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• Final Report Part IV
• Part A - Main Report
• 9. Wellington Airport
• Asset Base

• Infrastructure Development

• Archive

• Airfield Inquiry

• Final Report Part IV

• Non-Land (Specialised) Assets
• Land
  • WIAL Land Valuation
  • Zoning and Designation
  • Estimates of Opportunity Cost
    • Estimates Derived from MVEU Valuation
    • Independent Estimate
  • Adjustments for Holding and Levelling Costs
  • Seawall
  • Reclaimed Seabed
  • Conclusion
• Appropriate Asset Base

9.62 In Chapter 5, the Commission established principles for determining the appropriate asset base for airfield activities. The asset base for WIAL is now determined.

9.63 The airfield assets of WIAL can be separated into land and non-land assets. Non-land assets are considered first. The most significant non-land assets are the runways, taxiways and aprons that sit on that land (the sealed surfaces) and supporting infrastructure.

Non-Land (Specialised) Assets

9.64 In Chapter 5, the Commission concluded that, for reasons of economic efficiency, assets should normally be valued at opportunity cost, unless they are specialised, when some higher value is required in order to prevent investors' funds from being expropriated and dynamic efficiency harmed (as the opportunity cost of specialised assets is likely to be at or close to zero). In the case of airports, the Commission considers that depreciated historic cost should be used for specialised airfield assets.

9.65 The starting point for determining the value attached to WIAL's non-land airfield assets in the asset base are the values attributed to those assets by WIAL. Unlike AIAL and CIAL, WIAL has revalued its non-land assets consistently since vesting. The first revaluation, based on discounted cash flow (DCF), was undertaken at 30 June 1993. Prior to that WIAL valued all its non-land assets at vesting value depreciated, with any new assets included at depreciated historic cost (DHC). In 1995 (and again since) WIAL revalued all its non-land assets to optimised depreciated replacement cost (ODRC). In between revaluations, WIAL includes any additions to these assets at DHC.

9.66 To arrive at an airfield asset base for WIAL that includes non-land assets at DHC, only one adjustment is required - removal of revaluations above DHC. All revaluations of non-land assets to date have been removed from the Commission's analysis, and associated adjustments have been made to the depreciation of those assets.³⁸⁴

9.67 In Chapter 5, the Commission noted that the dimensions and structure of WIAL's sealed surfaces were largely determined by Civil Aviation Authority requirements and international standards, and that the current runway length was necessary to meet the operating requirements of the aircraft using the airport. As such, the Commission does not optimise any sealed surfaces. The Commission similarly does not optimise any buildings, infrastructure, or vehicles and plant assets.

Land

9.68 Compared to other utilities and infrastructure providers, land is a significant asset for airports. In Chapter 5, the Commission reached the following general conclusions on the valuation of airfield land:

• Airfield land should be valued at its opportunity cost, namely its value in its best alternative use in the event the airport were closed (highest alternative use value).
• The opportunity cost would be the higher of the value with or without the sealed surfaces (the latter incorporating the costs of removing the sealed surfaces).
• Any land holding and levelling outlays, and seawall and reclamation outlays, should be valued as specialised sunk assets at depreciated historic cost. These values should not include any amounts associated with such assets that are already included in the opportunity cost of the land, in order to avoid double-counting.

WIAL Land Valuation

9.69 As with non-land assets, the starting point for determining the value attached to WIAL's airfield land in the asset base are the values attributed to that land by WIAL.

9.70 WIAL has revalued its land consistently since vesting. The first revaluation, based on discounted cash flow (DCF), was undertaken at 30 June 1993. Prior to that, WIAL valued all its land at vesting value depreciated, with any new assets included at historic cost. In 1995 (and again since) WIAL revalued all its land to optimised replacement cost (ORC). In between revaluations, WIAL includes any additions to these assets at cost. WIAL most recently obtained valuations of its land at 31 March 2001 and 21 September 2001.

9.71 The Commission's starting point for its analysis of WIAL's asset base is 31 March 2001. This is the most-recent financial year for which results have been released. Analysis for 2002 can only be done on a forecast basis until the results for 2002 are released. While there is a valuation more recent than that of 31 March 2000 for WIAL's land, the 31 March 2000 valuation is the one that was current at 31 March 2001 (and should, therefore, be used for that year). The changes in land value suggested by the 21 September 2001 valuation are incorporated, where appropriate, into the forecasts of WIAL's asset base in 2002 and 2003.

