Policy dilemmas in the changing world of rail

BY PAM GRAHAM

The question of the week had to be whether Tranz Rail really was, as the headline on a press statement from the road lobby so succinctly put it, a basket case. And more interestingly, is it a takeover target?

Given that transport networks are important because good ones can boost economic growth, and given that many of the people involved in ours are hunkered in bunkers chucking strongly worded press statements at one another, it seemed worthwhile going beyond New Zealand to see what people overseas had to say about the issues facing rail in this country.

The gist of what they had to say was that New Zealand is a long, thin country with a reasonable-quality rail track to major destinations and a lighter track, or no track at all, beyond that. It exports and imports significant amounts of the bulky sort of stuff that is suitable for rail.

Rail is changing everywhere. Operators are running their businesses to customers' parameters, rather than their own.

In the US, the biggest growth segment for rail is business from trucking companies, traditional competitors which now see themselves as logistics operators. They are focusing on short hauls of high-value goods, leaving the long trips to rail. Trucks feed rail terminals that haul freight on fixed schedules on time. If they are late, customers get a refund.

At the ports, larger container ships are arriving on fixed schedules at fewer ports, requiring movement of freight to hub ports by whichever method makes the most sense.

Overseas observers also pointed out that it is not unusual for rail networks to face a lot of deferred maintenance when privatised, and few owners are prepared to create a Rolls-Royce network when one fit for the purpose will do.

It is also not unusual to sell assets and lease them back - as Tranz Rail has done - but it is better to use the money to build your business rather than for working capital or dividends.

Nor is it unusual to contract out maintenance, but doing so turns a variable cost into a fixed cost, which is a pressure for the future.

Some other advice: the best way to build volume is to make it clear to your customers that they are important; try to avoid arguing with bankers in public; use capital, if you can, to build the business.

As an example, governments in South America own rail networks leased to private-sector operators, but the operator often has exclusivity.

Few, if any, private-sector companies would invest now in a track to a remote forest if the wood is still five years away from its main harvest.

So there are many issues with rail, and everyone has an opinion. The phones in the Beehive were running hot this week after the release of the Government's transport strategy. A separate bill is designed to provide more flexible funding of infrastructure by setting rules for partnerships between the private sector and government, and allowing Transfund to pay for rail.

In all this, the Government faces a policy dilemma: does it want a very competitive core or a strong national network?

One international operator says that if a network was opened to all, operators would avoid 70 per cent of its track and competition on the rest would make it hard to earn acceptable returns.

His view is that a rail operator in New Zealand, with an exclusive franchise on a Government-owned track and with the right management team, could be successful.

Tranz Rail's current management team has been in place for only a few years and it has had to face a selldown by major shareholders and "legacy" issues with a weak balance sheet and a wilting share price.

Tranz Rail is putting in a new billing system, is moving to the long-haul intermodal model and has new technology that allows it to fix tracks faster.

The safety of tracks blew up as an issue this week and the company will meet its workers next week to try to avoid delays to freight trains in hot weather. The problem is with continuously welded rail - now common, but in New Zealand in the 1980s and 1990s it was not laid to the required standard and poor records were kept.

Remedial work now being carried out involves cutting out sections of track and stretching the remainder so it will no longer buckle at high temperatures.

Tranz Rail has four new measuring frames that speed up this process but they work best at cool temperatures, at night or in winter.

New Zealand investors, including fund managers and infrastructure investor Infratil, bought into Tranz Rail when Wisconsin Central and Fay Richwhite sold and they support the turnaround strategy. They are patiently waiting for the payback.

Managing director Michael Beard says it is on the way. Profit was on target in the first quarter and he told Radio New Zealand this week that the company will meet its second-quarter forecast. The third and fourth quarters look "okay as well".

He asked shareholders at the annual meeting to "stick with us". The company predicts an annual operating profit of more than $50 million.

The share price sank to 96c yesterday and there was speculation in the market that Tranz Rail is in the sights of someone such as Rail America, the world's largest short-line and regional railroad operator. The US company owns Freight Australia in Victoria, businesses in Canada and Chile and 49 railroads in America.

Anyone eyeing Tranz Rail would have to take account of the problems the company is dealing with and offer a superior business plan, money and a scenario acceptable to the Government. If Beard comes in on budget or better, they will not be required.

Trucking companies say they want to put more freight on rail and Ports of Auckland chief executive Geoff Vazey says too few containers are coming to his port by train. Rail accounts for 18 per cent of all truck and rail movements at the port, down from 27 per cent four years ago.

P&O Nedlloyd's weekly, fixed-day supercontainer service berthed for the first time on its new schedule in Auckland this month and the exchange of containers used up about half the capacity of the Fergusson container terminal. It went well. The service stops at only three ports and rail will pick up work moving freight to those hubs. These are possibilities for something other than a basket case.

Disruption in the whole transport system is possible in the next few months as exporters grapple with documentation rules designed to enhance the security of goods to and through the the US.

Gilbert Ullrich of Export New Zealand said that if the country moved quickly to comply, it would have an advantage over others which did not. Among the mess, he sees an opportunity.