Editorial: Takeover bid spells new hope for rail

Toll Holdings' increased offer for Tranz Rail has virtually ensured that New Zealand will soon have a new railway operator. Once the takeover is completed, another attempt can be made to find rail's most efficient role in the national transport network. It follows a decade of lacklustre post-privatisation management. A want of committed ownership during that time has starved Tranz Rail of upkeep and alienated many of its main customers. The question for New Zealand is whether Toll will deliver in the national interest, as well as its own, by promoting a more rational land transport arrangement.

The taxpayer has a strong interest, given the Government's decision to buy back into the railway. When Toll takes control of Tranz Rail, the Government will achieve its ambition of repossessing the lines but will be obliged to spend $100 million on an immediate track upgrade, and a further $25 million annually for four years. Toll, for its part, will invest $100 million in rolling stock. That deal represents extremely good business for Toll; it has infrastructure costs taken out of its hands. Equally, however, the outcome is better than if the taxpayer had been saddled with costs, real and potential, arising from the Government's previously proposed 35 per cent stake in Tranz Rail.

The deal gives Toll exclusive access to the tracks, although with performance controls. In theory, the Government can invite a competitor in if freight on a line falls below 70 per cent of present levels. In theory also, the risk of losing monopoly access will curb any impulse to hike haulage rates. If the ratio looks generous to Toll, it also gives major customers on some lines considerable leverage over the rail company. The danger is that the arrangement will lead to subsidies to keep lines operating when no competitor is forthcoming. Already, the Government looks likely to pay out more than already pledged if little-used lines, such as that between Napier and Hastings, are to remain open.

For all this risk, there is the potential for considerable gain. Toll will bring capital, an efficient IT system and a reputation for good service. It also appears confident that it can repeat events in Australia by doubling the freight carried by rail. At the moment, there is a gross imbalance between road and rail. In part, this reflects the troubled history of an asset that has come close to insolvency. It also indicates a failure to press home what appear to be obvious advantages, including rail's protected right-of-way and freedom from bottlenecks.

It could be, of course, that those pluses are overstated, and that firm foundations underpin road transport's dominance. But Toll's experience suggests it can develop synergies and service that make rail a more attractive proposition. Toll is gaining Tranz Rail for an attractive price, with the sweetest of deals with the Government. Its $1.10-a-share bid, up from 95c, still falls well short of the value placed on the shares by an independent adviser. But the salient fact for the company's major shareholders, and for the Government, was that the prospects of a better offer were extremely slim. RailAmerica walked away after undertaking due diligence. Interest from other parties had come to nothing. Toll stands alone in believing that an integrated operation will allow it to fashion a favourable rate of return.

The Government's part of the deal means that the rail infrastructure now represents a public liability. It must hope the changes promised by Toll are in the interest of the country, as well as the company. The Australians will get a substantial subsidy and a long lease. Let us hope they can succeed where the state and a private owner have failed, running a railway that contributes efficiently and profitably to the economy's vital arteries.

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