Cullen & Little Press Conference On Tranz Rail

Hon Dr Michael Cullen:

If I can introduce to you, for those of you who haven’t met Mr Paul Little from Toll Holdings. As you will by now be aware, the Government and Toll have been talking for some little time about a joint approach on the issue of rail, and we have, as of this morning, negotiated an agreement with Toll Holdings, which in some respects is very similar to the agreement that we had with Tranz Rail, and in other respects has got some significant differences. We, of course, have wanted to have a joint approach earlier. I think there’s probably some degree of cross-communications, partly because, under our various bits of legislation, we were unable to indicate to Toll how closely we were to agreement with Tranz Rail at our previous meeting. I think Toll had gained from elsewhere, if I can say so, a somewhat different impression, and so I think there was a degree of cross-communication at that point. We are now over that, I think, and to the point where we have been talking seriously for a couple of weeks. Officials and representatives of Toll have been meeting until late last night and, indeed, into early this morning, and then resumed this morning, and an agreement has been signed.

The essential features are that, again, the Crown will be purchasing the track for $1. There is a deal around land, which is the same deal, essentially, as the deal which exists under the present heads of agreement with Tranz Rail. As with the Tranz Rail agreement there is $100 million going into the infrastructure. The additional feature of this agreement is that there is a commitment from the Crown in terms of $25 million per year for the first 4 years for capital expenditure, which is replacement capital expenditure, and the total of $200 million is not subsequently recovered by way of the access-charging regime. However, unlike the heads of agreement with Tranz Rail, there is no ongoing subsidy within the access agreement beyond the initial 5-year period, so that the net present value—the cost to the Crown of the two deals—is almost identical in that respect. The key difference in this respect is that there is a clearer commitment to upfront expenditure to restore the state of the infrastructure. I think it’s fair to say that it was always our understanding that we expected to have a fairly heavy amount of up-front expenditure, given our knowledge of the state of the infrastructure of Tranz Rail.

We, of course, will not now be seeking a 35 percent equity shareholding in Tranz Rail. That, in part, was to give us the capacity to influence very significantly the make-up of Tranz Rail and its future direction. With a new competent operator in place there is not the same reason for the Government to be seeking a 35 percent equity shareholding.

Toll will be appointing a director to Track Co—and that was at the Government’s invitation—to ensure that there is good communication between Track Co and the operating company. Toll, as with the previous agreement with Tranz Rail, will have exclusive access to the network for freight services, subject to a complete key performance indicators regime with bonus and penalties, and incentives to encourage shifting of freight from road to rail, and step-in rights if volumes on the line slip below 70 percent of current usage, which is a higher level of step-in rights than the Tranz Rail agreement, which was triggered at 60 percent. So there is a higher level of guarantee, if you like, on overall service performance.

I think this deal results in an outcome where, if Toll’s new bid is successful—that is, its new bid that it put in: the same share price but subject to a 90 percent acceptance, if you read Mr Little’s statement—then the Government will achieve its prime objective of the ownership of the infrastructure, a secondary objective of upgrading that infrastructure, and the tertiary objective of ensuring a competent operator operating over that infrastructure to improve rail services in New Zealand. If, of course, Toll does not reach that level of acceptance it has the right to accept at a lower level. Should it not proceed to acquire Tranz Rail, then the current heads of agreement stay in place and at some future point will be voted on by shareholders. So this heads of agreement does not result in the current heads being removed from the table, but, essentially, those current agreements are dormant, pending Toll’s bid to take control of Tranz Rail. I think that will be very much in the total interests of New Zealand to achieve these kinds of changes. Now I will hand you over to Mr Little to talk to you on behalf of Toll.

Paul Little:

Thanks, Dr Cullen. We come here today somewhat exhausted but happy to have finally reached agreement. The deal is very much a partnership, which is for us an ideal outcome to this process, seeing the Crown and Toll working together. It reflects the position that, really, we’ve been open to for some time, and Toll looks forward to developing a closer working relationship to the Government, with it owning the track and us being the operator on the track.

