It's hard to feel sorry for Toll

Bruce McKay (March 23) invites readers to sympathise with rail operator Toll when he suggests the Government is trying to extract too much money in the form of charges for access to the rail network.

Whether Toll deserves sympathy or not, Dominion Post readers deserve a more lucid representation of the facts and events than Mr McKay provides.

He discusses the impact of the 2006 revaluation of Ontrack's assets to $10.6 billion and wonders whether achieving a return on that value is central to the determination of access charges.

The revaluation to $10.6 billion represents the depreciated replacement value of the rail network as required by New Zealand accounting standards.

If the Crown valued the network at the $1 it cost to repurchase in 2003 it would plainly be a nonsense – just as it's hard to imagine how the rail infrastructure along 4000 kilometres of network could be replaced for its previous value of $119 million.

Electrifying the Auckland network alone is expected to cost about $500 million. This makes $119 million as a value for the national rail infrastructure about as valid as the $1 purchase price.

However, none of these values affects the charges payable by Toll. The company is not required to pay track access charges based on Ontrack's revalued book value. Here, Mr McKay might have put his analytical skills to work by reading the National Rail Access Agreement – available on the Treasury website.

He would have seen that Toll is not required to pay any capital charges relating to the historical rail network.

Because the charging provisions in the National Rail Access Agreement are commonly misunderstood, it may be helpful to describe them. Toll is required to pay track access charges to cover two categories of expenses incurred by Ontrack:

* The reasonable cash expenses that an efficient access provider would be expected to incur in the operation and maintenance of the rail network;

* Financing costs (weighted average cost of capital) and depreciation (capital recovery) charges relating to capital expenditure incurred after the signing of the NRAA in 2004 but excluding the $200 million funding injection from the Crown and any funding that does not give Toll a commercial benefit.

The first of these categories is straightforward. It basically covers the cash costs of keeping the network operational.

The second category requires Toll to pay Ontrack for capital expenditure on the network.

However, it is only required to pay for capital expenditure incurred after the $200 million the Government agreed to contribute in 2004 has been spent. In practice, the $200 million has given Toll a three-year "holiday" on capital expenditure charges.

Thus, the reality is that Toll is only required to fund Ontrack's costs for new investment in the rail network – and then only after the $200 million has been spent.

Now that it has been spent, the amounts Toll will pay for capital charges will rise.

Based on expected Ontrack capital expenditure of about $70 million a year, the charges faced by Toll can be expected to rise by about $7 million a year for the foreseeable future.

I don't intend to comment on the negotiations in progress between the Government and Toll.

Mr McKay says he can understand why Toll would be frustrated, but there's arguably just as much reason for the Government to feel aggrieved.

In 2003 the Government was poised to take a shareholding and a degree of control in the financially ailing Tranz Rail. Toll emerged and bought Tranz Rail on the basis that in return for exclusive use of the network, it would meet the costs of operating and improving the network – without the need to be subsidised.

Finance Minister Michael Cullen is on record as saying that if the Government is to pay a substantial subsidy, owning the network would be preferable to paying the subsidy to a private sector company.

* Cam Moore is chairman of Ontrack.