Big Aussie faces tough test on NZ's tracks

By PAM GRAHAM

When the Government sold New Zealand's railways 10 years ago, the issue was not just whether the Government should be in the rail business.

It was whether the business should exist at all.

The railway that helped build a nation lost 30 per cent of its market after a law change allowed trucks to carry freight long distances.

By 1992, the railways - once famous for bad work practices - were being run as a business.

But that did not mean there was agreement on the business plan.

The Treasury's advisers thought New Zealand Rail's managers were being encouraged to expand a business that would better be run down or even closed.

Trucks and coastal shipping could handle all freight. Rail was a volatile, capital intensive business with fixed costs.

The short hauls in New Zealand meant it carried more high-value and time-sensitive traffic than rail in other countries, pitting it against more flexible truckers.

NZ Rail's management disagreed with the rundown strategy, saying customers would notice and there was no smaller core network to run down to.

The Government was advised that the difference of view on the way forward was the major ownership issue, and a sale would resolve it.

In 1993 the Government sold to a consortium including Fay Richwhite and the American railway company Wisconsin Central.

Ten years on, the owner is Toll Holdings, an Australian logistics company.

With Auckland roads clogged and forestry traffic growing on regional roads, the Government now wants land transport to include a rail component.

So Toll takes over with a $200 million taxpayer pledge to improve a track which is back in Government ownership and with sole access to that track - subject to meeting service standards which are yet to be fully defined.

It will invest $100 million in rolling stock over five years.

Rail's major customers lobbied hard for what they believed was a real chance of gaining open access to the track, but did not get it.

Toll Holdings' managing director Paul Little believes in a rail renaissance.

Toll's critics say it did not pay enough for Tranz Rail and it got a better track buyback deal than the one negotiated by Tranz Rail.

Toll is not disclosing its New Zealand plans, nor how it will achieve the 100 per cent ownership of Tranz Rail that it wants.

A drawn-out takeover offer left it with 84.2 per cent, and remaining shareholders are holding out.

The focus this year will be on how the Australians get on with the Government and customers, and where the money is spent.

The advice in 1992 was that having a private operator and Government-owned track transferred financial risk to taxpayers.

"A situation could arise where the operator has run down the rolling stock to match market conditions, but the infrastructure owner has maintained the infrastructure to a higher standard than required," the Treasury said then.

Among the customers, Carter Holt wants choice in service providers. It has forests in Northland that need infrastructure development.

Solid Energy wants to double coal exports, but does not know how committed Toll will be to the Midland Line, with its many ageing bridges, linking the port of Lyttelton with the West Coast.

Mainfreight is a big customer of rail and wants to be bigger, but is itself a potential Toll target.

Toll blocked Mainfreight's full takeover of Owens Group, so Mainfreight now runs Owens as a majority shareholder.

"A lot of people have been writing that there is a fight between Toll and Mainfreight as to who controls the transport industry in New Zealand. That is not a desire of Mainfreight's at all," said managing director Don Braid.

Mainfreight bid for Owens because the opportunity arose.

"We took that, and yes it was a defensive move, but at the same time it was a good move for Mainfreight shareholders and Owens shareholders."

Mainfreight founder and executive chairman Bruce Plested said he would not sell a business he created to last for 100 years.

"The only place I suspect I'll ever let shares go to will be senior people in Mainfreight."

A trust linked to founders owns 28 per cent of the company, according to the annual report.

Mainfreight was a failed bidder for Tranz Rail in 1993 in a consortium with Brierley Investments and an American company, Railroad Development.

Plested said it would be interesting to see how Toll went outside Australia.

Transport businesses required good systems, good people and good managers.

The intense management style required was nearly impossible to achieve from another country.

Plested said a logistics company did not have to own the supply chain over which it offered services.

Mainfreight used whatever mode made sense. It carried freight between Hamilton and the South Island and Palmerston North and the South Island that should be on rail.

Said Braid: "We said we were pleased if they [Toll] bought value to Tranz Rail, and then they lobbed a grenade at our door by buying the Owens stake."

"We don't have any desire to be part of the Toll empire."

Mainfreight asks: Is Toll the Brierley of the transport industry? An asset stripper?

Toll's chief financial officer Neil Chatfield rejects the suggestion.

Toll built businesses, he said, and was customer-focused.

Toll was getting to know the business and taking its time to get the relationship with the Government right.

Little has said that the shareholders who have forced Tranz Rail to remain listed have made his job harder.

The investors do not agree and say that the continued listing forces disclosure of the aggressive Australian's activities in New Zealand.