Under the deal the Crown, as you heard Dr Cullen say, will invest some $200 million in upgrading rail infrastructure and further replacement capital, and Toll will invest $100 million in rolling stock and in locomotives over the next 5 years. The “use it or lose it” regime previously set at 60 percent—we’ve agreed to that being lifted up to 70 percent. Clearly there will be significant incentive there for us to achieve not only the minimums but, as you have also heard mentioned, we will be rewarded if we are able to increase volumes generally across the network.

We will, however, need to meet performance standards for our customer service, and they will be predetermined and published by way of KPIs, and we welcome the opportunity to get closer to the major users, understand their issues, and jointly go forward and develop a first-class rail network for New Zealand and the major users. We believe that the turn-round, however, is not something that is going to happen overnight, and that is very important. It will probably take some years to achieve the sorts of levels that we are striving for—service levels. Clearly an expectation of that turn-round needs to be housed within that framework. So we will be working very hard to achieve what we believe we can bring to the table here, but it is a long and quite complex task.

Also mentioned by Dr Cullen was the requirement for us to achieve 90 percent acceptance. That is a very important issue for us. We have to invest heavily in capital, we have to invest heavily in people and resources generally to turn this business around, and it is very important that we don’t have any complexities, any issues along the way. So we are looking for 90 percent and, in fact, 100 percent on the back of achieving 90, and also our bid is conditional on receiving OIC approval.

We are very excited about this opportunity. It has taken a lot of hard work to bring it together, but we look forward to delivering a world-class railroad for New Zealand. Thank you.

Dr Cullen: All right, ladies and gentlemen, any questions?

Media: What would you say, Minister, was the turning point in bringing the Government back towards Toll, because certainly—

Dr Cullen: You are making assumption in the question which is false. So would you like to start again.

Media: Your language earlier on seemed to be—

Dr Cullen: No, if you recall, very early on I stated very clearly that we had sought a joint approach with Toll, in the first meeting we had.

Media: And at that point onwards, when Toll was pushing for a joint approach, you publicly were saying there was no point in you meeting with Toll.

Dr Cullen: No, I didn’t say that at all. I said there was no point in me meeting personally with Mr Little.

Media: Didn’t you accuse Toll of acting in bad faith, Dr Cullen?

Dr Cullen: I don’t recall saying that. I do recall suggesting that there were things that perhaps they needed to follow up on. I think Mr Little would agree that that’s been followed up on since.

Media: So why have you changed?

Dr Cullen: Sorry, I’m not clear what it is I’ve changed about. You started off with a false assumption and carried on—this sounds like a sort of genetically modified corn round 1 debate.

Media: Why does this Government want to make this arrangement with Toll?

Dr Cullen: Why we want to make this arrangement is exactly the same reason we went into the original heads of agreement: that the Government wants control of the infrastructure and ownership of that to ensure the capacity for a viable long-term rail freight system in New Zealand. We have seen a run-down of that network under private ownership. We are not prepared to see that situation continue into the future. We also wanted to see a more effective operator over those tracks than Tranz Rail has proved to be in recent years. I am confident that Toll is one of a number of companies that could provide that effective operation.

Media: Isn’t the reality though that Toll was getting the leverage ahead of the Government on this?

Dr Cullen: There was the prospect that Toll might get more than 50 percent, but I think you are jumping to answer the first wrong question, if you don’t mind me saying so, again.

Media: What’s better for taxpayers out of this agreement than the previous one?

Dr Cullen: They are very similar from a taxpayer perspective in that the net present value, the cost of that to the Government, is almost exactly the same as far as we can best calculate. They both give the Government ownership and control of the track. The difference with this agreement is that we have greater certainty around the future operating company, whereas under the existing Mark I heads of agreement we would have to have exerted our power as a minority shareholder and appointed directors to achieve that change in the company’s direction. Whereas now, I think it is fair to say, if the shareholders accept the Toll offer then that change in direction is assured.

Media: You have got a bob each way now, haven’t you?

Dr Cullen: You may say that; I couldn’t possibly comment.

Media: Given that the Grant Samuel report today on Tranz Rail about the Toll offer said that Toll was likely to succeed in its bid, is this really just a face-saving exercise for the Government?

Dr Cullen: No, because we’ve been engaged in these discussions for some time, and prescient as my officials are, they wouldn’t necessarily have known what was in the Grant Samuel’s report at the time we started discussions.

