Asset Base
10.57 In Chapter 5, the Commission established principles for determining the appropriate asset base for airfield activities. The asset base for CIAL is now determined.
10.58 The airfield assets of CIAL 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
10.59 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.
10.60 The starting point for determining the value attached to CIAL's non-land airfield assets in the asset base are the values attributed to those assets by CIAL. Since vesting, CIAL has valued its non-land assets in its financial accounts at vesting value depreciated, with any new assets included at depreciated historic cost (DHC). On 30 June 1999, CIAL obtained a valuation of its sealed surfaces based on optimised depreciated replacement cost (ODRC) methodology. The ODRC valuation was more than double the DHC value at 30 June 1999.
10.61 In arriving at new prices in December 2000 (which took effect on 1 January 2001), CIAL included its sealed surfaces in its airfield asset base at the higher ODRC figure, with any additions since 30 June 1999 being included at DHC. In its financial accounts, CIAL still includes sealed surfaces at DHC (in contrast to AIAL and WIAL who have included the revaluations in their accounts). Other non-land assets (Buildings, Vehicles, Furniture and Plant) were not revalued and were included in pricing at vesting value depreciated, with any new assets included DHC.
10.62 To arrive at an airfield asset base for CIAL that includes all non-land assets at DHC, only one adjustment is required - removal of revaluations above DHC. The 30 June 1999 revaluation of sealed surfaces has been removed from the Commission's analysis, and associated adjustments have been made to the depreciation of those assets from 2000 onwards.420 The Commission has reversed CIAL's reseal reserve adjustment to produce a DHC figure for CIAL's sealed surfaces.421
10.63 In Chapter 5, the Commission noted that the dimensions and structure of CIAL'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
10.64 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 net costs of removing the sealed surfaces).
- Any land holding and levelling 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.
CIAL Land Valuation
10.65 As with non-land assets, the starting point for determining the value to be attached to CIAL's airfield land in the asset base are the values attributed to that land by CIAL. Up until 30 June 1996, CIAL valued all its land at vesting value, with any new assets included at cost. On 30 June 1996, CIAL revalued all land to market value. Since then, CIAL has regularly revalued land, and in between revaluations it has included any acquisitions at cost.
10.66 At 30 June 1999, CIAL attributed the following values to airfield land (note that some land is freehold and some leasehold):
Table 60: 30 June 1999 Valuation of CIAL Airfield Land
| | Area (ha) | Value per ha ($) | Amount
($000s) |
|---|
| Runways, Taxiways and Grass | 328.0865 | 10,000 | 3,281 |
| Lessors Interest | 32.8764 | | 361 |
| Apron | 9.0269 | 500,000 | 4,513 |
| Canterbury Aero Club | 1.4426 | 500,000 | 721 |
| Lessors Interest | 0.525 | | 328 |
| Pavement (allocated to Airfield) | 1.9426 | 250,000 | 486 |
| Land Held for Development | 176.47 | 422 | 2,972 |
| Total | 550.37 | | 12,662 |
10.67 For the purposes of arriving at prices in 2000, CIAL voluntarily excluded the land held for development (approximately 176ha) from its asset base. The Commission does not, therefore, consider whether it is appropriate to include the land or not, but takes it as read that it should be excluded as CIAL has done. This is also consistent with the Commission's approach to land held for development by other airports.
10.68 The revised figures are summarised in Table 61. These figures are the Commission's starting point for determining the appropriate value for CIAL's airfield land.
Table 61: 1 January 2001 Value of CIAL Airfield Land Used for Pricing
| | Area (ha) | Value per ha ($) | Amount
($000s) |
|---|
| Runways, Taxiways and Grass | 328.0865 | 10,000 | 3,281 |
| Lessors Interest | 32.8764 | | 361 |
| Apron | 9.0269 | 500,000 | 4,513 |
| Canterbury Aero Club | 1.4426 | 500,000 | 721 |
| Lessors Interest | 0.525 | | 328 |
| Pavement (allocated to Airfield) | 1.9426 | 250,000 | 486 |
| Total | 373.9 | | 9,690 |
10.69 Unlike AIAL, the market value existing use (MVEU) of CIAL's airfield land was not derived by using a base figure for the value of the land and adjusting that value upwards for such factors as levelling and holding costs. A zonal approach was used to value the CIAL land assets (one of the two approaches used by WIAL). CIAL's land assets are valued with direct reference to prices paid in the active market for land with a similar intensity of use. Valuing the land using a zonal approach involved the following steps:
- Identifying land associated with airfield activities.
