Govt-Toll reach accommodation on Tranz Rail

The government has negotiated a deal with Toll Holdings under which the Crown will regain ownership of the track for $1 and both parties will commit to rebuilding the rail network should Toll succeed in its bid for Tranz Rail.

Finance Minister Michael Cullen today released the draft Heads of Agreement which will be activated if Toll Holdings buys Tranz Rail.

“The government’s aim has always been to secure rail as a vital piece of infrastructure in the national interest. This ensures we will achieve that if Toll acquires Tranz Rail.

“Before we went public with the HoA between the Crown and Tranz Rail, I warned Toll that they were on a collision course with us and instructed my officials to suggest a joint approach under which the Crown would get the track and Toll the operating company,” Dr Cullen said.

“They rejected the offer at that stage on the basis that they wanted the track too. I am pleased that they have since reconsidered that decision.”

The HoA between the government and Toll Holdings duplicates many of the features of the earlier HoA entered with Tranz Rail but there are some differences, reflecting Toll’s stronger balance sheet.

A new Crown entity – TrackCo – will be set up to maintain and control the track. TrackCo will charge Toll for the use of the track. For the first five years, the charge will reflect TrackCo’s cash outgoings. Subsequently charges will reflect not only TrackCo’s operating costs but also any capital costs. [This compares with the implicit $20 million a year subsidy Tranz Rail wanted.] Toll will appoint a director to TrackCo. Toll will have exclusive access to the network for freight services but will be subject to transparent Key Performance Indicators with a bonus and penalty regime. The Crown will have “step-in” rights if volumes on a line slip below 70 per cent of current usage. Incentives will be provided to encourage Toll to shift freight from road to rail. The government will invest $200 million to upgrade the rail network; $100 million up front and $25 million a year over four years. The refurbishment programme will focus on improving safety and efficiency and will be determined in consultation with Toll. Toll will invest $100 million in rolling stock. Tranz Rail’s lease over the land under the tracks will be surrendered except for some specific properties. The Crown will pay compensation of around $50 million for any resulting loss of assets or income. This transaction will be revenue neutral for the Crown.

Dr Cullen said the most significant difference between the government’s HoA with Toll and its HoA with Tranz Rail was that the Tranz Rail agreement committed the Crown to taking a 35 per cent equity stake in Tranz Rail at a cost of $76 million.

“Should Toll’s acquisition bid fail, the Crown’s HoA with Tranz Rail remains alive and will be referred for approval to Tranz Rail shareholders.”

Backgrounder

SUMMARY OF THE HEADS OF AGREEMENT BETWEEN THE GOVERNMENT AND TRANZ RAIL

The key parts of the Heads of Agreement with Toll announced today are the Crown’s purchase of the rail network, future investment by the Crown and Toll, and the agreement on access to the network.

The agreement is conditional on Toll’s takeover offer for Tranz Rail being successful.

Major differences between the Crown’s agreement with Toll and the previous agreement with Tranz Rail

The Crown will not take equity in Tranz Rail. The Crown will not provide Tranz Rail with an ongoing implicit subsidy, which was estimated at $20 million per annum. Instead, the Crown will invest $200 million over five years in TrackCo, the new Crown company that will own the network. The access fee TrackCo charges is now a full cost recovery model, apart from the initial $200 million capital investment. Toll will invest up-front capital spending in rolling stock of $100 million. Toll will appoint a director to TrackCo. The threshold below which Toll would lose its exclusive access rights on a given line rises from 60% to 70% of present traffic levels. A working party with representatives from TrackCo and Tranz Rail will make recommendations on the capital expenditure programme on the network. This is to ensure an appropriate level and focus for expenditure. There will be stronger incentives in the access regime to get more traffic onto rail.

Purchase of rail network As part of the deal, the Crown will purchase the rail network and the associated infrastructure for $1. This purchase will include all the elements necessary to run the network, including track infrastructure, structures, signals, the train control centre, intellectual property and the plant and rolling stock used for track maintenance. Transfer of ownership is expected to take place on 30 September, 2003.

A Crown entity called TrackCo will be set up to manage the rail network. TrackCo’s responsibilities will include maintenance and control of the network, safety systems and incident management and investigation.

TrackCo will take over current third party contracts for network maintenance.

The Crown will terminate the majority of Tranz Rail’s existing lease of the land underneath the tracks, although Tranz Rail will retain specific properties, notably the core terminal land that Tranz Rail currently uses for its operations.

As part of this, the Crown will purchase a variety of assets and revenue streams from Tranz Rail, including access rights to surplus land and property and sub-leases, for around $50 million, subject to valuation.

Future investment by the Crown and Toll in rail

Under the deal the Crown will invest $100 million upfront in TrackCo to refurbish and improve the network. This will be in addition to normal replacement capital expenditure which will be $25 million per annum over four years.

TrackCo will recover all operating and capital expenditure, apart from the agreed $200 million capital expenditure in the first five years.

Toll will appoint a director of TrackCo.

Toll will invest $100 million upfront in rolling stock.

Access agreement Under the terms of the deal, Tranz Rail will have exclusive access rights to the network for freight services. However, the Crown will have “step-in” rights, which will allow it to grant access rights to another operator, should Tranz Rail fail to satisfy Service Level Agreements relating to volume. The use it or lose it threshold will be 70% of current traffic levels, compared to 60% in the Crown’s previous agreement with Tranz Rail.

The overall access charge will be set every three years and adjusted by movement in an agreed index for the next two years. For the nine months to June 2004 Tranz Rail will meet the costs of TrackCo.

The access charges will be allocated among the different services on two bases: firstly, a fixed component that will reflect the density of traffic that a particular line is capable of handling and secondly, a variable component that will reflect the actual tonnage and distance of the traffic on that line.

The charges will be structured to provide an incentive to move additional freight on rail. It is proposed that 10% or greater volume growth on certain lines would attract an access charge holiday.

Tranz Rail will also have first right of refusal for any new line and any new subsidy for a line or a freight service. Existing access rights by Auckland metro, heritage operators and Tranz Scenic will also be provided for under the agreement.

Agreed Process

To implement the proposed transaction Toll and the Crown would formally agree to a process as follows:

Immediately the Toll takeover becomes unconditional, Toll and the Crown will enter a replacement Heads of Agreement, with terms as agreed.

The rail network transfer will be completed, establishing TrackCo in Crown ownership.

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