9.72 At 31 March 2001 (based on the 31 March 2000 valuation) WIAL, using a zonal approach, attributed the following values to airfield land:

Table 37: 31 March 2000 Gross Valuation of WIAL Airfield Land

9.73 WIAL's per ha values for the various land parcels shown in Table 37 are based on a zonal approach to valuation (where the land values are assessed with direct reference to prices paid in the active market for land with a similar intensity of use). WIAL's valuers also, for comparative purposes, computed a valuation under a hypothetical subdivision approach. The resulting land values produced by the two approaches are not materially different. As such, the figures in Table 37 essentially incorporate the following components (making up the market value existing use) under the hypothetical subdivision approach, which can be summarised as follows:

• The sale price of the land for the purposes of a hypothetical subdivision is estimated (assuming a mixture of residential and commercial use), net of selling costs and legal fees.
• An allowance (deduction) is made for:
  • The estimated profit and risk associated with developing the subdivision.
  • Development costs.
  • The interest costs (at 8%) over the 10 year sale and development period.
  • The costs that would be incurred to enable the land to be used as an airfield are added, including planning approval and professional fees, holding costs and financing costs.

9.74 While holding costs are explicitly derived (in the last step) under the hypothetical subdivision approach, they are regarded as implicit in the zonal approach. In addition, WIAL has advised that neither approach includes any adjustment to the land value to explicitly reflect levelling costs.

9.75 Table 38 provides a breakdown of WIAL's total gross land value on an entire airport basis (all 110ha, not just the 85.4ha relating to airfield activities) using a hypothetical subdivision approach. The Commission does not have this information on this basis for airfield activities. The figures for airfield land are estimated by the Commission based on the proportion that the airfield land value ($49,375 from Table 36) is of the total value of WIAL's land (70.32%).

Table 38: 31 March 2000 Gross Value of WIAL Land Broken Down

9.76 The gross realisation was derived as follows:

Table 39: 31 March 2000 Gross Realisation of WIAL Land

9.77 The per ha values detailed in Table 39 represent the estimated sale price of the land for the purposes of a hypothetical subdivision (assuming a mixture of residential and commercial use). The values are supported by market evidence of block land sales in Wellington's eastern suburbs (Rongotai, Kilbirne, Seatoun and Miramar).

9.78 As noted above, the valuation obtained by WIAL in 2000 gave its land (including non-airfield land) a total value of $69m. As shown in Table 37, the airfield land was valued at $49.3m. The figures shown in Tables 37 to 39 above are the gross land values (in that the value of WIAL's seawall - $20.5m - is subsumed within the value of the land). In its financial accounts, and in the pricing proposals that WIAL is discussing with airlines, the land value adopted by WIAL is lower, as the ODRC value of the seawall is deducted from gross land value (but added to civil works). In 2000, this reduces the $69m total land value by $20.5m, arriving at a book value for WIAL's total land of $48.5m (civil works similarly went from $45.3m to $64.9m). The net impact on the total asset base is zero - WIAL's approach ensures there is no double counting. This adjustment in respect of seawall relates entirely to airfield land, so the same adjustments are made to airfield land values.

9.79 [...³⁸⁵] On the same reasoning, the other three parcels of leased airfield land should also be excluded (although it is not clear whether WIAL is to exclude them). The costs associated with leased land is presumably recovered from the parties that lease the land. Removing the leased airfield land reduces the total airfield land value by $2.6m.

9.80 The revised (financial accounts and pricing) figures, excluding the seawall and leased airfield land, are summarised in Table 40. These revised figures are the Commission's starting point for determining the appropriate value for WIAL's airfield land.

Table 40: 31 March 2000 Net Value of WIAL Airfield Land

Zoning and Designation

9.81 All WIAL airfield land is covered by a specific airport designation. The designation limits development that may inhibit the efficient operation of Wellington International Airport.

9.82 The underlying zonings of the various parcels of airfield land at Wellington International Airport have changed over time. At vesting, the zonings were a mixture of residential, industrial and recreation. Currently, all airfield land falls into the Airport and Golf Course Recreation Precinct (as specified in the Wellington City 1998 District Plan).