- Disaggregating land into broad zones based on the intensity of land use.
- Based on market evidence, deriving land values and applying them to the identified parcels/zones of land.
- Estimating individual land values.
10.70 The $10,000 per ha valuation of the runways and taxiways land is based on comparable sales of rural land in the greater Christchurch area. The $250,000 and $500,000 values attributed to the other land are based on a comparable land use of large industrial. The lower value of $250,000 used for pavement (roading) reflects its lower intensity of use.
Zoning and Designation
10.71 Historically, airport land at Christchurch was a designated area within an underlying rural zone. Currently (since the Proposed Christchurch City District Plan 1995), all CIAL airfield land is zoned "Special Purpose (Airport)". Any development of that land has to be clearly associated with the operations of the airport. Some commercial activity is permitted, but it is limited to that which is "ancillary to" or "connected with" aeronautical type activity. Residential accommodation is only allowed in association with the security or management of an activity within the zone, for short-term location of personnel associated with the operations of the airport, or to provide accommodation for travellers.
Estimates of Opportunity Cost
10.72 For each of the various types of airfield land owned by CIAL, 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 CIAL constitute an opportunity cost valuation.
- Any submissions made by the airlines as to the appropriate opportunity cost figure for CIAL's airfield land.
- Any submissions made by CIAL as to the value of CIAL'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, Christchurch International Airport on the appropriate opportunity cost value of CIAL's airfield land.
- Advice obtained from Telfer Young on the appropriate opportunity cost values (or range of values) for CIAL's airfield land.423
10.73 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 CIAL's airfield land in a single parcel tomorrow (this would be akin to "scrap" value).
Submissions Received
10.74 The major proportion of CIAL airfield land is valued (by CIAL) on a rural use basis, but some small areas of land are valued by reference to sales of commercial/industrial sites. During consultation with CIAL in 2000, the airlines agreed with the valuation on a rural basis, but disagreed with the use of higher commercial/industrial values for other land parcels. The airlines (based on their valuers' opinion) considered that there was no market-based evidence to substantiate the use of the higher values for some areas of airfield land. They suggested that a uniform value per ha should be applied. The airlines proposed a base land value of $30,000 per ha, adding a 55% premium for airport land, and an allowance for site preparation (presumably levelling costs) of $15,000 per ha, producing a MVEU of $61,500 per ha.424
10.75 In its submission on the Draft Report, BARNZ considered that the value CIAL had assigned to its airfield land ($9.69m or $10,000 per ha), based on extensive and intensive rural use, appeared to be reasonable.425
10.76 CIAL submitted that the next best use of the bulk of the airfield land would be as rural residential land (valued at $10,000 to $12,000 per ha). However, CIAL noted that other land uses that should be considered are:426
- Resort, hotel or golf course land, similar to the close-by Clearwater Resort.
- Parcels of commercial or technology park development along the eastern perimeter of the airfield (valued at $200,000 per ha).
- More extensive rural residential use along the western boundary of the airfield (CIAL suggested that such small holding would be valued at $50,000 per ha).
Commission Assessment
10.77 The current zoning of CIAL's airfield land limits the best alternative rural (farming) use. However, if the airport were to cease to operate it is highly likely that the zoning would change. The current zoning reflects the present use of the land as an airfield and a desire to control development around the airport, so as to avoid noise controls. Without the airport, there is no need for the restrictions on development to continue.
10.78 The Commission is of the view that the best alternative use of CIAL airfield land would be for urban/lifestyle development, incorporating a range of uses including commercial, retail, industrial, lo density residential and lifestyle blocks. The location of the land (both in proximity to the City, and to State Highway one north and south of the City), the existing infrastructure/amenities in place at the airport, and the type of land uses undertaken on nearby land lead the Commission to this view.
10.79 having considered submissions from CIAL and BARNZ on opportunity cost estimates, and taken advice from Telfer Young, the Commission is of the opinion that $70,000 per ha is an appropriate estimate of the opportunity cost of CIAL's airfield land. This value would apply to all airfield land owned by CIAL.
10.80 Compared to the values adopted by CIAL, the Commission estimate results an increased valuation of the runways and taxiways land (valued by CIAL at $10,000 per ha), but decreased values for other areas of airfield land (valued at $250,000 and $500,000 per ha by CIAL). However, as the runways and taxiways land makes up the majority of airfield land (in terms of ha), the overall impact on the valuation of CIAL airfield land (excluding development land) is to increase it from $9.69m to $26.1m. The Commission uses this higher valuation in its analysis below.
