KiwiRail survival plan is 'on track'

EXPENSIVE TOY: Toll Holdings boss Paul Little gave then finance minister Michael Cullen a model train after Labour signed  documents to buy back the rail system.
ROBERT KITCHIN/The Dominion Post
EXPENSIVE TOY: Toll Holdings boss Paul Little gave then finance minister Michael Cullen a model train after Labour signed documents to buy back the rail system.

Mainfreight is a believer. So is dairy giant Fonterra. Transport Minister Steven Joyce is "agnostic" and many taxpayers will be praying for a miracle.

The $4.6 billion "turnaround" plan for New Zealand's rail freight network is inspiring devotees and cynics in equal measure.

Mainfreight and Fonterra are backing it with hard cash and complementary investments. Mainfreight, a listed global logistics company, has earmarked $60 million for investment in new railhead depots.

Meanwhile Fonterra has shown the faith with a $130m new rail hub complex in Hamilton and another planned for Mosgiel.

But market analyst Brian Gaynor, who doubts New Zealand has the right topography and scale for viable rail, reminds us New Zealand taxpayers have already sunk $4b into the decrepit, and failed, rail business.

Are we simply throwing more good money after bad?

Nationalised by a Labour-led government two years ago, and now called KiwiRail, our railway is about to get a $750m taxpayer injection while corporate rebuilders work up a head of steam.

The Government has committed $250m this year to a rail renaissance with $500m more on offer over the next three years if the change team produces a compelling business case. But getting KiwiRail back on track will require $4.6b of capital investment over the next decade.

The $750m from taxpayers is a shunt. The rest has to be generated and re-invested by KiwiRail itself.

John Spencer, the Wellington businessman and veteran company director appointed to head the KiwiRail board, leaves little doubt the turnaround has to work. Or? "We won't have a rail system."

KiwiRail chief executive Jim Quinn, who has worked in the competitive courier industry, understands the project will attract some negativity despite what he calls strong arguments in its favour. These include a projected 75 per cent explosion in freight volumes over the next 20 years. Rail carries a third of the country's export goods even in its current creaky state, and one milk train carries the equivalent of 28 dairy road tankers.

"This business has an odd history. But it is what it is. We can all get twisted about the past and it's understandable that this past raises questions," Mr Quinn acknowledges. But there are really only two questions to ask, he says.

"Does New Zealand need a rail system as part of an innovative transport system? The answer is yes. Is there a solution that would bring it to a self-sustaining status? Our view is yes. By year six or seven of this 10-year plan we will be in this place."

WHY SUCH a long haul to move from the red into the black? Because the national rail system has been run down so far, the board, management and staff literally have to rebuild it from the sleepers up. The most modern of KiwiRail's 149 locomotives is 20 years old. The average age of its wagons is 25 to 30 years and they weren't designed to carry today's heavy loads.

Around 70 per cent of the container wagon fleet was made to a 1970 design. More than 2.5 million sleepers are close to being garden borders and 800 bridges are nudging 100 years old. Around 200 kilometres of the 4000km rail network is nearing the end of its life.

The rail and interisland ferry assets that cost taxpayers $665m in 2008 when the Labour-led government bought the company from Australia's Toll transport group were last year valued at just $349m by Treasury.

Which all goes some way to explaining the need for that $4.6b spendup in the next 10 years. The question is where will the money come from?

Last month the now state-owned enterprise announced an 11 per cent fall in operating profit on the previous year. Net profit after tax at $185.5m for the year ending June was around 46 per cent below the company's statement of corporate intent target of $348.3m.

A PricewaterhouseCoopers/AECOM report earlier this year to the Government said the freight business would become insolvent if it carried on as is, and Budget 2010 papers revealed officials had been considering exiting rail freight in a "managed manner".

Two years ago after the re-nationalisation of the rail network, Gaynor wrote that since 1990 the taxpayer had spent or committed nearly $4b on rail with debt write-offs, equity injections, asset buy-backs, subsidies and grants. That didn't include spending by the company itself. Nor, he said, did it take account of the "huge" wealth transfer to overseas investors in the late 90s, when the company was listed as Tranz Rail.

