Is there a role for the Crown in Tranz Rail's future?

By FRAN O'SULLIVAN

Tranz Rail chief executive Michael Beard is sharpening his arguments for tough Government talks over rail's future.

"We can't take our toys away and play somewhere else," said Beard. "We're here on the ground so we're going to have to engage the Government, and indeed we are."

Nearly a decade on from the time the National Government privatised New Zealand Rail, its Labour successor is about to embark on the final stage of devising a new national rail strategy.

The Government is determined that rail will play a significant role in the development of New Zealand's economy through transporting key exports such as the "wall of wood" that is getting close to harvest in Northland and on the East Coast.

A team of high-powered Cabinet ministers will soon be deployed to run the Government's strategy.

The key ministers - Finance Minister Michael Cullen and Transport Minister Paul Swain - are not talking publicly about the "commercially sensitive" issue. But they recently briefed potential political allies such as the Greens and United Future on the upcoming talks.

At Tranz Rail the discussions are just one more in a big list of challenges that Beard must meet.

Yesterday, he announced a net loss of $122.7 million for the June 30 year.

Standard & Poor's is today expected to announce a credit rating downgrade for Tranz Rail which may prompt the owners of the Cook Strait ferry Aratere to ask the company to post a $118 million letter of credit from its bankers.

Officially, the upcoming Government discussions will focus on rail's place in the New Zealand Land Transport Strategy.

But the Treasury - acting independently of the Government - has also been working on a contingency plan if Tranz Rail cannot work its way out of its difficulties.

The company runs the Cook Strait ferries, which are a vital link between the North and South islands. It also transports perishable commodities such as milk and carries coal, which would otherwise have to be barged to exporting ports.

Neither Cullen nor Swain will entertain public comments on this latter contingency risk.

But Swain did concede recently that the Government might have to step up to the plate.

At yesterday's press briefing neither Beard nor his chief financial officer, Wayne Collins, was focusing on negatives.

Nor were they keen to engage in discussion on the ramifications of the Government talks.

But Beard earlier told the Herald that Tranz Rail did need to engage the Government.

The Government laid the groundwork in a February land transport package.

In post-election briefing papers from the Ministry of Transport, officials noted a Land Transport Management Bill was ready for introduction - subject to minor adjustments.

The ministry is also studying the relative costs of road and rail transport to help inform future land transport policy.

"It is important that the cost structures of the various land transport systems are clearly understood and related to current user charges so that future policy can work towards ensuring that transport users are accurately informed about the consequences of their use decisions," the papers note.

"The Government is especially concerned whether rail and road transport are being developed within comparable frameworks. The study will evaluate the costs and charges involved in the total nationwide road and rail systems."

In essence, the Government wants to ensure that the country's vital transport infrastructure is fully used. It owns the roading network but sold the national rail network as part of the 1993 privatisation.

Many options will be explored.

They range from outright subsidies for Tranz Rail to carry freight on unprofitable lines to buying back the network itself. The latter option is favoured by a group of Tranz Rail's main customers.

Beard acknowledged he has to be prepared to look at all options.

"If the Government says, 'Look this is the one we really want to pursue', we'd have to work it through.

"It really started with us saying to the Government that the roading industry doesn't have a cost of capital component as far as the trucking bit is concerned. It doesn't have any tax obligations. It is regionally cross-subsidised and it is operator cross-subsidised.

"What we see is it's very hard for us to compete with that situation on an ongoing sense."

Beard also wants the imbalance remedied. "I don't have a fixed view on it other than to say we will engage with the Government on all those options if that is what they want to do."

Before the election, Beard acknowledged that the controversial issue of a buyback of the national rail network was "not a political imperative for Labour".

But the company had been wary about the Greens' position.

If Labour had been forced to rely on the Greens for its parliamentary majority, a buyback would undoubtedly have been one of its bargaining chips.

But Greens co-leader Rod Donald said the recent discussions were "general rather than detailed".

There are also environmental concerns. Transport produces 16 per cent of total greenhouse gas emissions. Getting more efficient use of the railways could help the Government to meet the Kyoto Protocol targets.

A wide range of Government bodies now have their fingers hovering over Tranz Rail's business.

The Land Transport Safety Authority has been asked by the Government to develop targets for the safety of the rail network. The authority wants to be able to take more active steps in identifying and managing critical safety issues.

Transfund New Zealand is evaluating a number of rail-based projects as part of its Alternatives to Roading project - which include proposals from the company for subsidies.

