Rail's future - a tunnel without light at the end

By PAM GRAHAM

What is going on with Tranz Rail? Will the Government buy back the track or the company? And if it does, will public ownership achieve what it did not before?

The line between the public and private sector is again being redrawn and it looks as twisted as a heated railway line. What's more, we can't debate it because it might affect Tranz Rail's share price.

The story so far is that the Government wants rail to be a bigger part of the infrastructure policy that is so important to business and the nation's economic growth.

Unfortunately Tranz Rail was sold in 1993 without public obligations enshrined in a Kiwi share, and the company is now aiming to use its very limited financial resources on things that will benefit its shareholders most.

Last year the Government's Moving Forward plan and Land Transport Strategy broached the issue of rail in the land transport policy, giving a reason to engage with our main railway company.

Tranz Rail is open to ideas, especially if they give it a less political operating environment - no more arguments about closing uneconomic branchlines - and a viable freight business. It is quitting all passenger business.

"We are open minded in terms of saying we have a set of financial objectives to achieve for our shareholders and we know there are national interests the Government has to pursue," chief executive Michael Beard said in an interview at the start of a year in which talks with the Government are a big agenda item.

The story gets a bit muddled here, depending on to whom you talk, but talks were held on the so-called "range of options" between the release of the Moving Forward document in March last year and the election.

Talks since the election have been only at the officials' level and have not included those options. Everyone involved agrees that the parties have never sat in a room with advisers seriously pricing an option.

The suggestion is that Tranz Rail first proposed the options for future ownership and access to the rail network to the Government. Since then it has shored up its finances and is under less pressure. It is not clear if this will lead to Tranz Rail seeking to change the options or its preferred choice.

Meanwhile the Government seems to be taking the view that, while it has noted indications from the company about more discussions this year, it does not feel it is its role to approach the company.

Hence the fact that talks seem to have come to a halt since the election.

Options discussed last year were:

* Government ownership of the network and open access to it.

* Government ownership of the network and access on a limited number of lines to other operators.

* Government ownership of the network and sole access for Tranz Rail.

* Tranz Rail ownership of the net with an across the board subsidy.

* Tranz Rail ownership of the network with targeted subsidies.

* Doing nothing.

The reason we are not having a national debate over such a significant issue is apparently a Government fear that it would affect the Tranz Rail share price. (That strategy has, in itself, fuelled speculation that consideration is being given to buying the company.)

The only problem with that is that comments by Transport Minister Paul Swain have already helped shift the share price.

It has risen 29 per cent this year, and reports about secret talks were one reason for this.

The Greens, who are big fans of more state action to boost rail, have stayed silent so they cannot be accused of spoiling the chances of the Government acting.

Act Party leader Richard Prebble is willing to talk, but he favours the do-nothing option. The former minister of rail says it is a myth that rail is better for the environment than road.

"I started with a favourable view toward using rail more, but there was just no evidence. The railway management themselves said to me it's a myth, it is quite a good selling point for us, but it is not correct. We are not even more fuel efficient".

Prebble says let the market deliver.

"If the market decides that the present management is unable or incapable of running rail, then the share price will drop to a point where someone else will buy it."

That point probably arose three months ago, he said.

"If it hadn't been for the Government's foolishness in talking about buying the track then, probably the market would have come up with a solution already."

In other words someone else would have bought Tranz Rail. That remains a definite possibility, especially with the share price still relatively low, and some overseas operators have certainly run the ruler over the company.

If that happened it might well relieve the Government of a major problem because none of the options on the table is straightforward.

People involved in running railways warn that the maximum competition option of the state buying the network and having open access is not as simple as it looks.

If, say, Solid Energy moved its own coal, Fonterra ran its own milk trains, Carter Holt Harvey and Norske Skog carried their own logs, pulp and paper, and maybe Ports of Auckland and Port of Tauranga ran trains what would be left for Tranz Rail? Smaller users might find themselves without a carrier.

Open access to a light density network like New Zealand's would not work, says Peter Turrell, the senior vice-president international of Rail America.

The American company owns the rail company privatised in the Australian state of Victoria, where open access is also an issue.

Turrell said new operators cherry picked when access was open. They had no obligation to stay on a lightly used line unless there was a subsidy.

The indications are that the Government has a problem with the idea of giving subsidies to monopolies - especially a fairly unpopular monopoly such as Tranz Rail - although it does not appear to have done detailed work on the options.

It certainly does not want to be a rail line operator, with all the political complications that would bring, and it regards buying back the track as a last option.

When we can have a debate about the rail network, it will be necessary to canvass such things as whether there would be a flat access fee if the Government owned the network or a lower access fee for low density lines which would effectively be a subsidy.

The Government has commissioned Booz Allen Hamilton to report on transport pricing in general by March. Booz Allen has subcontracted some work to the University of Leeds which did a similar study in the UK.

The Leeds report concluded that road transport charges in the UK would be higher if they were set on economic efficiency grounds, and subsidies for buses were not fully justified.

Rail charges should rise for passenger services and fall for freight, and subsidies for passenger services were not justified.

The New Zealand pricing analysis is intended to provide an intellectual basis for the Government's latest attempt at infrastructure policy.

It is a field in which Government policy has veered from the extreme of highly protected state control to unfettered private enterprise.

In 1982 New Zealand cast aside a rule that all freight travelling more than 150km had to go by rail, ending a monopoly with legendary bad work practices and 21,000 employees.

In 1993, the rail system was privatised and the company says it now employs about 3000 people and carries a third more cargo than before privatisation.

Its critics say safety has been compromised by contracting out work, and it is not moving enough freight over a network that has high fixed costs.

Its major customers are lobbying for reform that gives them choices, and road users are lobbying against public funding of a rail operator they consider to be a basket case.

Consider the Bay of Plenty as an example of the problem.

Tranz Rail carries 1.5 million tonnes of logs for Fletcher Challenge Forests from Murupara to the Port of Tauranga and 500,000 tonnes of pulp and paper for Carter Holt and Norske Skog.

The paper is profitable but the logs are marginal, Tranz Rail has said. It will not invest in the line because of the "customer's inability to withstand price increases".

It has asked for $17 million from Transfund, the road funding body that last year was given $30 million to spend on "alternatives to roading".

Tranz Rail would use $8 million for capital works on the line from Murupara and Kawerau and the rest would be a subsidy to cover costs.

That is the kind of thing already being considered of which there could be more in the future.