Government must take back the lines on rail

* Statement from the RAIL FREIGHT ACTION GROUP

The basic problem facing rail freight services in New Zealand is that the infrastructure needs a major investment of capital.

The recent Halliburton report reveals deferred network maintenance that carries a price tag in excess of $200 million.

In the meantime, rail struggles to provide an efficient freight service, with substantial portions of the network subject to speed and weight restrictions, and substandard bridges and tunnels reducing rail's competitive advantage still further.

Worse still, there is no prospect of substantial improvements to the system. Tranz Rail can't afford $50 million for a line into the new export port at Whangarei. Nor can it replace the dated and inefficient Raurimu Spiral in the centre of the North Island, or acquire land to improve sharp corners, or make myriad other improvements.

While roads are continually improved, there have been no significant improvements to the rail network for 10 years. Small wonder then that rail continues to lose market share to road.

Neither Tranz Rail nor RailAmerica appear able to finance the major upgrade of the network so desperately needed.

Tranz Rail is already conducting a major garage sale of assets to fund its day-to-day operations and satisfy its bankers.

The company does not appear to be in a position to significantly invest in maintaining or improving the infrastructure.

Its own investment imperatives , include the desperately needed upgrade of its 20-year-old locomotive fleet, whose lack of reliability is frustrating to freight users.

If hundreds of millions of dollars had not been stripped out of Tranz Rail for payments to shareholders, substantial funds would have been available for investment in the rail infrastructure, but that is history.



New bidder RailAmerica is making the right noises, but where will it obtain the major sums needed? The company is not that much bigger than Tranz Rail, with total equity of $526 million and a debt burden already approaching $1 billion, which could be increased by a further $400 million to finance the proposed purchase of Tranz Rail.

RailAmerica itself is selling assets to raise cash at the moment.

There has been talk of $158 million being injected into rail as a consequence of the RailAmerica bid. In fact, all of this money will go to shareholders. Not one cent of it will be available to improve rail.

Clearly, the Government is the player with the vested interest and deep-enough pockets to make the needed infrastructure investment.

Two other changes would be needed to reap all the benefits of an upgraded infrastructure.

The first is a change in business strategy.

Rail is a capital-intensive business with high fixed costs. A rail operator needs to chase any volume that more than covers operating costs, so as to spread the cost of capital over these increased volumes.

Tranz Rail's business strategy is that every piece of freight business should provide a nominated rate of return on both infrastructure and operational costs. The difficulty, when it values the network at almost $400 million, is obvious.

This inflexible pricing philosophy forces some potential customers to road. Others simply have to accept lost export orders as a result of not being able to obtain workable contracts with the rail operator.

The second change needed is to increase operational efficiency to exploit the inherent advantages of rail to the full.

Both these changes are open to Tranz Rail or RailAmerica as the service provider.

If New Zealand is to prosper, it needs an efficient infrastructure to underpin economic activity.

The Government well recognises that it must actively help to ensure efficiency in the energy sector. It is already involved in ensuring an appropriate roading infrastructure that benefits a healthy, competitive road transport industry.

By contrast, a private-enterprise rail company is clearly struggling to make a monopoly model work, despite being custodian of nearly 4000km of track.

It may have seemed a great deal for both parties back in 1993 when the state handed responsibility and monopoly rights to Tranz Rail. The unavoidable truth is that the experiment has failed.

Our group urges the Government to conclude its discussions with Tranz Rail, while there is still time, and commit to buying back the infrastructure.

If the RailAmerica bid succeeds, the Government is likely to find itself negotiating with an owner wanting a great deal more money for the network, and increasing subsidies to keep certain regional lines open.

The opportunity is still there for the Government to reverse the mistake made in 1993, and create a level playing field where the state owns, improves and maintains both the road and rail networks and charges access fees to commercial users.

Both RailAmerica and Tranz Rail appear to have the ability to provide an efficient rail freight service if relieved of the obligation to maintain the rail infrastructure.

The Government can solve this problem by taking back and upgrading the infrastructure, and, by acquiring the right to allow other operators access to the rail network, can ensure the benefits of competition can be obtained in future.