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Little debate on government's rotten rail deal

By Shoeshine

Friday 7th February 2003

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Could there be a better indicator of the sorry state of political debate than the attention given to the possible nationalisation of our rail network?

If all goes ill, taxpayers could soon find themselves again the owners of 3807km of track so dilapidated that the rails bend on hot summer days.

The bill for fixing them will run into hundreds of millions of dollars over the next few years. But the reaction has been virtually non-existent.

National transport spokesman Roger Sowry has argued on TV and radio that Tranz Rail "should be allowed to find a private investor so it can repair its lines."

And Act New Zealand's Deborah Coddington has put out several press releases claiming the government is buckling to lobbying by "big business" ­ specifically, Carter Holt Harvey, Fonterra, Solid Energy, and Fletcher Forests ­ seeking cheaper freight costs.

Neither examined either the ideological schizophrenia the government is displaying in its approach to monopolies and competition, or the commercial sense or otherwise of a state-owned rail infrastructure.

The apparent rationale for buying back the rails is to open them up to competition from other rail operators that fancy challenging Tranz Rail.

The question nobody has asked or answered is why the government needs to own the rails to achieve this.

Its approach to rail is completely different from the policy it's pursuing over access to telecommunications networks.

Back in 2001 Econet Wireless turned up wanting access to Vodafone's GSM mobile network.

Econet argued in private that Vodafone would never negotiate access on commercial terms ­ not that Econet had tried to do so ­ and that legislation was needed to give the regulator the power to set the terms.

And that's what Econet got.

In rail's case there's been no suggestion so far that anybody wants to carry freight in competition with Tranz Rail.

The crucial difference seems to be that Vodafone's network is state-of-the-art, having been built only in the last decade.

Vodafone is part of a multinational operator and the local operation, at least, is in rude financial good health. To buy its infrastructure the government would have to spend a sizeable chunk of our annual GDP.

Tranz Rail's network is barely "fit for purpose" as last year's Halliburton KR report showed.

If the figure of $120-130 million being bandied about is anywhere near what the government would contemplate paying it will come "cheap."

The question is whether it's worth anything at all.

Over the last six years Tranz Rail's declared capex (capital expenditure) on "track and related structures" has been $196 million, or an average of $33 million a year.

The annual report shows it has capex and opex (operating expenditure) commitments of $427 million over the next seven years "in relation to the outsourcing arrangements entered into [with Transfield] during the year."

What is capex and what opex is a point accountants debate so it's impossible to tell how much the company needs to spend to bring the network up to scratch.

But it's worth noting Downer EDI this week won a $A20 million contract to upgrade 160km of track on two lines in Victoria.

That works out at $135,000 a kilometre. At that rate New Zealand's 3807km would cost $514 million. How much of it needs upgrading similar to the Downer project isn't known.

If the government bought the network and took on the capex requirements it would be able to fund them at least partly by the access charges Tranz Rail would have to pay to use the track.

As the rationale for buying it in the first place is to introduce competition, the price it's willing to pay will presumably also reflect assumed cashflows from other users' access charges.

But, as far as is publicly known anyway, nobody has yet put their hands up to compete with Tranz Rail. Given the size of our economy it's unlikely anybody would, unless access charges were set far lower than was needed to fund network capex.

In that case the taxpayer would be subsidising the shareholders of the operator. If the operator passed on the subsidy the taxpayer would, as Act's Coddington points out, be subsidising rail freight customers.

Although it hasn't admitted it, the government has already made one gigantic miscalculation when it paid Tranz Rail $81 million ­ more than four times the amount of an independent commercial valuation ­ for the Auckland rail corridor.

Officials noted at the time that Tranz Rail was "aware Auckland and the Crown are keen to buy these assets and have no alternatives to dealing with Tranz Rail."

It's possible another buyer might have been found ­ French company RATP said this week it was interested in buying and running the Tranz Metro service in Wellington ­ but it's unlikely anyone would want to buy the national network.

So Tranz Rail has no alternative to dealing with the Crown.

Managing director Michael Beard has been doing his best not to sound too keen.

As he last week outlined a range of six favours the government could do his company, from subsidies on unprofitable routes to buying the network, he insisted he didn't want "to portray that we're looking for a handout or that we're looking to be saved."

But that's exactly what he's asking.

Investors took on Tranz Rail's business risks when they bought its shares or lent it money.

It isn't the taxpayer's job to bail them out. If Tranz Rail can't fund its costs and provide the services its customers want it should be allowed to go bust so another, stronger operator can get on with the job.

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