Its original investor consortium, including David Richwhite, Sir Michael Fay and two US parties, realised mainly tax-free profits of $370m from selling their Tranz Rail shares. (A later Securities Commission insider-trading case relating to Tranz Rail against Fay and Richwhite resulted in them settling for $20m).

But as Mr Quinn would say, that was then, this is now.

Full steam ahead. The rebirth of New Zealand rail has already begun.

The nine-year-old leased Cook Strait ferry Aratere is off to Singapore for a $43m stretch job which will add 30 per cent to its freight and vehicle space.

Twenty new locomotives worth around $75m are on their way. Tunnel improvements have started, new wagons are coming, along with new cars for the South Island's TranzAlpine and TranzCoastal long distance passenger services. It is spending $3m with IBM on software to improve speed and reliability. A $1.6b upgrade and electrification of Auckland's rail system is well under way, and in Wellington, $550m is being spent to improve passenger services and reliability with a new electric fleet and infrastructure.

The upgrades in both cities are funded by central and local government with KiwiRail commissioned to do the work. Passenger fare increases will help pay for the improvements down the track, and freight customers can also expect to pay more once the service is faster and more reliable.

The overall plan is to grow KiwiRail by increasing its momentum. Modernising old equipment is pivotal and KiwiRail wants to take two hours out of the 13-hour Auckland to Christchurch run by the end of 2012.

The plan generally makes the most of rail's natural advantages – moving bulky goods, linking export industry to ports, and shifting people through increasingly congested cities. Mr Joyce says his government "sought a lot of assurance" from KiwiRail's customers – present and potential – that they would use an improved service before committing to the turnaround plan.

"KiwiRail is under no doubt from shareholding ministers and myself as transport minister that revenue growth and cash generated will be the milestones we measure. This is an old-fashioned commercial approach."

The Government wants a return on investment and evidence of much improved customer service, he says.

However, Mr Joyce says "no-one should be under any illusion" the turnaround of a high fixed-cost business in poor shape is going to be easy, and the Government doesn't expect to be paid a dividend for several years.

He says the rail freight renaissance is complementary to, not in competition with, the Government's plan to invest $11b in state highways between 2009 and 2019, or coastal shipping.

"For the Government the challenge, both in the policy and shareholding sense, is not to screw the scrum but to ensure that each [transport] mode as much as possible gets the price signals it should be getting."

Mainfreight managing director Don Braid says under the turnaround plan his company is not competing with rail for the first time ever. "They are being a genuine service provider."

Mr Quinn agrees. The KiwiRail team is "very clear we are not the solution, we are part of the answer".

"We have to build a culture of partnering, of working with our customers."

Mainfreight increased its annual spend on rail freight by 15 per cent last year to $25m annually.

Mr Braid expects that will double as the turnaround advances. The Government was smart in only buying the railway back from Toll, not the freight-forwarding business too, he says. "They would have had their hands full of problems if they had, competing with us. This way they work alongside the likes of Mainfreight instead of competing. By focusing on the core business of a line-haul operator they can provide an excellent service and convince us to move more with them."

Port reform is also integral to rail's recovery, in Mr Braid's view.

"Unfortunately we have a transport minister who believes market forces will help ports find their way in the world of shipping. That is not right. He needs to understand international shipping could end up treating New Zealand as a trans-shipment port, mostly likely to Australia, if we don't get our act together and produce a world-class port."

Rail's turnaround plan also sees under-used and non-profitable lines such as Auckland to Northland, Napier to Gisborne and Masterton to Pahiatua under threat of closure.

It's hard to make a commercial case for a line such as Napier to Gisborne which hosts one train a week, earns $600,000 a year and needs $20m spent on it. Communities will be thoroughly consulted before decisions are made over the next two years, Mr Quinn says.

KiwiRail is on the move, but don't expect to see dramatic change overnight, or even in 12 months, says Mr Spencer.

"This is a 10-year plan, a long-term plan. What I am chairman for is to make sure there is progress on that."

The Dominion Post