In March last year, the Government intervened to stop a $112 million deal which Tranz Rail extracted from Auckland local authorities to lease back the city's rail infrastructure. The Crown put up $81 million for the asset.

Cullen said then that the Government's main reason for replacing the Auckland local authorities at the negotiating table was strategic. It did not want its national rail policy pre-empted by events in Auckland.

The main users want open access for competing operators on the rail network, but Beard contends it's not that simple.

"This is a single-track network we're talking about with most of the train slots taken up. It's not like a European network with several tracks. In Australia you've got the broad gauge, narrow gauge and standard gauge.

"You've got a single-track system with limited passing loops; you've got to have one control system, so from a really practical viewpoint the whole notion that you have lots of different operators on tracks is just not physically possible.

"That would be an interesting discussion if they want to talk about that.

"Again, if we have to discuss these things we will."

Beard has one strong weapon in his upcoming discussions with the Government.

Tranz Rail's adviser is Rob Cameron - a well-connected investment banker who ran the Air New Zealand negotiations for the Government. Cameron won't speak publicly either but company sources say he has constructed a brilliant economic argument for Beard to employ.

Be that as it may, the short-term future is what occupies Tranz Rail's management.

The $112.7 million loss was a big reversal from the net profit of $5.6 million for the previous year.

The result was hit by heavy writedowns in asset values and changed accounting treatments totalling $143.3 million.

Crucially, the company's operating profit was $23.9 million, just over half the $45.2 million scored the previous year.

Concern that Tranz Rail may have difficulty recapitalising its balance sheet - even if it does finally undertake a discounted rights issue - has prompted the Government's Treasury advisers to undertake their own watching brief.

The Government was caught short last year by the rapid deterioration of Air New Zealand.

It ultimately had to stump up $885 million for a bailout which has left it as the company's largest shareholder.

There is no suggestion that a similar situation is imminent in Tranz Rail's case.

Beard and chief financial officer Collins have been negotiating with the company's bankers to renew arrangements.

Beard's assurances yesterday that the company was on track to meet forecast figures for the September quarter will have given some comfort to analysts and shareholders.

But the situation is still fragile.

Cullen's office is quick to distance the minister's political objectives from Treasury's watching brief.

But critical national interests would come into play if Tranz Rail failed to get its act together. If something did happen they would have to have a Plan B sitting there, said a source.

The Government has a secondary interest in Tranz Rail's future profitability.

As shareholder in Solid Energy - the country's main coal-exporting company - the Government wants to see it grow.

Solid Energy is in the vanguard of the users action group and its chief executive, Don Elder, has openly shared his frustrations over price negotiations with the company.

But Tranz Rail still holds an important chip - its monopoly over use of the national network.

Beard says the shakeout could be positive for Tranz Rail.

"There's a lot of cash on the table here potentially, because if you look at what they are planning to spend on the roads and other things to move all these logs around ... there's potentially a lot of cash to be spent here.

"It's a matter of national priority as to whether it gets spent on more roads.

"Once you have got a reasonable motorway network around Auckland, at that point you might also want to say, 'Do you put more highways on or could you avoid some of that expenditure by encouraging traffic on to the rail?' "

Tranz Rail is also having talks relating to its lease with the Railways Corporation to try to ensure greater flexibility.

Frustrating the Government's ability to deal simply with the issue is the failure by the former National Government to retain a Kiwi - or golden - Share when it privatised New Zealand Rail in 1993.

The Tranz Rail consortium, led by merchant bankers Fay Richwhite and Wisconsin Central, bought the company for $328.3 million. They sold their stakes in February, just months before the shares slid dramatically.

Cullen has previously acknowledged that the failure to retain a Kiwi Share "places the Government in a much weaker position than we were with respect to either Telecom or Air New Zealand".

He said it had also made designing an integrated land transport strategy more difficult.

"The essential point is to ensure that forestry and mining companies are able to get their product to market at reasonable cost. That may or may not involve direct access rather than using Tranz Rail's services."

The exact composition of the post-election ad hoc committee has still to be confirmed.

"Once things are sorted out it will be all on again," said a source.

"It will be on how rail fits into the wider land transport strategy. That does not necessarily mean buying anything from Tranz Rail.

"If Tranz Rail in whatever guise it ends up in - whether it's a whole lot of other people who buy bits of it - or the current shareholders decide to put a lot of investment into it and get it running properly, then if they can perform - a fully private sector group with an operation which fits in with the strategy and allows for future expansion of the rail system, particularly in Northland or Gisborne - there would be no need to do anything with them."