Jul 2, 2008

This Isn't A Toy Rail Set

Fran O'Sullivan says that something doesn't stack up with the nationalisation of the railways.

Something doesn't compute.
If rail is again coming into its own due to the convergence of forces outlined at the Wellington railway station yesterday - the need for New Zealand to be more sustainable, lessen the carbon footprint of the country's transport network and gain greater fuel efficiency by using diesel-powered trains instead of road to carry similar freight loads - then economic logic suggests railways will become profit-making machines as the alternatives will be too expensive in the new carbon constrained era.

If the theory holds true, there is no reason why KiwiRail should be drag on the taxpayer. Yet the rationale for taking the rail business back into Government-ownership was Cabinet Ministers did not want to be forking out subsidies to a foreign (read Australian) private company. It was noted Toll had a 70 year track access agreement.
Better to buy out Toll so the Government had control over all major transport channels: rail, road and coastal shipping and could orchestrate a major strategic shift in the country's transport architecture.
Listening to Cabinet Ministers it was almost as price did not really matter. But in the end it always does.
What was missing from yesterday's celebrations was a determination by the Government to set up KiwiRail to make an operating profit within a relatively short timeframe.
The business may have been a basketcase under Tranz Rail's ownership as the barely polite allusions by Clark and Cullen to asset-stripping and financial scandals indicated.
But it's not as if Australia's Toll Holdings wasn't pulling decent profits from its subsequent investment in the NZ railways assets.

And what was the real cost? We won't know for a while (surprise, surprise)

The Government is still sitting on all the background advice it received on the re-nationalisation which won't be released until both sides determine what they want to withhold for reasons of commercial sensitivity.
But the overall investment will be huge.
Toll was supposed to pay Ontrack - another SOE which runs the national rail track assets - some $48 million annually for access fees.
The value of this over 10 n years at seven per cent would have been $340 million - money that will not now come into the overall business.
Add the $340 million forgone revenue to the $690 million purchase price and the $120 million debt and the overall Government investment quickly tops the $1 billion mark.
Some of this will be recouped as KiwiRail's customers - including Tranzlink - pay freight fees. But most won't.
Then there's the $80 million Cullen says he needs for KiwiRail to run in a "steady as you go" fashion for the next five years which is basically deferred capex for keeping rolling stock and other assets in use.
He's already planning to take a more "aggressive" reinvestment package to Cabinet later this month which will include options for upgrading rail stock including the locomotives.
This will be on top of the $400 million the Government has promised to upgrade the nation's tracks.
What the Government should do is decouple the upcoming major investment required to modernise the rail service from ongoing operations.
Set up KiwiRail with an appropriate balance sheet as it did with Air New Zealand and require it to meet tough financial targets.
The $1.5 billion plus that will ultimately be sunk into this investment requires the Cabinet Ministers to realise they are playing with real train sets now - not just models.