Brian Gaynor: A fine line between cost and safety

The trade-off between safety and savings is a major issue for transport companies.

Unnecessary expenditure on safety is a waste of resources, but under-expenditure and poor quality control can lead to big problems, as experienced by Ansett Australia and Railtrack in Britain.

Ansett was grounded for safety reasons in Easter last year and went broke less than six months later. The Hatfield train crash in October 2000 led to the collapse of Railtrack, Britain's rail network operator.

Our rail safety standards came under scrutiny this week with the release of Tranz Rail Infrastructure Review stage 2 report by Melbourne-based engineering consultant Halliburton KBR.

The report, which was commissioned by the Land Transport Safety Authority and Tranz Rail, looks at the safety implications of the latter's decision to contract out its track maintenance operations.

On December 13 last year, Tranz Rail said it was contracting out its infrastructure maintenance (track, overhead lines and points) to Transfield Services, an Australia-based maintenance organisation.

Transfield had been given a three-year, $150 million contract and Tranz Rail managing director Michael Beard said his company would expect total cost savings of about 10 per cent a year.

Analysts responded positively and the general consensus was that the Transfield contract, plus another with Alstom New Zealand to provide locomotive services, would generate annual cost savings of about $8 million for Tranz Rail.

Beard announced that the majority of the 800 Tranz Rail staff employed in the infrastructure and locomotive power operations would be offered employment by Transfield and Alstom. These redundancies and restructurings were included in a $45.1 million cost provision in the June 2002 results.

Halliburton's stage one report, which was released on June 13, revealed that Transfield was planning to perform the same work with approximately 18 per cent fewer employees than Tranz Rail.

The findings were a mixture of positives and negatives for Tranz Rail. On the basis of Transfield's proposed staffing levels, the report found that the "integrity of the track and infrastructure was not immediately at risk". But it also identified inadequacies, which included:

* Transfield's estimates of routine maintenance might be understated and it might not be committing enough resources to some lines.

* The service provider might not have the resources to undertake timely renewal works and a backlog might develop.

* Tranz Rail might not have the resources to monitor Transfield's performance. This was a major contributor to Railtrack's problems.

* It was unclear how the contracting out to Transfield would prevent any long-term deterioration of the rail network.

Tranz Rail put an immediate spin on Halliburton's stage two report. It told the Stock Exchange that the report found the network was "fit for purpose" and the asset replacement programme "appears to be providing an overall improvement in the average age and condition of assets and of the network generally".

But Halliburton is not fully satisfied that current practices will prevent deterioration in the network and believes that Tranz Rail should not reduce resources, including employees, any further. This recommendation will have a major impact on the company's ability to obtain cost savings from its Transfield contract.

Newly privatised companies can cut costs on safety issues but this often comes back to haunt them. Halliburton believes that Tranz Rail faces problems because of its emphasis on cost savings over safety in recent years.

The company has adopted a policy of welding rail joints in an effort to eliminate bolted joints. The continuous welded rail strategy reduces track maintenance and saves money.

Halliburton revealed that 2500km of the company's network is continuous welded rail and a significant proportion has not complied with Tranz Rail's track code. This non-compliance with acceptable engineering standards can lead to safety problems, including track buckling under extreme summer heat or breaking in cold winter conditions.

Continuous welded rail is an accepted process, but the codes and standards for its formation and maintenance need to be strictly applied. Tranz Rail has not done this and, as a consequence, speed restrictions of 40 km/h are imposed during hot weather.

This can have an enormous impact on train schedules and the commercial competitiveness of Tranz Rail. It is also a stark reminder of Railtrack's problems in Britain.

Railtrack was listed on the London Stock Exchange in mid-1996 after the sale of shares to 250,000 investors at £3.90 each. The company's main objective was to make money and maximise dividends and its share price surged to an all-time high of £17.68 in October 1999.

But Railtrack's fortunes took a fatal turn for the worse on October 17, 2000, when the 12.10pm from Kings Cross to Leeds crashed at Hatfield. The accident was caused by a broken track, a phenomenon known as gauge corner cracking.

Under Railtrack's standards, any length of continuously welded rail over 600ft (183m) long had to be replaced rather than fixed when problems developed. This is an expensive and time-consuming process.

A problem was spotted at Hatfield but the replacement track was delayed, partly because of the desire to keep the line fully operational, for financial reasons, during summer.

There were other contributing factors to the Hatfield crash. These included:

* Railtrack contracted out its track maintenance and its monitoring of these contractors was ineffective.

* The company had a low level of capital expenditure. Industry experts estimate it replaced only 0.8 per cent of track every year compared with 2.5 per cent by network operators in France, Germany and Italy.

* Railtrack's board and senior management were dominated by financial people instead of engineers.

The Hatfield crash was a disaster for Railtrack. Speed limits were placed on many of its lines, 724km of track had to replaced because of gauge corner cracking, and financial compensation had to be paid to train operators because of delays caused by speed restrictions.

The company was placed in administration a year ago but it has subsequently re-emerged in a different form. Its shares closed yesterday on the London Stock Exchange at £2.48, a far cry from the £17.68 of October1999.

The lesson from Railtrack is that track operators need to fully maintain and replace their network or they will be faced with major safety problems. In other words, longer-term safety cannot be compromised by cost-cutting.

The Halliburton stage two report has positive as well as negative messages for Tranz Rail shareholders. Sadly, the bad news tends to dominate and positive comments may be seen by the market as influenced by Tranz Rail's joint commissioning of the report.

Investors have taken a negative view of the findings as Tranz Rail's share price dropped from $1.51 to $1.35 this week. This is a long way from its $4.36 close on the same day last year.

There are now major concerns that Tranz Rail will not meet its profit forecasts because of increased expenditure on track repairs and replacement. There are also concerns that the decision to contract out its infrastructure maintenance to Transfield may be based on false economies and could compromise the company's safety performance over the longer term.

* Disclosure of interest: none

* bgaynor@xtra.co.nz