: The countries that are building a lot of wind (stations) have a more proactive approach to it than New Zealand. The economics of the Tararua stage two, with the support of carbon credits, is marginal and wouldn't have gone ahead if it wasn't part of a policy to grow in that area and if it wasn't a comparatively low cost add-on to an existing facility. I don't think the two wind power stations that have been announced recently are the thin edge of the wedge, but we think it's in the country's interests to get them built.

SC: Infratil's head office is in Wellington which has seen an exodus of businesses moving their head offices out. What's your view of the Wellington commercial property market?

LM: Personally, I think it's bottomed. There aren't many big corporates to go now. But government is playing a big part in business life now. That means not only is there employment growth, but anybody not based here will have to spend a lot of time flying down here. There are also some very strong growth sectors in Wellington such as the cultural sector, particularly film.

But the real issues that drive growth and passenger numbers are the price of air travel and competition. We're seeing a bit of a fool's paradise with Air New Zealand at the moment. If that merger (with Qantas) goes ahead, I think it will have negative consequences for Wellington.

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