9.83 While the land remains subject to the airport designation, the provisions relating to the Airport Precinct in the Proposed District Plan do not apply. The Plan permits some commercial activity, but it is limited to that which is "ancilliary to" or "connected with" aeronautical type activity.

Estimates of Opportunity Cost

9.84 For each of the various types of airfield land owned by WIAL, the Commission has derived an estimate of opportunity cost - the highest alternative use value (excluding holding and levelling costs). In deriving its estimates, the Commission has considered:

• Whether the values attributed to the land by WIAL constitute an opportunity cost valuation.
• Any submissions made by the airlines as to the appropriate opportunity cost figure for WIAL's airfield land.
• Any submissions made by WIAL as to the value of WIAL's land in its next best use (other than as an airfield).
• The permitted uses of the land, as dictated by its zoning and designation (outlined above), indicating possible alternative uses. The likelihood of changes in zoning is also considered, as it has implications for the next best alternative use.
• The impact of existing infrastructure at, and adjacent to, Wellington International Airport on the appropriate opportunity cost value of WIAL's airfield land.
• Advice obtained from Telfer Young on the appropriate opportunity cost values (or range of values) for WIAL's airfield land.³⁸⁷

9.85 Opportunity cost estimates derived are based on an assessment of the proceeds that would be obtained from an orderly sale of the land (in economically manageable parcels) over such time period as would likely be needed to achieve the highest and best alternative use value of that land. They are not estimates of the proceeds that would be obtained by the sale of WIAL's airfield land in a single parcel tomorrow (this would be akin to "scrap" value).

Estimates Derived from MVEU Valuation

9.86 A possible way to determine the opportunity cost of WIAL's airfield land is to adjust its market value existing use (MVEU) valuation. WIAL submitted that the estimated block value shown in Table 38 reflects the land's value in its alternative highest and best use. It submitted that this is an estimate of what a developer would pay for the bare land on the open market with the intention of developing a multi-use subdivision on the site.³⁸⁸ It is the market value existing use of the land less the adjustments for airport use (totalling to $21.3m as shown in the airfield column of Table 38). By this approach, Table 38 would suggest an opportunity cost value for WIAL's airfield land of $27.7m, or $324,762 per ha (for the 85.4ha).

9.87 The value implied by Table 38 reflects a mix of residential, commercial and industrial alternative uses. The Commission considers that this assessment of the best alternative use of WIAL's airfield land is reasonable. Given the location of Wellington International Airport, it is highly likely that, in the absence of the Airport, the land would be used for the purposes of a hypothetical subdivision (with a mixture of residential and commercial use). The land does not have the same heritage or rural zoning as the land at Auckland or Christchurch International Airports, which significantly increases the possible alternative uses of WIAL's airfield land. BARNZ submitted that the likely alternative use of the land would be a mixture of commercial, industrial and residential uses.³⁸⁹

9.88 While the Commission agrees with WIAL's assessment of the best alternative use, it has questions about the opportunity cost estimate that can be derived from the tables above. The Commission's questions stem firstly from the fact that WIAL's opportunity cost estimate is derived from the gross valuation of its land (shown in Table 37 and Table 38) and not the net valuation (shown in Table 40). As a result, the opportunity cost estimate is overstated, as the gross valuation still includes WIAL's seawall (which is included in the asset base as a specialised asset at an ODRC value of $20.5m). It is further overstated to the extent that leased airfield land (which has a gross market value existing use of $2.6m) is included in the $27.4m estimate.

9.89 The Commission has further concerns over this being a suitable means of producing an opportunity cost estimate. WIAL submitted that, in deriving the block value figure in Table 38, it was finding an alternative use value in order to determine the market value existing use. It argued that this is not the same as endeavouring to find the optimal sale proceeds of the land if the airport ceased to operate.³⁹⁰ As with AIAL, the Commission regards the value implied by Table 38 as having been estimated in order to determine the cost involved in acquiring land and establishing an airport, not the alternative highest and best use value that might eventuate should the airport cease to operate.

Independent Estimate

9.90 To avoid these issues, the Commission has sought advice from Telfer Young as to what an appropriate independent estimate of opportunity cost might be. Based on advice from Telfer Young, the Commission considers that $450,000 per ha is a reasonable estimate of opportunity cost of WIAL's airfield land.

9.91 The Commission notes that the $450,000 per ha estimate assumes that the seawall is in place and that the value or otherwise of the seawall is subsumed on the value of the land. Given this, the seawall should not also be included in civil works (discussed further below).

