Government purchase of rail business closed one rail history chapter and opened another

The Government’s 2008 purchase of the New Zealand rail and ferry interests held by Australian logistics company Toll Holdings, closed one chapter in the country’s railways history and opened another.

Private sector ownership of the rail and ferry businesses had begun in 1993 when the Government sold New Zealand Rail Limited to a consortium that included North American railway company Wisconsin Central and local investment advisory firm Fay Richwhite.

The new business was re-branded as Tranz Rail but mounting financial problems led to the company being sold to Toll Holdings in 2004. In a subsequent transaction, the Government bought back the railway track and associated infrastructure.

This was vested in the New Zealand Railways Corporation, a forerunner to privatisation that had administered rail land when the infrastructure was in private sector ownership.  As part of the transaction, Toll and the Government negotiated an agreement for Toll’s long term exclusive access to the network.

The Government agreed to contribute $200 million towards infrastructure upgrades being carried out by the corporation under the trading name, ONTRACK. Toll pledged $100 million in rolling stock investment and agreed to pay the full capital and operating costs associated with using the network.
But Toll found it was not immune to the challenges that Tranz Rail had encountered. A lengthy wrangle over how much Toll should pay for network access ended in stalemate and frustration.

While Treasury investigated a number of variations on the existing ownership model,  ONTRACK developed a proposal for the Government to buy Toll’s rail and ferry businesses.

The Government chose the purchase option and after lengthy negotiations with Toll, bought the business in 2008 for $665 million and renamed it, KiwiRail.

Launching KiwiRail, the Finance Minister Dr Michael Cullen said: “For a decade after its sale, there were stories of financial scandal, of asset-stripping, and of neglect. 

“In recent years, Toll Holdings has worked hard to turn this around, but in the end all have acknowledged that it is not possible to run an effective rail network in New Zealand without significant financial support from the New Zealand taxpayer.

“By bringing our rail system back into public ownership — following the buyback of the tracks four years ago — we will spare future generations from subsidising a private rail operator and will be able to create an integrated, sustainable transport system.”

The purchase was compared by some to the Government’s earlier successful bail-out of Air New Zealand. But Prime Minister, Helen Clark, made it clear: “We are not going into this to make money.. 

"Rail is of a different order. It is needed for a sustainable, integrated transport network and we had the opportunity to buy," she said.

Toll Chief Executive Paul Little said "if we'd had a choice", Toll would probably have preferred not to have sold the rail and shipping assets but it had been unable to reach agreement with the Government over a raft of important issues. 

He said the rail system desperately needed an injection of capital and the Government would ensure that occurred. 

Asked how much needed to be spent on the business, Michael Cullen said preliminary work indicated it would be measured "in the hundreds of millions rather than the tens of millions.”

Former Treasury official John Wilson, in a 2010 paper on the privatization experience, summed up the privatization “experiment”. “Two different but very aggressive commercial operators have tried to make money out of New Zealand rail freight and concluded it is not possible”, he wrote.

“Ultimately, the rail system reverted to government ownership and public funding because although Tranz Rail and Toll faced hard budget constraints, the public, including a significant part of the business community, did not find the consequences of these hard budget constraints acceptable.”

KiwiRail was launched with the unveiling of a new red, grey and yellow locomotive livery at Wellington Railway Station. A number of commentators noted the irony of former National Party Prime Minister Jim Bolger being appointed Chairman of the new KiwiRail board. He had, after-all, been Prime Minister when Railways were sold in 1993.

But Jim Bolger was equal to the task. He countered any implied criticism with the simple words, “the world has changed”.
He pointed to the steep rise in oil prices, the changes in shipping patterns and the advent of news terms like food miles and carbon efficiency. He described a world in which rail had an important role in determining New Zealand’s economic future.
The late 2008 election and a change in government created apprehension about rail’s future. But despite being critical of the purchase, the new government subsequently backed a KiwiRail $4·6bn, 10-year plan to make the business financially sustainable.

The Government allocated $250m in the first year and agreed to a three-year package worth NZ$750m, subject to individual business cases and meeting conditions for investment.

The Government’s backing recognised the likelihood that total freight traffic in New Zealand would double by 2040 and that freight customers were adamant that rail would need to play an effective part in handling the increase.

“Government commitment enables us to invest in our business in a way that our predecessors haven't been able to in a long time,“ said KiwiRail Chief Executive Jim Quinn. “Our customers have been telling us they would consign more goods to rail if transit times were more relevant and the network more reliable.“

The plan emphasised the need to maintain a connected network rather than a series of short lines but it did provide for minor routes to be closed or mothballed if they could not attract an “anchor customer“ or a “compelling public good reason for them to stay“.

It also provided for the cost allocation for the Auckland and Wellington passenger networks is to be clarified. Those essentially non-commercial services were to be funded through fares and support from the local and national authorities.

The delivery of KiwiRail’s Turnaround Plan was hampered by a number of significant natural and business events. These included the Christchurch earthquakes, spring and summer droughts, the Pike River Mine disaster and the financial crisis experienced by state coal miner Solid Energy.

But by mid-2013, the renewal of Railways’ ageing locomotive and wagon fleets was well advanced. Twenty new Chinese-built locomotives were in service and a further 20 in the process of being commissioned. Together with the introduction of hundreds of new wagons, they were improving freight on-time performance and contributing to growth in rail freight’s trading revenues.

Sources: A Short History of Privatisation in New Zealand, John Wilson, 2010; New Zealand Herald; Fairfax. KiwiRail Express.