Media: But the writing has been on the wall for some time, too, hasn’t it?

Dr Cullen: No, the writing was only really on the wall from the point that Tranz Rail made a hash of its presentation to the media and analysts a week or so back. At that point I think it was clear that the balance shifted in favour of acceptance of the Toll offer.

Media: What happens if, as has been speculated, a third bidder comes into the fray this week? How does that affect things?

Dr Cullen: Well, if the third bit comes into the fray, at the end of the day it is up the shareholders to decide which bid they are going to accept for their shares, if any bid at all. The Government’s Mark I heads of agreement remains on the table, in a dormant position. It is obviously not for me to say what the shareholders should do at this point; that would be inappropriate.

Media: Have you had any discussions with another bidder?

Dr Cullen: We’ve had discussions off and on with a number of potential partners in relation to the future of Tranz Rail. Nobody has come forward, I think it would be fair to say, with a specific proposal as concrete as that of Toll’s which would secure the ownership of the track and a change in direction at this stage. Of course, we are now at a stage where we would not enter into discussions in detail with any other potential bidder while Toll is proceeding to achieve its objectives. That would not be appropriate behaviour.

Media: So haven’t you just made Toll’s bid look much more attractive, and certainly more attractive than any third party that may come in now?

Dr Cullen: Well, Toll’s bid always looked attractive if, by any chance, we decided to stay with the original heads of agreement, in any case. That hasn’t essentially changed.

Media: But certainly better than a third party coming in now that can’t access the kind of capital expenditure you are offering on the rail—on the track?

Dr Cullen: If a third party comes in now and should achieve shareholder approval, and Toll has not therefore got that shareholder approval, then it is open to it to seek an arrangement with the Government. The Government’s objectives remain to get the ownership and operation of the infrastructure and ensure the upgrading of the infrastructure. The Government’s objectives ensure a good operating company operating over that infrastructure. It is clear that Toll is capable of being a good operating company, based on its record.

Media: Can I just ask a question of Mr Little. What do you say to the travelling public of New Zealand, the one’s that still are using the rail, in terms of what sort of services they could expect and how long it might be before there is a sort of first-class system that you think you might like to run here?

Paul Little: Your question is directed at passenger rail, you are talking about. Look, I think in the short term we will do our utmost to ensure that the passengers currently using rail won’t suffer any reduction in service levels. I think in the medium to longer term it is fair to say that we are not sure whether or not we want to continue to be owners and managers of the assets that run passenger rail services. We certainly don’t have a lot of expertise in that area. When we are inside the company and we can review that decision more clearly, we will obviously push ahead with what we believe will be a responsible and transparent way forward.

Media: So you could perhaps on-sell those to another operator?

Paul Little: Well, that is certainly one of the alternatives, and it is one that the current company has looked at too.

Media: In terms of the extra spending on the track compared to the previous Government deal, was that a condition that Toll pushed for in the negotiations?

Dr Cullen: It’s more around the structure of the access charging regime in the first 5 years in going forward, in that the $100 million was already there and the expectation was obviously there would be replacement capital expenditure as well. But there is a significant difference. Whereas the previous access charging regime was around a permanent subsidised regime, this basically says that we have upfront expenditure, then from 5 years on we recover the full cost of capital expenditure, from that point on, in terms of the charging regime. The result of those two together is to come up with roughly, as I say, the same net present value in terms of cost to the Crown, but from Toll’s perspective I think what Mr Little was seeking is a greater assurance around, firstly, expenditure early on to ensure an upgrade to the infrastructure to make it usable from an operating company’s perspective and also a degree of consultation around the process of what upgrading was going to occur. We had no difficulty with that, since obviously that is sensible, in any case, from the owner of the tracks’ perspective, to work closely with the operating company in terms of the nature of the upgrading, the priorities within that.

Media: Is the upgrading to upgrade it to the standard it has been at, or is it to upgrade it beyond that in total?

Dr Cullen: When you say “been at” you mean now, 2 years ago, 10 years ago, or whenever?

Media: Whatever. I mean is it going to lift its capacity to carry heavy traffic or not?