9.92 The $450,000 per ha figure also does not take into account the costs of removing sealed surfaces that sit on the operational airfield land. Depending on what the best alternative use was, the sealed surfaces might have to be removed (in order for the land to be put into that use). The costs of removing the sealed surfaces could be significant. In any event, as noted earlier, the Commission takes the higher of the value with or without the sealed surfaces.

Adjustments for Holding and Levelling Costs

9.93 In the revised assessment of WIAL's asset base contained in this Report, the Commission has considered whether it needs to include estimates of the DHC of the holding and levelling costs associated with the development of airfield land. As noted above, amounts associated with such assets should only be included where they are not already included in the opportunity cost of the land, in order to avoid double counting. Amounts should not be included where the holding and levelling costs have no separate value to WIAL.

9.94 Vesting documentation indicates that no separate amounts were attached to these costs as part of WIAL's vesting value. The Commission considers that this may have been because the costs had already been almost fully (if not entirely) depreciated at vesting. Any value that did remain, may have been implicitly included within the vesting value of the land. The fact that the land had been levelled may have added to the value of the land at vesting. As no value was specifically attributed to holding and levelling costs at vesting, investors would not have expected to recover, and earn a return on, such costs.

9.95 The levelling costs associated with the development of WIAL's airfield add to the opportunity cost value of the land. Many potential alternative uses would require levelled land. As such, the Commission considers that levelling costs (the value attached to the fact that the land is level) are captured in its estimates of the opportunity cost of the land. No additional value needs to be allowed for levelling costs.

9.96 In terms of holding costs, the Commission considers that the costs originally incurred when the Airport was developed were almost fully (if not entirely) depreciated at vesting, with low or no value to WIAL remaining. As such, no additional value needs to be allowed in the asset base for holding costs associated with WIAL's airfield land.

Seawall

9.97 The airfield at Wellington International Airport is bounded in part by sea, and lies partly on reclaimed land. The seawall has been built, both as part of the reclamation process, and to protect the land against erosion by the sea.

9.98 As noted in Chapter 8, AIAL has treated its seawall as a separate asset (included in civil works), with a separate value being assigned to it in the asset register, rather than the value being subsumed within the value of the airfield land. As noted above, WIAL has treated its seawall in the same manner. In its value of airfield land included in its financial accounts in 2000, WIAL includes an amount of $20.5 m relating to the seawall in civil works values (transferred from land values). Regardless of whether the seawall is included in civil works or subsumed into the land value, the issue is whether the seawall has a value over-and-above that of the land it protects.

9.99 Using the Commission's valuation principles discussed in Chapter 5, this issue can be resolved by considering the opportunity cost of the seawall and land. Where the seawall is needed to support the runway, but would not be needed for an alternative use of that land, its opportunity cost is zero (as it has no alternative use). Where the seawall is needed to protect reclaimed land more generally, the opportunity cost of that land would be the same as other equivalent land in the vicinity (as the land does not have a use, alternative or otherwise, without the seawall). Again the opportunity cost of the seawall would be zero. The only value, in opportunity cost terms, is in the value of the land it protects.

9.100 In the Draft Report, the Commission made no adjustments to WIAL's asset values to exclude the seawall from its assessment of WIAL's appropriate asset base. However, seawall amounts included in revalued non-land assets (as part of civil works) were reduced to DHC when non-land assets were adjusted. In the revised assessment of WIAL's asset base contained in this Report, the Commission excludes the value of WIAL's seawall from civil works values. As noted above, the value associated with the seawall is subsumed into the Commission's estimate of opportunity cost. The Commission's treatment of seawall in the case of AIAL is different as the seawall at Auckland is not necessarily needed for alternative uses. The values attached to WIAL's seawall at vesting and in the 31 March 2000 valuation that are removed from specialised assets, are shown in Table 41.

Table 41: Treatment of WIAL Seawall

Reclaimed Seabed

9.101 Much of WIAL's operational airfield land has been reclaimed and filled. As noted above, this land would, under the Commission's approach, have an opportunity cost valuation of $450,000 per hectare, as for other airfield land. The issue then is whether any allowance should be made for the costs of reclamation over and above the opportunity cost of the land.

