KiwiRail is starting negotiations for a new funding package it hopes will run from 2017 to 2020 and is looking for a small number of rail upgrade projects that will demonstrate that there is a "value of rail" to New Zealand beyond purely commercial returns.

The state-owned rail operator's chief executive, Peter Reidy, told BusinessDesk one such project was in Wiri, South Auckland, where the addition of just three kilometres of railway track could unblock a major rail freight and passenger bottleneck and help alleviate road congestion.

Also in his sights is a plan that would remove trucks travelling through central Christchurch to the Port of Lyttelton.

He was commenting ahead of the release under the Official Information Act this morning of the December 2014 KiwiRail Commercial Review, which concluded that the best option for the government on a purely commercial basis was to quit the rail business altogether while recommending other options for its continuation.

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The review became the basis for a government decision to maintain a national rail network, despite it having no prospect of running profitably,

KiwiRail now appears to have abandoned a hope expressed by chairman John Spencer last year that the government would relieve it of responsibility for maintaining the national network of tracks, tunnels, and bridges, which make it unprofitable when its 'above rail' freight and passenger services could be profitable in their own right.

"We see some benefits in an integrated infrastructure and operating company together," said Reidy. "It would be very problematic if you split it out into different ownership. We'd be too small, you wouldn't be agile, you wouldn't be able to make decisions for customers quickly."

The 2014 review led to a $400 million two-year commitment, ending June 2017, to fund various high-cost capital works, including refurbishment of two major tunnels, at Otira and Kaimai.

We see some benefits in an integrated infrastructure and operating company together. It would be very problematic if you split it out into different ownership. We'd be too small, you wouldn't be agile, you wouldn't be able to make decisions for customers quickly.

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"Our shareholder will need to continue investing in infrastructure, but at a reduced rate over time," said Reidy. "The next three to four years is very much about getting to some of the tough bits of infrastructure requiring investment", and seeking to "drive out costs and operate a bit smarter."

The company was successfully shifting large customers to 'take or pay' arrangements where they agreed to a certain size and regularity of train service while reducing maintenance costs.

For example, KiwiRail had reduced the cost of laying thousands of sleepers annually from $240 to $180 per sleeper, Reidy said.

However, the big gains were in the joined-up thinking now occurring between KiwiRail and relevant government agencies, which was "not happening two years ago".

We're off the front page. We're not embarrassing government. We're sticking to the plan of productivity and efficiency and some of the hard commercial decisions we have to make.

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Reidy said freight volumes have been sliding as state-owned coal miner Solid Energy's export volumes have plummeted and the dairy industry has pulled back production volumes in response to falling global prices.

"Bulk revenue is down about 15% (in the current financial year), and that is primarily coal and milk," he said, although "most other sectors are showing growth."

"What has shifted is that we are now seeing the investment in infrastructure as being directed to where we can enable growth" in line with the government's wider economic agenda, he said, citing the benefits to the tourism sector of the South Island TranzAlpine train, where passenger numbers are exploding, but which will never be sufficient to pay for maintenance of the track.

"We're off the front page. We're not embarrassing government. We're sticking to the plan of productivity and efficiency and some of the hard commercial decisions we have to make," said Reidy. "We believe if we just stick to that plan and be really clear about we can help the government in Auckland, then I think the funding will flow."

Capital requirements for 2017-2020 were "under discussion over next two months with the shareholder, Ministry of Transport, Treasury, and the New Zealand Transport Authority