Dr Cullen: I think the simple answer to that is yes, given the fact that there are parts of the line which don’t have great capacity to carry heavy traffic, certainly at any speeds, at the present time.

Media: Given that the ________ institution said that your offer wasn’t sufficient at 95c—they were saying $1.20 is about right—and you are looking for 90 percent acceptances, how optimistic are you that you will actually achieve that, given that you haven’t achieved your price?

Paul Little: It may have been your assumption 95c wouldn’t have succeeded; ours was that it was always going to succeed. I think that Toll is able to bring the management skills, the resources, the experience needed to turn Tranz Rail round, and of course not just rail operations, there is shipping and road operations too. We are very anxious to develop an integrated transport capability within New Zealand and we believe that that desire and that level of experience would allow us to achieve our aims. But in looking at where the business is today, the business is still not without its problems. Our view is that financially there is another set of problems in front of the company should nothing happen in the not too distant future. So we believe it is a very fair and full bid, and in company with the Crown and its willingness now to expend funds on the network I think we can all look forward to a successful outcome.

Media: Does this agreement mean that the Crown is effectively backing your offer?

Paul Little: No, I think from our point of view, the Crown had a desire to regain some influence and some control over the future going forward. We were never concerned about that. We understood that they had come off quite a bad experience with the current operators. Having the Government own the track is a model that we are quite used to working with in Australia. We felt it was a good out-turn or a good outcome for both groups.

Media: Mr Little, there were three items that the Tranz Rail directors said they had of concern about your bid. What happens if you are not able to meet their concerns over those items?

Paul Little: Well, I think the new bid that Toll will put on the table, effectively we need to generate a new bid to lift our requirement from 51 percent to 90 percent. Within that new bid you will see a relaxation of many of the conditions that may have been in the first bid.

Media: Including the one about the directors—you had concerns about the directors giving some sort of surety over the last set of accounts?

Paul Little: Yes, including that.

Media: And the financing clause, as well?

Paul Little: What—the material adverse change?

Media: I can’t remember exactly. I thought it was financing clause.

Paul Little: If you want to see me later we can go through the fine print of the bid, if you like.

Media: What is the nature of the incentive that is given from the Government to Toll to increase the freight volume?

Paul Little: It is just the recognition that the Government would like to be more responsible with the way they encourage goods to be moved around the country. There is a land transport document that has been produced that we believe is a very responsible document. We think that together we can achieve that. But the nature of the incentives are confidential, and I don’t intend to talk about them here today.

Media: Is that you too, Dr Cullen?

Dr Cullen: There’s no point if Mr Little saying he won’t talk about them and then ask me to. Of course I won’t.

Media: It’s taxpayers money.

Paul Little: Well, it’s a savings for taxpayers. I think that’s the encouraging—

Dr Cullen: That’s right.

Media: Do you have any estimate as to—

Dr Cullen: I can answer your question more directly, Vernon, in terms of taxpayer money. The whole point, of course, from the Government’s perspective and why the Government has been deeply concerned about the direction that Tranz Rail has been following, is that it ends up being taxpayer money, anyway. Every time Tranz Rail has cost a customer to the roads, it has created another additional cost to the Government.

Media: Mr Little, do you have any estimate of the level of freight that you would expect the company to be carrying in about 5 years compared with what it is now—a percentage increase or decrease?

Paul Little: All I can say to you is that it is my understanding that currently there is something like 20 percent of the long-distance freight task in New Zealand is enjoyed by rail. Our view is that that can be significantly higher than what it is at the present time. Until we get inside the company, it is difficult to give you an exact number.

Media: How would you describe Tranz Rail at the moment—clapped out, tired, or what?

Paul Little: All of those. Look, I think we are very anxious to get inside the company quickly, because not only are there financial issues there that the company needs to address, there is clearly—as Dr Cullen mentioned earlier on—as a result of the press release that the company did a week or so ago, a lot of misunderstanding inside the company about where the key issues are and what issues need to be addressed very quickly. We are very anxious to get inside the business quickly to overcome those problems. We all know that the freight users are very dissatisfied at the moment, and we are also anxious to understand their requirements.

Dr Cullen: OK. Thank you very much, everybody.

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