Crunch Time For Rail’s Future
Government must take decisive action now

Tranz Rail has warned that it may close up to 25% of New Zealand’s rail network at the end of this month unless it receives some form of Government assistance.

There can now be no doubt that the future of rail in New Zealand faces “clear and present danger.”

It has now become URGENT that the Government makes a decision on whether to become involved in the inevitable restructuring of rail, and if so, what form its involvement should take.

- The monopoly rail freight service provider is in virtual “fire sale” mode with various assets up for sale to raise cash.

- The company’s operating profit for the March quarter was significantly below forecast. Its credit rating has been downgraded.

- Banking arrangements are up for review shortly and the company is under pressure from creditors.

- The company has not been able to generate sufficient trading profit to adequately maintain the network or to extend and significantly improve it.

- New Zealand continues to lose export dollars because of the state of rail freight services, and major users continue to defer growth or to transfer volumes to road.

- The company is looking to Government to change the model for railways in New Zealand.

- Restructuring the New Zealand rail model appears inevitable.

THE GOVERNMENT HAS FOUR MAIN OPTIONS

1. DO NOTHING- THE “WAIT AND SEE” OPTION.

Possible outcomes

- Given adequate time Tranz Rail may succeed in generating enough cash from asset sales and trading to keep the banks at bay. However, even if this is achieved the company will continue to struggle with a business model which is clearly not delivering what most freight users need. The trend of losing market share will continue.

- It is also possible that Tranz Rail may go into receivership. This would place enormous pressure on the Government to immediately pick up responsibility for running rail services again, including maintenance of the network. Having no rail freight services available is not an option. New Zealand would return to pre 1993 days of the Government being the monopoly provider of all rail freight services. A giant step backwards. Failing Government intervention, a receiver might or might not, continue running some services, while asset sales continued. The difficulties of transferring all rail freight volumes to road would be horrendous. Substantial national economic loss would appear inevitable.

- Another entity may make a bid for Tranz Rail. It is significant that no bid has emerged despite Tranz Rail’s depressed share price indicating that the entire company could be bought on market for much less than asset value. Does this demonstrate that no potential purchaser has any confidence in the structure of New Zealand’s rail service, or their ability to run profitable services based on the current model? Or that everyone is waiting for clear and decisive action by Government?

- While the Government continues to take no action, there is increasing risk that an asset stripper, not a rail operator, will buy the company and sell assets that compromise the future running of an efficient rail service.

- There is no competitive market for rail services in New Zealand. A vacuum left by the failure of Tranz Rail will not necessarily be filled by a new entrant.

2. THE GOVERNMENT PAYS EVER INCREASING SUBSIDIES TO ARTIFICILLY IMPROVE ABILITY OF RAIL
- THE “TILTING THE PLAYING FIELD” OPTION

Possible Outcomes

- Subsidies paid to Tranz Rail/ to users/on a commodity basis/on a route basis.

- Penalties on other transport modes such as increases in road use charges.

- Amounts needed will continually increase because the basic causes of rail’s situation have not been addressed.

- A focus on maintaining the current infrastructure and not upgrading/ improving of the network

- A distortion of the economics of the NZ transport system.

- Process will become politicized.

- No intrinsic restructuring leading to better outcomes. Subsidies likely to be an ever increasing “band-aid” masking problems.

3. THE GOVERNMENT TAKES CONTROL OF TRANZ RAIL BY INJECTING NEW CAPITAL AND APPOINTING NEW DIRECTORS
– THE “AIR NEW ZEALAND OPTION”.

Possible Outcomes

- The Government will be back in the business of running rail services as the controlling shareholder in a listed public company.

- Having taken this step it would be extremely difficult to refuse requests for further cash injections to preserve the taxpayers’ original investment, or to enable rail to realize its potential.

- Private interests will further benefit from Tranz Rail having a cornerstone shareholder with “deep pockets”.

- The company having been “politicized” in this way, would keep the Government would be under constant pressure to give subsidies and other encouragement to rail, to keep marginal lines open and to build new lines.

- The Government would effectively be in competition with the road transport industry and coastal shipping, and incentivised to introduce measures that advantage rail and disadvantage other transport modes.

- It would be extremely difficult for any Government to extricate itself from this position.

- There would be no change in the discredited current rail model. The opportunity and momentum to undertake a much needed restructure of the rail sector will be lost.

- The above points all apply in the event of the government itself making a bid for the company.

- The company’s new strength and confidence may enable it to continue the current approach to business where rail users are held hostage in negotiations, so that nothing is gained in terms of better outcomes for the economy.

- In a few years when the value has been lost, or again stripped out, we could be back in the same position we are in now.

4. GOVERNMENT BUYS BACK THE RAIL NETWORK AND CHARGES ACCESS FEES TO COMPETITIVE FREIGHT SERVICE PROVIDERS
-THE “RAIL FREIGHT USERS” OPTION.

Possible Outcomes

- The financial pressure on Tranz Rail would ease. The company could reduce its debt level, and be freed of the obligation (possibly $40-$50 million a year) to properly maintain nearly 4,000 kilometres of track. Instead, it would pay access fees commensurate with its use of the network.

- Government would have ownership of both roads and rail, be responsible for maintaining both and not expect a return on capital in either case. Commercial users of either mode would pay access fees that would cover ongoing maintenance. There would be a level playing field.

- There would be the possibility of competition by various freight service providers on rail, just as on road, under specific conditions.

- Government could continue to take the other actions necessary to support the national transport strategy, including support for marginal lines.

- Tranz Rail could concentrate on its chosen core business of providing commercial freight services and expanding its market share.

- Rail Freight would be given every opportunity to flourish and resolve current shortcomings, flourish and support national economic growth.

Options one, two and three are full of risk and at best achieve little.

Option four would create a rail model, working successfully overseas, enabling rail to flourish and play an appropriate role in meeting the country’s transport and economic needs.

The time has come for Government
to take decisive action.

January position paper is attached for your convenience

CO-ORDINATOR AND SPOKESPERSON - CEDRIC ALLAN - PORTER NOVELLI NEW ZEALAND LTD

Email: cedric@porternovelli.co.nz

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