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Govt does deal with Toll on tracks

Monday 7th July 2003

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The government has negotiated a deal with Toll Holdings under which the Crown will regain ownership of the track for $1 and both parties will commit to rebuilding the rail network should Toll succeed in its bid for Tranz Rail.

Finance Minister Michael Cullen today released the draft Heads of Agreement (HoA) which will be activated if Toll Holdings buys Tranz Rail.

"The government's aim has always been to secure rail as a vital piece of infrastructure in the national interest. This ensures we will achieve that if Toll acquires Tranz Rail.

"Before we went public with the HoA between the Crown and Tranz Rail, I warned Toll that they were on a collision course with us and instructed my officials to suggest a joint approach under which the Crown would get the track and Toll the operating company," Dr Cullen said.

"They rejected the offer at that stage on the basis that they wanted the track too. I am pleased that they have since reconsidered that decision."

The HoA between the government and Toll Holdings duplicates many of the features of the earlier HoA entered with Tranz Rail but there are some differences, reflecting Toll's stronger balance sheet.

· A new Crown entity - TrackCo - will be set up to maintain and control the track. TrackCo will charge Toll for the use of the track. For the first five years, the charge will reflect TrackCo's cash outgoings. Subsequently charges will reflect not only TrackCo's operating costs but also any capital costs. [This compares with the implicit $20 million a year subsidy Tranz Rail wanted.]
· Toll will appoint a director to TrackCo.
· Toll will have exclusive access to the network for freight services but will be subject to transparent Key Performance Indicators with a bonus and penalty regime. The Crown will have "step-in" rights if volumes on a line slip below 70% of current usage.
· Incentives will be provided to encourage Toll to shift freight from road to rail.
· The government will invest $200 million to upgrade the rail network; $100 million up front and $25 million a year over four years. The refurbishment programme will focus on improving safety and efficiency and will be determined in consultation with Toll.
· Toll will invest $100 million in rolling stock.
· Tranz Rail's lease over the land under the tracks will be surrendered except for some specific properties. The Crown will pay compensation of around $50 million for any resulting loss of assets or income. This transaction will be revenue neutral for the Crown.

Dr Cullen said the most significant difference between the government's HoA with Toll and its HoA with Tranz Rail was that the Tranz Rail agreement committed the Crown to taking a 35% equity stake in Tranz Rail at a cost of $76 million.

"Should Toll's acquisition bid fail, the Crown's HoA with Tranz Rail remains alive and will be referred for approval to Tranz Rail shareholders."

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