Which track for Tranz Rail - public or private?

By FRAN O'SULLIVAN

The prospect that the Government may renationalise the rail network is fast becoming a political football.

Publicly listed Tranz Rail has been the owner since 1993, when the National Government sold NZ Rail to a consortium headed by merchant bankers David Richwhite and Sir Michael Fay for $328 million.

But Tranz Rail's ownership has been marred by poor safety and claims that the major shareholders have underinvested in the network.

The company has also been in conflict with some of New Zealand's biggest exporters, who say their ability to use the network in a cost-effective and efficient way has been stymied.

It is that latter point which has long exercised Labour Cabinet ministers and their political ally, Progressive Coalition leader Jim Anderton.

However, Tranz Rail claims roading gets an unfair advantage through user charges and taxpayer subsidies.

Many ministers believe that the national rail network is a vital strategic asset, particularly with the forestry "wall of wood" fast maturing in the North Island.

Their ambition is to develop a transport strategy which ensures that all major pillars - road, rail, air and sea - perform to capacity.

Reports have been prepared which point the way to a levelling of the field between road and rail.

But ministers' ability to deal simply with Tranz Rail has been hampered by National's failure to ensure that the Crown retained a "Kiwi share".

This would have enabled the Government to step in and ensure access to the network at a cost-effective price. It would also have ensured that appropriate maintenance was done.

Neither Prime Minister Helen Clark nor Finance Minister Michael Cullen want to publicly disclose their position on the sensitive renationalisation issue, which is only one of the options the Government has.

It could, for instance, settle the exporters' concerns by giving outright subsidies to either Tranz Rail itself, or its customers, to ensure the network is used. That idea is also being discussed.

But the ability of Clark or Cullen to simply resolve these strategic transport issues is complicated by the realities of MMP politics.

Clark will almost certainly get the opportunity to form the next Government after the July 27 election, but polls suggest that she will need allies.

Greens co-leader Rod Donald says renationalisation of the network would be a "key priority" if his party gets into coalition negotiations.

The other main contender, New Zealand First, wants to form a Government rail-track company to buy back the network "at a fair price".

Both parties believe the network has too much strategic value to remain in private ownership.

Campaigning in Timaru this week, Clark was questioned about her stance.

"I haven't made any comment on the commercial affairs of Tranz Rail," she said. "All I've said is, as every New Zealander would agree, it is important to have a functioning rail system."

Asked if it was something the Greens particularly wanted, she replied: "No doubt."

The rail system would need to be addressed at some point, but not during the election campaign.

Clark compared the rail issue to Air NZ's problems, which resulted in a Government rescue package.

"The Government stepped in when the national airline would otherwise have stopped functioning. I'm not aware that's the situation with Tranz Rail."

The difficulty for Clark and Cullen is that the Government has set a precedent through its acquisition of the Auckland rail corridors.

And the prospect that Tranz Rail's rail network might be the subject of a Government buyback has been around since March last year.

That is when Cullen and Transport Minister Mark Gosche - two of Labour's most effective ministers - fronted up to an Auckland Mayoral Forum meeting to talk tough on rail.

Auckland politicians had been negotiating with Tranz Rail to buy a slice of the network for an urban passenger rail service. But their figure of $112 million was too high for the Government to stomach.

Cullen and Gosche said it was time for their Treasury negotiators to step in and get the price down.

They wanted to protect the national rail network for future development by securing agreement on several fronts.

First, any deal had to protect the network's ability for operators or customers to use rail seamlessly from Otino in the north to Ohai in the south.

Second was the ability to run standard systems for interconnection, signalling, maintenance and communication.

Finally, the Government wanted to ensure that any deal would enable both Auckland politicians and Tranz Rail to achieve their respective ends: run a fast, efficient passenger service while still letting private operators to run services for their customers.

Late last year, Tranz Rail and the Government reached a deal. The Government paid $81 million and has since been locked in a range of discussions with Tranz Rail.

Advising the company is Wellington investment banker Rob Cameron, who advised the Government on Kiwibank and was appointed Crown negotiator for the Air New Zealand nationalisation.

Cameron was not prepared to talk publicly about his role, but those close to the discussions say he is an expert at blindsiding the Government with "principle at the expense of commerciality".

Next month, Government officials and Tranz Rail's advisers will resume their discussions, which effectively mirror at national level those which took place over the Auckland passenger service.

For economic, environmental and social reasons, Labour wants to see the network used more.

Tranz Rail wants to achieve its objectives as an efficient and profitable rail freight operator: it has either disposed of or put on the block assets such as the Tranz Scenic passenger service which are surplus to its core business.

The problem for the Government officials is that Tranz Rail has the upper hand.

When the Government sold the state's rail assets , Tranz Rail paid $328 million for 3900km of track, 7600 units of rolling stock, three interisland ferries and a fleet of refrigerated trucks.

This year the Government bought back 86km of track for $81 million.

One source says that in retrospect $81 million was "probably too much, but in the negotiating process our negotiators and theirs ended at $81 million to take account of those things Tranz Rail have lost".

That included advertising hoarding space and land around the tracks.

The problem for the Government, the source adds, is that the lease it signed in 1993 gave Tranz Rail rights over the track to the exclusion of anyone else.

"While the current Government has a philosophy of the four transport networks ... the one that we can't do anything with is rail."

Ironically, the negotiations may deliver Tranz Rail financial salvation from its own problems.

If the network is nationalised, the Government will incur the costs of strengthening network lines for increased freight.

But the benefits for Tranz Rail would be considerable.

"They would get the price and the responsibility would pass to the Crown to maintain the track," says one financial analyst.

"The Government would have a gun to their head, because these guys could say, 'Well, bugger it, if you don't do it our way, we're going to scale down the size of our operations and move to trucks.'

"If the Government keeps getting involved in these things, it will have ended up selling Tranz Rail for a pup in 1993 and buying back bits like the rail network for more than it sold it for in the first place."