10.81 The figures above do 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 may significant. CIAL estimated that it would cost $2.7m to remove its sealed surfaces.427 However, as noted earlier, the Commission takes the higher of the value with or without the sealed surfaces.
Adjustments for Holding and Levelling Costs
10.82 In the revised assessment of CIAL'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 the runways, taxiways and aprons land (337.1Ha). 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 CIAL.
10.83 Vesting documentation indicates that no separate amounts were attached to these costs as part of CIAL'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.
10.84 The levelling costs associated with the development of CIAL'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.
10.85 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 CIAL remaining. As such, no additional value needs to be allowed in the asset base for holding costs associated with CIAL's airfield land.
Land Held for Development
10.86 CIAL holds 176.47ha of land for future development of the airfield. This land was valued at 30 June 1999 at $2.972m, made up as follows:
Table 62: 30 June 1999 Valuation of CIAL Airfield Development Land
| | Area (ha) | Value per ha ($) | Amount
($000s) |
|---|
| North of Harewood Road | 15.8126 | 12,000 | 190 |
| East of Subsidiary Runway | 2.1267 | 250,000 | 532 |
| South of Avonhead Road | 8.2343 | 50,000 | 412 |
| Located on Title #1 | 70.7668 | 12,000 | 849 |
| Lessors Interest | 51.6558 | | 654 |
| Balance of Titles | 27.8767 | 12,000 | 335 |
| Total | 176.47 | | 2,972 |
10.87 There are two key reasons that CIAL holds land for future development:428
- To provide land for airport developments that increase operational capacity (e.g., part of the land is held for a proposed apron development).
- To provide a buffer between the core airport activity and the possible encroachment by land uses such as housing, which may, in the future, constrain the Airport's operations.
10.88 As noted above, in its value of airfield land included in its asset base for pricing purposes in 2000, CIAL excluded all land held for development. In the Draft Report, the Commission, therefore, did not consider whether to make adjustments in respect of optimising out the land (as CIAL had done it itself). The Commission did not consider whether any further adjustments were needed to historical periods. Since the Draft Report, the Commission has learned that approximately 122ha of development land existed at vesting and was valued (at vesting) at $0.955m and that more land has been acquired since vesting. As a result, adjustments were needed for 1989 to 1998 to make the asset base in those years consistent with that currently used by CIAL for pricing purposes. In this Report, the Commission has optimised all land held for development in the years 1989 to 1998.
10.89 The Commission notes that its approach to land held by CIAL for development is consistent with that for AIAL and WIAL. If and when CIAL decides to start to develop the land, and the airlines agree to this, it will be appropriate, at this point, for the capitalised net holding costs associated with the land to enter CIAL's charging base.
Conclusion
10.90 In addition to the general principles determined in Chapter 5, the Commission has determined the following in respect of the valuation of CIAL's airfield land:
- The appropriate estimate of opportunity cost of CIAL's airfield land is $50,000 per ha.
- Holding and levelling costs associated with the development of CIAL's runways, taxiways and aprons land should be included at DHC (to the extent that they are not covered by opportunity cost and continue to have separate value to CIAL).
- In accordance with CIAL's treatment of land held for development, it is excluded from the asset base until such time as CIAL starts to develop it. The capitalised net holding cost to that point should be treated as a specialised asset, to be written off over the medium-term; and the land would be valued at opportunity cost.
Appropriate Asset Base
10.91 Based on the Commission's views of asset base outlined in Chapter 5 and their application to CIAL above, the Commission estimates the value of CIAL's airfield assets as at 30 June 2001 to be $38 million. The detailed calculation of the asset base is included in Appendix 17. Table 63 summarises the adjustments to CIAL's valuation to arrive at the Commission's assessed value.
Table 63: CIAL Airfield Asset Base as at 30 June 2001
| | Amount ($000s) |
|---|
| Asset Base used by CIAL for Pricing Purposes | 40,067 |
| Optimisation of Development Land | 0429 |
| Adjustment to Operational Airfield Land Value (ORC to OC) | 16,483 |
| Add back of Reseal Reserve | 0430 |
| Adjustment to Non-Land Asset Values (ODRC to DHC) | -20,031 |
| Associated Adjustment to Depreciation (ODRC to DHC) | 1,568 |
| Commission Airfield Asset Base | 38,087 |
10.92 The inclusion of non-land assets at DHC (rather than ODRC) reduces the asset base by $18.4m.431 The inclusion of land at opportunity cost increases the asset base by $16.4m.
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