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Cullen considers giving rail freight a helping hand

By Karl du Fresne

Friday 14th February 2003

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Finance Minister Michael Cullen has confirmed that the government might consider subsidising troubled Tranz Rail's freight operations.

While he made it clear he did not consider it an appealing option, it is seen as one means to shift freight from road to rail to relieve pressure on an overburdened roading system in line with Labour's land transport strategy.

Other options include buying back the railway network, sold to a private consortium led by merchant bank Fay Richwhite in 1993, and opening it up to competition ­ a course favoured by a group of disgruntled Tranz Rail customers.

Until now the government has played its cards close to its chest over rail's future. Last month, Prime Minister Helen Clark banned ministers from commenting on the possibility of a track buyback after Tranz Rail's share price rose sharply in response to reported comments by Transport Minister Paul Swain.

But in an interview with The National Business Review, Dr Cullen, who heads a government committee doing some "hard thinking" about rail issues, acknowledged that subsidisation was a possibility.

He said the government already subsidised rail passenger services but was concerned that subsidies tended to be an "endlessly leaking bucket."

Subsidisation risked putting too much power in the hands of the subsidised party, which could threaten to stop providing services unless it was given more money ­ "and the politics of that become horrible."

Asked whether subsidies could be a hard concept to sell politically, given that New Zealand has largely left them behind, Dr Cullen said: "Unfortunately not. I don't think people have been weaned off subsidies. I think people actually like the idea as long as they are the ones getting the subsidies."

Although he was "quite unkeen" on the option, it could be justified by taking pressure off the roading network. At present rail was disadvantaged against roads because unlike roads, it was expected to provide a return on capital.

"Tranz Rail argues it is unfair competition," he said.

Contrary to popular belief, road-user charges fell well short of meeting the true cost of the roading network. "Politically it would be impossible to put up road charges to the point where you are covering the cost of capital."

Dr Cullen said the government was concerned that the railway network was gradually shrinking, with branch lines closing as the emphasis shifts toward containerised main-trunk traffic. That trend did not sit well with the government's land transport strategy.

"If everything came off rail ­ and particularly if we saw, say, central North Island timber coming off rail ­ the government is faced with a horrendous roading problem."

Changing the regulatory regime to open the railway network to competition was another option, but it would be a "heavy weapon" as the government would be changing the rules of the game against an incumbent player. But it would be silly to rule it out.

One concern about opening the system to competition was that it could lead to endless litigation over access, as had happened in the telecommunications sector.

Dr Cullen said rail presented the government with a "very difficult" public-policy issue.

"You are basically faced with a situation where the previous government sold the rail subject to very weak conditions in terms of the government's negotiating capacity."

He said he wouldn't care to put any one option in front of any other at present. In a typically Cullenesque remark he added: "We are keeping all options open. We are floating like a butterfly and might yet sting like a bee."

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