9.102 WIAL has submitted that, from an economic perspective, it is appropriate to value land at opportunity cost and any airfield land originally purchased as land should be valued in its next best alternative use.³⁹¹ However, WIAL further submitted that created land should be valued at creation cost.³⁹² In this regard, WIAL argues that it should be allowed to recover the costs associated with reclaiming seabed to create land.

9.103 The Commission has considered whether it needs to include estimates of the DHC of the reclamation costs associated with the development of airfield land. As noted above, amounts associated with such assets should only be included where they are not already included in the opportunity cost of the land, in order to avoid double counting. Amounts should not be included where the reclamation costs have no separate value to WIAL.

9.104 Vesting documentation indicates that no separate amounts were attached to these costs as part of WIAL's vesting value. The Commission considers that the reclaimed seabed was probably just simply valued as land, with costs of reclamation disregarded. As no value was specifically attributed to reclamation costs at vesting, investors would not have expected to recover, and earn a return on, such costs.

9.105 Without the reclamations, a large part of WIAL's airfield land would not exist in its present form. As unreclaimed seabed, it would have an opportunity cost of zero. However, as reclaimed land, it has a number of potential alternative uses. The reclamation costs associated with the development of WIAL's airfield add to the opportunity cost value of the land. As such, the Commission considers that reclamation costs are captured in its estimates of the opportunity cost of the land. No additional value needs to be allowed for reclamation costs.

Conclusion

9.106 In addition to the general principles determined in Chapter 5, the Commission has determined the following in respect of the valuation of WIAL's airfield land:

• The appropriate estimate of opportunity cost of WIAL's airfield land is $450,000 per ha.
• Holding, levelling and reclamation costs associated with the development of WIAL's operational airfield land should be included at DHC (to extent they are not covered by opportunity cost and continue to have separate value to WIAL).
• Any value attributed to WIAL's seawall are excluded from specialised assets as its value is subsumed in the Commission's estimate of opportunity cost.

Appropriate Asset Base

9.107 Based on the Commission's views of asset base outlined in Chapter 5 and their application to WIAL above, the Commission estimates the value of WIAL's airfield assets as at 31 March 2001 to be $54 million. The detailed calculation of the asset base is included in Appendix 15. Table 42 summarises the adjustments to WIAL's valuation to arrive at the Commission's assessed value.

Table 42: WIAL Airfield Asset Base as at 31 March 2001

9.108 The exclusion of leased airfield land reduces the asset base by $2.6m. The inclusion of non-land assets at DHC (rather than ODRC) reduces the asset base by approximately $24.5m. The major change between the figures estimated in the Draft Report and the figures shown above relates to the adjustments made to include operational airfield land at an opportunity cost value of $450,000 per ha. This increases WIAL's asset base by $7.6m (relative to WIAL's value, which was the figure used in the Draft Report).³⁹³ The removal of the seawall from civil works reduces the asset base by a further $20.5m.

³⁸⁴Depreciation figures when the assets are valued at DHC will be lower than when the assets are included at ODRC, so depreciation figures are reduced (amounts are added back to the asset base).

³⁸⁵WIAL Response to Section 70E Notice, 11 February 2002.

³⁸⁶$32,451 figure shown in Table 37 less $20,532 value attributed to seawall. Note that the $ per ha figure is recomputed to give an effective rate ($11,919/54.0854).

³⁸⁷Telfer Young's advice to the Commission is included in Appendix 21.

³⁸⁸WIAL Response to Section 70E Notice, 11 February 2002.

³⁸⁹BARNZ Submission on the Draft Report, 10 August 2001, page 21, paragraph 13.3.

³⁹⁰WIAL Submission on Estimates of Opportunity Cost, 20 May 2002, pages 8-9.

³⁹¹WIAL Submission on the Draft Report, 14 August 2001, Expert Report 2, page 13.

³⁹²Ibid, Vol. 1, page 58, paragraph 9.23.

³⁹³The optimisation of selected assets is the change that occurs in moving from scenario 1 to 2 in the Commission's workings in Appendix 15. The reduction of land to opportunity cost occurs when then moving from scenario 2 to 4. The removal of revaluations of non-land assets to ODRC occurs when lastly moving from scenario 4 to 6. Scenarios 3 and 5 make the same adjustments, but without any optimisation. Scenario 6 reflects the Commission's adopted principles and views on WIAL's appropriate airfield asset base.