Budget documen' />

State-owned KiwiRail's freight business will become insolvent if its present situation continues, the Government has been advised.

Budget documents reveal that officials have considered exiting rail freight "in a managed manner", and regard maintaining the status quo as a route to "an unmanaged exit".

KiwiRail produced a 10-year turnaround plan this year, which focuses on the core national rail network. The plan envisages $4.6 billion of capital investment over 10 years, $1.1 billion of which is sought from the Government, but expected freight customers to fund all capital and operating needs long term.

The Treasury contracted PricewaterhouseCoopers and AECOM to undertake financial and engineering due diligence on the plan.

A cabinet paper in April after that process concluded the plan was short of being a detailed business case, but was a good way forward.

The paper advises that exiting rail freight is not viable.

"Exiting rail removes the option value of rail meeting New Zealand's growing freight demand and has significant risks associated with the management of the exit," the report said.

The status quo of keeping existing services with limited investment is referred to as an option with little to commend it with ongoing risks around reliability and safety.

"The end-result is likely to be insolvency and receivership - in effect an unmanaged exit, with higher Crown costs." Customers were canvassed last year. The paper said ministers wanted customers and the wider market to share the risk of the business. The customers wanted the North Island main trunk line and Interislander capacity increased.

No reference was made to individual customers. The paper did not say freight charges would rise. Rather, it talked of "engagement with stakeholders focused on revenue generation and their ongoing commitment to rail".

The Crown spent $690 million to buy rail back from Toll Holdings. It earlier paid $1 for the network.

It has provided $240 million of new debt since the purchase and a further $140 million debt facility to New Zealand Railways Corp, according to the papers.

The May budget provided a $250 million capital appropriation and the papers envisage $750 million over three years.

The capital expenditure was driven by engineering and safety needs rather than service delivery improve-ments. Advisers argued for additional rolling stock investment.

Draw downs of capital are contingent on joint ministerial approval of specific business cases. Ministers were advised to require better performance reporting and assurances that KiwiRail is achieving desired investment outcomes.

The budget documents do not commit to the extent of the rail freight network or significantly tackle the issue of whether a national network was needed.

"Rail freight's role as part of New Zealand's transport system may be optimised by being limited to the current set of viable import-export lines, the full network solution as proposed by KiwiRail, or by something in between".