Tranz Rail reached a critical turning point three years ago. Our choice was simple: Stay on the existing track and go broke, or change direction and focus on the business we do best - linehaul rail freight and ferry services. We decided to make the change, and the signals tell us we are heading in the right direction.

Three years ago and under one roof, the firm was running passenger and freight rail businesses, New Zealand's largest trucking company, a major engineering operation and a ferry line. The capital expenditure to keep that complex multi-enterprise business going in its existing form would have crippled the firm, and returns from some of these activities did not warrant fresh investment in any event.

We had to narrow our focus to build a sustainable new Tranz Rail around our core business - rail freight - where we knew good returns could be made.

Since then, we have been progressively selling our interests in passenger rail, engineering services, and other assets. We have out-sourced track and rolling stock maintenance. We are currently exploring the market for our trucking company. We are concentrating new investment on restructuring the rail freight operation - and the new Tranz Rail is being created.

No one said it would be easy. The move challenged the culture and work practices that had developed over 140 years of rail operation in New Zealand. Driven strongly by an engineering philosophy for much of its history, the enterprise had to become more customer-sensitive in an increasingly competitive environment.

Tranz Rail people have risen to the challenge. Step into a rail yard and you can see the difference. Cargo loading has been mechanised and streamlined. Shunting is being minimised. Containers are replacing the old boxcars. The number of new 24ft curtain-sided containers, developed by Tranz Rail, is growing in response to customer demand. Special purpose rolling stock is hauling bulk commodities - milk, coal, logs - and more is being developed in partnerships with our major bulk freight customers.

New sprint trains are moving freight between Auckland and Wellington in 11 hours and between Auckland and Christchurch in 30 hours. New partnerships have been formed with port operators to speed the transfer of import and export cargo between ship and rail.

On-time performance has been lifted dramatically by both our rail services group and our Interislander ferry services group.

Delays due to speed restrictions on sections of our rail network have been reduced 40 per cent in the last year as our track de-stressing projects progress. Delays due to cargo handling errors have fallen 60 per cent in the last year. Locomotive and wagon maintenance initiatives are steadily lifting the reliability of freight carriage by rail. New customer relations services have been introduced to simplify and humanise the business of doing business with Tranz Rail.

These improvements are beginning to reflect in our financial results. We have reported the third quarter financial performance for this year. While it was not up to our original expectations, largely due to the impact of the drought on agricultural sector demand, our year-to-date trading performance is significantly better than over the corresponding period last year.

We are on track to deliver a full year net profit after tax of $30.4 million, $2.7 million under our original budget forecast. We will exceed the forecast if our negotiations to sell our Wellington commuter rail operation, the Wellington Railway Station, and our Tranz Link distribution service group are concluded before the year's end on June 30.

In the year-to-date, we have been able to cut our debt burden by $79 million due to a successful $60 million rights issue and proceeds from asset sales and performance improvement. We plan to bring it down further before the year's end.

Our financial performance is improving - but we have a long way to go before Tranz Rail makes an adequate return on investment in the business. Strategic changes are moving us in the right direction.

We plan to increase the momentum over the next year. Another roll on-roll off freight ferry will be added to the Interislander fleet in June. We are close to completing our assessment of options for moving our South Island ferry terminal from Picton to Clifford Bay - significantly cutting cargo transit times between our North and South Island rail networks. The next year will see a revitalisation of the information technology systems - increasing our ability to utilise all our operating capacities. Further locomotive and wagon reliability initiatives are in the plan.

Success will come from continuing our strong, strategic focus on changing Tranz Rail from a transport industry jack of all trades into a specialist linehaul freight mover and ferry operator.

The manner in which significant and challenging changes have been made in the company so far is a tribute to Tranz Rail staff who are determined to see that rail continues to play a vital and sustainable role in 21st century New Zealand. Their commitment - and the positive response of our major customers and sustained support of our investors, bankers and suppliers - gives confidence that we can build on the improved performance already achieved.

The New Zealand Land Transport Strategy outlines the vision of an affordable, integrated, safe and sustainable transport system that could be in place by 2010. It says: "Wherever feasible, the Government will encourage transport of products by rail." This vision recognises rail has the capacity to cut road congestion, and has environmental advantages over trucking in fuel efficiency, pollution, noise, and land-use.

But there is a broader challenge ahead for all New Zealanders. If road and rail are to maximise their contribution to the country's economic and environmental performance, they need to operate on the same financial basis - not one in which rail pays in full for its track and trucks get a subsidised ride on the roads.

Greater transparency about the hidden costs of competing modes of transport will let consumers make the right decisions. In that brighter future, Tranz Rail will realise its true potential.

* Michael Beard is the managing director of Tranz Rail