David Briginshaw, Editor-In-Chief

New Zealand comes full circle

THE decision by the New Zealand government to take all rail operations into public ownership takes the country’s foray into private rail ownership full circle as everything will be back in the public sector once more, but the decision also raises a number of important questions concerning the role of governments in rail transport.

New Zealand was the first country in the world to privatise its national railway - New Zealand Rail - as a complete entity. It was sold in 1993 as a profitable enterprise to a consortium led by the US regional railway, Wisconsin Central, which was on a mission to acquire foreign railways under the dynamic leadership of Mr Ed Burkhardt.

At first the railway - renamed Tranz Rail - went from strength to strength with both traffic and profits rising steadily. But a few years later it was dealt a double blow by the Asian economic crisis in 1997 followed swiftly by soaring fuel costs which severely dented profits, although traffic continued to grow to record levels. By 2001, Tranz Rail was making a loss and Wisconsin Central, by then under new management, was keen to sell the railway.

In 2003, the government agreed to take over control of the infrastructure, while the rail operation was sold to Toll Holdings, Australia. Toll agreed to pay Ontrack, the new infrastructure authority, an access charge, but almost immediately it started to complain that the access charge was too high. “Why Toll signed the agreement seemingly escapes Toll’s executives,” says IRJ’s regional editor, David Leitch.

Toll took the dispute to arbitration saying it could only afford to pay $NZ 48 million ($US 37.6 million) compared with the $NZ 56 million it had agreed to pay. Even though Toll lost, it still refused to pay the full amount leaving the government to cover the difference. The government was very unhappy at being forced to subsidise a foreign private company, and the general mood in New Zealand was turning against the privatisation of existing or former state-owned companies.

With national elections due by November, the government decided to start negotiations to purchase Toll Rail. When Toll bought out the minor shareholders last year, it said the railway operation was worth $NZ 700 million. The government offered $NZ 500 million for Toll Rail initially, but this was rejected. The government increased its offer to $NZ 665 million which Toll accepted.

Toll Rail told IRJ that while this figure was less than it wanted, it was more than the government wanted to pay, so it was a “win-win” for both parties. “If agreement had not been reached, we faced the prospect of months of court battles and this was not much of an alternative for either party,” says Ms Sue Foley, corporate affairs manager for Toll Rail.

Foley points out that Toll’s objective, when it acquired Tranz Rail, was to increase the business by 4% a year, which it has achieved. She says that in less than five years, Toll has turned “what was a basket-case when we took it over, into a desirable property.”

Toll Rail’s CEO, Mr Paul Little, says that Toll’s preference was to hold onto the rail and ferry business, but “because we couldn’t get the security we needed around track access we couldn’t go and invest another $NZ 100 million while having a dubious return. The Toll Board simply couldn’t live with that.”

However, it appears that the government will have to pay Toll another $NZ 100 million to cover debts incurred by Toll Rail. On top of this, the government will probably need to invest $NZ 300 million to modernise equipment and operations.

While the government was obviously forced into a corner regarding the acquisition of Toll Rail, it seems to have given little thought to what other solutions might have been possible or what to do with the railway once it became an operator again. The irony is that Toll will be the railway’s biggest freight customer, generating about $NZ 60 million in revenue a year. The sale will give what Little describes as a “war chest” which will be used to expand its road freight business in New Zealand. As Leitch points out, Toll will be a customer with a unique knowledge of its supplier’s operations. This could prove quite damaging for the rail operator in the future.

Quite why the government does not intend to integrate its rail operations with Ontrack to form a fully-integrated railway once more is a mystery when there would be clear benefits in doing so. The government could offer the rail operation as a concession. Options would be a single national concession, or separate freight and passenger concessions, or separate concessions for the North and South islands. Operating rail services as a concession would help to ensure that they are run commercially, and hopefully without too much political interference. It is also unclear at this stage how Ontrack will be funded. If the government funds Ontrack directly, then it should be possible for the new operator to make a profit.

All too often governments make decisions without thinking through the consequences or having a game plan in place. Railfreight should be operated along commercial lines. Grants can be given to shift the balance in rail’s favour for environmental reasons, but this is not necessarily a reason to take the railway into state ownership. Of course, it is a different story for passenger services, where state subsidy is common, but long-distance passenger rail only accounts for a tiny proportion of the operation in New Zealand. In freight, it is up to governments to ensure fair and equitable competition between modes, but not to become freight operators.