KEY POINTS:
It's still too early to judge whether the Government has made an adroit investment by plunging a billion dollar plus, and growing fast, into KiwiRail.
Despite the hoopla at Wellington's railway station yesterday morning as the new state-owned enterprise and its bevy of Government-appointed directors were announced, Cabinet Ministers still were waiting on negotiators to finalise the $690 million transaction at the centre of the Government's major rail strategy.
The deal that was finally clinched with Toll Holdings negotiators late yesterday afternoon, to buy its New Zealand rail and ferries business, was a clean one not the commercially preferential agreement that had caused considerable competitive angst.
Toll's subsequent statement to the Australian Stock Exchange did not confirm the significant changes that had taken place since Finance Minister Michael Cullen was presented with a mock trainset at his Beehive office by Tolls Australian boss Paul Little on May 8.
It is clear Cullen has listened to adverse market criticism that the original frame agreement cemented Toll in a preferential position vis a vis other competing KiwiRail freight users.
Toll NZ, which retains ownership of the profitable Tranzlink trucking business, will now pay commercial rents for railway yards and buildings which it will lease from KiwiRail, instead of enjoying the six year rent free period competitors believed breached the competition laws.
The upshot is the purchase price for Tolls rail and ferry assets has risen to $690 million compared to the $665 million announced in May.
And some $120 million of Toll NZs overall debt will also be transferred directly to KiwiRail the new SOE that will run the trains and ferries business.
All associated buildings will pass to Government ownership along with another $18 million of Toll associated debt. Toll NZ's top four management secondees - which includes chief executive David Jackson - will depart in three months. Under the original proposals the four were to be seconded until next February. But concerns emerged that it would be legally inappropriate for Jackson and his team to continue to run the business given that Toll-owned Translink would still be a major client along with competing freight and trucking firms.
KiwiRail's new chairman Jim Bolger also has a hands-on style which would have presented a considerable challenge to Jackson, who is used to a more free-wheeling environment. But many of the underlying managers are long-standing employees so the business is expected to tick over well until a new chief executive is appointed. Or, if the Government is feeling frisky, a railway operator/s is contracted to run the business in the fashion that Veolia Transport runs Auckland's rail service.
What's not been addressed is why the Government has been so prepared to pay a premium to acquire the former Toll NZ assets at this point yet not signal it would run the asset hard after acquiring ownership.
The Prime Minister says the Government has bought the rail business back for strategic reasons. Finance Minister Michael Cullen says the truth is New Zealand must have a strong, thriving rail network if we are going to live up to our full economic and environmental potential. Incoming KiwiRail chairman Jim Bolger indicates current oil prices makes the $690 million plus rail investment a no brainer.
Oil prices did indeed peak recently at US$144 a barrel and are tipped to go as high as US$150-US$170 a barrel according to OPEC. Yet the taxpayer is being told that he/she will have to fork out subsidies well into the future to prop up the newly renationalised railways.
Something doesn't compute.
If rail is again coming into its own due to the convergence of forces outlined at the Wellington railway station yesterday - the need for New Zealand to be more sustainable, lessen the carbon footprint of the country's transport network and gain greater fuel efficiency by using diesel-powered trains instead of road to carry similar freight loads - then economic logic suggests railways will become profit-making machines as the alternatives will be too expensive in the new carbon constrained era.
If the theory holds true, there is no reason why KiwiRail should be drag on the taxpayer. Yet the rationale for taking the rail business back into Government-ownership was Cabinet Ministers did not want to be forking out subsidies to a foreign (read Australian) private company. It was noted Toll had a 70 year track access agreement.
Better to buy out Toll so the Government had control over all major transport channels: rail, road and coastal shipping and could orchestrate a major strategic shift in the country's transport architecture.
Listening to Cabinet Ministers it was almost as price did not really matter. But in the end it always does.
What was missing from yesterday's celebrations was a determination by the Government to set up KiwiRail to make an operating profit within a relatively short timeframe.
The business may have been a basketcase under Tranz Rail's ownership as the barely polite allusions by Clark and Cullen to asset-stripping and financial scandals indicated.
But it's not as if Australia's Toll Holdings wasn't pulling decent profits from its subsequent investment in the NZ railways assets.
The Government is still sitting on all the background advice it received on the re-nationalisation which won't be released until both sides determine what they want to withhold for reasons of commercial sensitivity.
But the overall investment will be huge.
Toll was supposed to pay Ontrack - another SOE which runs the national rail track assets - some $48 million annually for access fees.
The value of this over 10 n years at seven per cent would have been $340 million - money that will not now come into the overall business.
Add the $340 million forgone revenue to the $690 million purchase price and the $120 million debt and the overall Government investment quickly tops the $1 billion mark.
Some of this will be recouped as KiwiRail's customers - including Tranzlink - pay freight fees. But most won't.
Then there's the $80 million Cullen says he needs for KiwiRail to run in a "steady as you go" fashion for the next five years which is basically deferred capex for keeping rolling stock and other assets in use.
He's already planning to take a more "aggressive" reinvestment package to Cabinet later this month which will include options for upgrading rail stock including the locomotives.
This will be on top of the $400 million the Government has promised to upgrade the nation's tracks.
What the Government should do is decouple the upcoming major investment required to modernise the rail service from ongoing operations.
Set up KiwiRail with an appropriate balance sheet as it did with Air New Zealand and require it to meet tough financial targets.
The $1.5 billion plus that will ultimately be sunk into this investment requires the Cabinet Ministers to realise they are playing with real train sets now - not just models.
