Government moves to protect rail network

The government has this afternoon signed a Heads of Agreement to buy the rail network for $1, take out a 35 per cent stake in Tranz Rail and rescue it from insolvency through an immediate cash injection of $44 million, Finance Minister Michael Cullen and Transport Minister Paul Swain said.

“We are entering this transaction for important public policy reasons: to ensure that the trains keep running and to secure rail as a vital piece of infrastructure in the national interest,” Dr Cullen said.

Mr Swain said that if the rail system were to cease operating – even temporarily – the disruption to the economy would be significant.

“More importantly, the government is moving to secure much more control over safety, customer satisfaction and service standards. This is good news for the travelling public and for freight rail users,” he said.

Dr Cullen said the $44 million had been provided as a secured deposit at normal commercial rates and was a down payment against the purchase price.

“Tranz Rail approached the government last month under pressure from its banks. It was threatened with going into receivership because it could not meet lease payments for wagons and locomotives due on 19 June.

“Negotiations with Tranz Rail were nearing completion when Toll Holdings made its move. But, even if after getting more information on Tranz Rail’s predicament Toll Holdings decided to proceed with its bid, it could not complete the process in time to make the 19 June deadline and to meet Tranz Rail’s immediate cash needs,” he said.

“The purchase of the 35 per cent shareholding, at 67 cents a share, will be recommended by the Tranz Rail board to shareholders for approval at an extraordinary general meeting on 11 July.”

The 67 cent price was the fairest value the government’s advisors were able to arrive at and reflected Tranz Rail’s financial position, the benefits to the company of the total package and the fact that the government was injecting new equity rather than seeking to buy existing shares.

“Existing shareholders stand to benefit from the recapitalisation deal the government is offering because it will substantially strengthen the company’s balance sheet,” Dr Cullen said.
“Earlier this week, we had discussions with Toll Holdings to explore any common ground between them and the Crown. However they wanted to proceed with their bid, and we had no confidence that we would be able to negotiate an acceptable arrangement with them post-acquisition for the track.

“The 35 per cent stake would give the government effective control of Tranz Rail as it would make it the largest single shareholder. The government would also have the right to nominate three of the seven directors to the board.

“But there would be nothing to stop Toll Holdings from leaving its offer for Tranz Rail on the table or issuing a new offer as the government is not necessarily committed to remaining a long-term shareholder in the operating company. Ownership of the track - with all the consumer protections that implies – would, however, remain with the Crown,” Dr Cullen said.

The main components of the government-Tranz Rail Heads of Agreement are:

- A new Crown entity - TrackCo - will be set up to maintain and control the rail network. Tranz Rail will be charged for the use of the track. The charge is not expected to fully cover TrackCo’s costs in the first few years, implying a level of subsidy of around $20 million a year. The rate will be reviewed after three years.

- Tranz Rail will have exclusive rights to the network for freight services but, to maintain this access, will need to satisfy rigorous Service Level Agreements relating to volume and will be subject to a tough ‘use it or lose it’ regime in the event of non-compliance. It will also be liable to financial penalties should it not meet agreed service standards.

- Tranz Rail will partially surrender its lease over the land under the tracks and will be compensated by the government for any resulting loss of assets or income, for example from sub-leased properties. Compensation of around $50 million will be paid but this will be cost neutral to the Crown.

The government also intends to invest $100 million over the next five years in improving and upgrading the rail network.

Dr Cullen said the consortium led by Fay Richwhite and Wisconsin Central which bought Tranz Rail for $328.3 million in 1993 had been the beneficiary of an extremely soft privatisation.

“Unlike with the Telecom and Air New Zealand sales, the then National government did not insist on a Kiwi Share in Tranz Rail and did not put in place any effective alternative mechanism to enforce performance obligations.

“The proposal we are announcing today goes a long way to remedy that structural weakness,” he said.

Mr Swain welcomed the deal, saying it would protect rail as a transport option now and into the future and would give the government leverage to ensure that Tranz Rail performed to expectations.

“Rail is a key component of the New Zealand Transport Strategy, released last year. The government’s objective is to shift people and freight on to rail as a cost competitive and environmentally sustainable way to ease the pressure on our roads.

“This is a major step toward achieving that goal,” Mr Swain said.

ENDS

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