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Rail's battle rekindles that shrinking feeling

By Karl du Fresne

Thursday 24th April 2003

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Kurow, Culverden, Cromwell, Kaikohe ...

No, it's not a line from I've Been Everywhere, Man. These are just four of the many country towns once served by trains but where the rumbling and graunching of rail wagons has faded to a distant, nostalgic memory. Others include Foxton, Opunake, Fairlie and Roxburgh.

Since its peak in the mid-1950s, New Zealand's railway network has shrunk from 5500km of track to 3898km as uneconomic branch lines have been closed.

And as Tranz Rail fights for survival, speculation is mounting that more uneconomic or marginal lines could face closure.

The recent collapse of Tranz Rail's share price led to speculation that the company might be targeted by a corporate raider intent on axing remaining non-profitable lines and concentrating on maximising revenue from main trunk routes and interisland ferries.

That would alarm the government, which views rail transport as an integral part of its land transport strategy, and local authorities in areas such as Gisborne, where the rail service is hanging by a thread.

Tranz Rail's plight has exacerbated the nervousness of its major freight clients, who have lost confidence in the company and are calling for government intervention to ensure the survival of the railway network.

Some of those key customers were understood last week to be considering making an offer to buy the sections of line on which they are the sole or major users.

Such a strategy might appeal to companies such as state-owned coalminer Solid Energy, which accounts for an estimated 95% of traffic on the Westport-Lyttelton line, and is chafing with frustration at Tranz Rail's inability to increase the tonnages of coal hauled from its West Coast mines.

The branch lines to Kinleith ­ used by Carter Holt Harvey ­ and Kawerau (Norske Skog) fall into the same category.

Judging by comments made in Parliament earlier this month by Finance Minister Michael Cullen, the government would not be averse to a breakup of the railway network.

Asked by New Zealand First deputy leader Peter Brown whether he contemplated the rail network surviving as one entity, Dr Cullen ­ who chairs a government committee doing some "hard thinking" on rail issues ­ answered: "The government's interest is in rail contributing to its overall land transport strategy. Unified ownership of the present assets is not essential to that objective."

Asked whether he would be happy if the rail network was disposed of piecemeal, ending up in multiple ownership, Dr Cullen answered: "Yes."

As The National Business Review reported last week, the Rail Freight Action Group ­ whose members include major freight customers Carter Holt Harvey, Solid Energy, Fonterra and Fletcher Forests ­ has been lobbying the government to buy back the rail network, privatised in 1993. The group says the railway infrastructure is now so rundown that rail's future is at risk unless the government steps in.

RFAG's preferred option is for the government to set up a new Crown agency to take over the rail network, invest the estimated $200 million-plus needed to catch up on deferred maintenance, and open the tracks up to competition in return for access fees.

The group points out that this would result in rail operating on the same basis as road, thus resolving arguments about uneven playing fields. As the incumbent operator with experienced staff and rolling stock, Tranz Rail would still have a big advantage over prospective new entrants.

Subsidies, another option, are already being used under the "alternatives to roading" scheme to divert freight traffic from road to rail.

In the Wairarapa, for example, Greater Wellington Regional Council is seeking funding for a transfer station at Masterton where logs could be offloaded from trucks on to trains for the trip to the Wellington waterfront. That would ease congestion on the steep and winding Rimutaka Hill Rd, which is traversed by up to 200 logging trucks daily.

Until last week, the government and Tranz Rail had been quietly playing down speculation about the possibility of state intervention in rail.

But as the company's share price went into freefall following its disastrous downgrading by credit agency Standard & Poor's, the company invited government officials to a meeting in Auckland. Though Tranz Rail continued to insist it did not need rescuing, the meeting indicated a significant shift from its previous "Crisis? What crisis?" stance.

Another sea change was signalled by the presence at the meeting of former Richmond Meat chief executive John Loughlin, a surprise appointee to the Tranz Rail board.

Mr Loughlin's appointment coincided with the announcement that Tranz Rail's chief financial officer Wayne Collins was stepping aside to concentrate on the sale of assets such as Tranz Rail's road transport subsidiary Tranz Link, its Wellington commuter services and the upper floors of Wellington Railway Station.

Analysts say asset sales are essential to relieve the company's debt and claw back some of the credibility lost with the five-notch credit downgrading.

Commentators have suggested that Tranz Rail is unlikely to be a willing seller of the track network if it's then going to have to face competition from other users but Tranz Rail managing director Michael Beard appears not to have ruled out open access. Asked earlier this month how the company felt about the prospect of the government buying back the tracks and opening them to competition, Mr Beard said: "It [the network] was purchased on an exclusive-use basis, but time moves on."

He pointed out that the company had already accepted that its commuter passenger services in Wellington and Auckland could be operated by other interests. But he added that there were practical difficulties, such as timetabling, in putting several different operators on a single-track system.

If the government decided to buy back the network on an open access basis, an obvious sticking point would be the price.

The tracks are valued in Tranz Rail's books at $330 million but some commentators suggest their real value, given the backlog of maintenance, is probably zero ­ especially since the sharemarket last week valued the entire company at slightly more than $80 million.

Cynics have suggested all the government needs to do is wait for the company to implode altogether and then pick up the pieces.

Whatever form any state intervention takes, the challenge for the government will be justifying the deal to taxpayers. Transport commentator Bob Stott, editor of Rails magazine, suggested the public would need to be convinced that in return for its investment in the rail infrastructure there would be a marked reduction in the number of heavy trucks using the roads. And he pointed out that state ownership of the tracks would not, by itself, automatically attract traffic from road to rail.

Mr Stott was also sceptical about open access, saying it could result in competing operators fighting each other to a standstill, "cutting rates and perhaps cutting corners until the rail industry is so debilitated that no one will invest another cent in it."

Individual members of RFAG say that despite their concerns about Tranz Rail's ability to handle the increased freight demands of a growing economy, they generally enjoy a good day-to-day relationship with the company.

They acknowledge that rail is far more efficient now than before it was privatised, hauling 5.5 million tonnes more each year ­ and with only 3000 staff compared with 21,000. "Tranz Rail by any yardstick is more efficient than the old Railways Corporation," RFAG spokesman Cedric Allan said.

Tranz Rail admits its relationships with major customers have been strained in the past. "We have had some tough commercial negotiations because some of the rates [paid by customers] were just not economic to us," Mr Beard said.

"We have opened our books to these guys [major freight users] and shared with them the fundamental dilemma that certain lines and certain commodities don't pay their way, and if you want rail to continue to be active in these areas the government has to find a way to level the playing field [with road]."

Mr Beard said rail had always played its cards close its chest, creating the assumption that it was making super-normal profits. "Well, you can see from our stock price and our profits that that certainly isn't the case."

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