Thursday 24th April 2003
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Seventeen months ago, just after he'd pumped $885 million of cash into Air New Zealand's crumbling foundations, our finance minister couldn't resist having a gloat at business' expense.
"Perhaps we're beginning to learn," he told the newspaper formerly known as the Dominion, "given the history of rail, Air New Zealand and a few other things, that there are some things it is quite a good idea for the government to retain an ownership interest and the private sector doesn't do everything better [sic]."
A couple of months previously the airline's share price had hit its all-time low of 18c, giving it a market value of $102 million or about the price of a decent-sized Auckland office block.
Tranz Rail's shares last week sank to 30c, giving it a market worth of just $63 million.
If Cullen's crystal ball foretold the rail operator's distress, it was, as with most oracles, maddeningly spare with details. Otherwise the government would not have agreed to pay $81 million for the Auckland rail corridor alone.
The similarities between the two companies are obvious. Both provide transport services critical to the economy. The government can't afford to let either of them cease operating. And Tranz Rail needs, as Air New Zealand needed, huge chunks of cash to prevent it doing so.
The differences are equally clear. Tranz Rail has no direct competitors but competes on a very slanted playing field with road operators. It doesn't operate internationally. It isn't reeling from the collapse of a major subsidiary like Ansett. And there is no Qantas waiting in the wings eager to take a big equity stake.
As the company teeters on the brink of insolvency it's these differences that will dictate the government's approach this time around.
In its drawnout negotiations with ministers Tranz Rail has so far been pushing for taxpayer subsidies to keep open loss-making lines.
The other major item on its survival wish-list is government action to redress the effective taxpayer subsidy its road-hauling competitors enjoy.
But it would be months before either of those started to lift the company's cashflows and profits. The developments of the past few weeks have shown Tranz Rail can't wait that long.
According to documents Tranz Rail provided to rating agency Standard & Poor's the company will have only $1.3 million of cash by the end of June. That was assuming the $10.7 million sale of rolling stock to Carter Holt Harvey went through.
Although its bank facilities will be fully drawn at that time, the banks have so far been supportive, agreeing, for instance, to spread a single $14 million repayment over three months.
Still, their tolerance won't last forever, particularly if the situation deteriorates further. The company needs a truckload of money without delay.
One possibility is that it will be able to raise significant new private-sector equity. But its bungling may have put paid to that.
The embarrassing attempt to get an injunction stopping S&P from publishing its ratings downgrade was designed to prevent the action from derailing a sale of shares to US institutions. This is hardly a good look for a company trying to raise money and professing to operate a policy of absolute candour with the markets.
Another option is for the government to come to the rescue Air New Zealand-style. That could pull Tranz Rail off the ropes but it would create difficulties of its own.
For one thing, it would look extraordinarily heavy-handed for the government to take an ownership stake and then enact legislation that would benefit Tranz Rail that is, level the road-rail playing field at the expense of private-sector competitors. Targeted subsidies would have the same effect.
Another option is simply for the government to buy Tranz Rail back lock, rolling stock and barrel.
But in that case the public funds the government spent would simply replace private-sector investors with the taxpayer. It would still have to pump in equity on top of that.
While that might put the company on a firmer footing in the short term, the same problems arise as with subsidies or an equity stake. The long-term problems are of a structural nature that will take government action to fix. And government action that disadvantages existing private-sector investors could come at a high cost for a nation that relies so heavily on foreign investment.
The solution favoured by Tranz Rail's major customers is for the government to buy back the rail network itself and open it up to competition, with Tranz Rail taking its chances along with anyone else who wants to haul freight and passengers around the country.
This would commit the taxpayer to paying hundreds of millions of dollars to bring the tracks up to scratch and to fund future investment and maintenance.
But it would effectively put rail on an equal footing with roads, which don't need to cover their cost of capital because they are "a public good." And it would do so without the need for scary legislation.
Shoeshine suspects it's all down now to haggling over price. He hesitates to recommend this but the situation looks ripe for a public-private partnership.
A little judicious revenue-withholding now from the Rail Freight Action Group would probably tip the company into receivership.
That would allow the government to pick up the assets from the receiver for a song, keep the tracks and offer their use for competitive services.
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