Trouble at Tranz Rail

By CHRIS DANIELS

Tranz Rail's relationship with some major customers has deteriorated to a level seldom seen in New Zealand business.

In its attempt to transform itself into a freight-only company, Tranz Rail has succeeded in pushing five of its biggest customers - accounting for more than half its freight business - into forming a lobby group demanding that the rail company lose its monopoly track rights.

Tranz Rail supporters have responded with counter-accusations of sabotage, claiming that the major customers are co-ordinating a behind-the-scenes campaign to gain a business advantage next time contracts come up for renewal.

This has merely added to the company's woes, making it harder to win back confidence and support in the New Zealand financial community.

The programme of transformation, of turning Tranz Rail into a freight-only company, has been spearheaded by chief executive Michael Beard.

But there has been a reduction in freight revenue of $25 million in the year to the end of March.

In the forestry industry, where the number of logs being cut is rising dramatically every year, Tranz Rail is carrying fewer logs than before with revenue from forestry dropping by nearly $15 million, or 26 per cent, in the past year.

In July, the public first heard the combined voice of the big customers whose business is supposed to underpin Tranz Rail's financial transformation.

The Rail Freight Action Group sprang from the frustration and worry affecting five of the biggest exporters and rail users. Dairy giant Fonterra joined forestry companies Carter Holt Harvey and Fletcher Challenge Forests, along with state-owned coal company Solid Energy and BHP New Zealand Steel.

These companies each have yearly rail freight bills of more than $10 million.

Hiring veteran Auckland public relations consultant Cedric Allen, the Rail Freight Action Group began, slowly at first, issuing a press release announcing its presence on the day Tranz Rail released its business projections to the financial community in July.

While Tranz Rail supporters cry sabotage and claim it is an attempt to kneecap the company while it is trying to get back on its feet, these big customers say they are genuinely concerned about Tranz Rail's future.

For some customers, the relationship with Tranz Rail has badly deteriorated in the past few years, starting when freight contracts came up for renewal and it started raising prices by up to 40 per cent.

In some cases Tranz Rail started asking customers to make a contribution for new wagons or track upgrades. In others, it simply told the clients it no longer wanted to continue doing business with them - shifting their freight was not lucrative enough.

But it is not just the disgruntled and tight-fisted demanding change - some in the action group are enjoying the fruits of an improved relationship with Tranz Rail.

One, who agreed to speak to the Herald on condition that his company was not identified, said it did not feel overcharged and service had recently been improving.

But a sense of disquiet has come over even those customers claiming a healthy relationship with Tranz Rail.

A plummeting share price and talk that Government discussions over the long-term strategy for land transport may lead to some form of renationalisation of parts of Tranz Rail's business have caused concern about the viability of long-term contracts.

After all, no matter how bad the company might be now, it will not get any better if it either goes belly-up or shuts down services to stay in business.

Solid Energy's chief executive, Don Elder, tells a story of a comprehensive breakdown in the relationship with Tranz Rail and a subsequent hardening of attitudes.

When rumours began circulating of Tranz Rail talking to the Government about buyout options for its track network, Solid Energy and the other big customers realised that they risked being left out in the cold - that if they did not move quickly, a deal would be reached that took no account of their needs.

Both Tranz Rail and the Government deny that a buyback of the national rail track is being discussed.

But Finance Minister Michael Cullen did touch on the prospect in talks with Auckland mayors over the Government's $81 million purchase of the Auckland Rail Corridor from Tranz Rail.

Elder says his two-year battle with Tranz Rail over a simple contract extension was a frustrating and expensive exercise.

The new contract would allow Solid Energy to increase the amount of coal it exports and Tranz Rail to win more business.

A simple negotiation? Don't count on it, says Elder, who says Solid Energy ran straight into an intransigent Tranz Rail, which was trying a new approach to earning money from its tracks - tracks across the Southern Alps that no other rail company is allowed to use.

Solid Energy mines and transports two million tonnes of West Coast coal a year to Lyttelton, from where it is exported to the world's steel mills and power plants.

Its present contract with Tranz Rail is capped at 2.7 million tonnes a year, but Solid Energy wants to increase this to around 4 million.

"It sounds like a pretty simple extension to the contract," says Elder. "Two years on from attempting to agree that extension, we have failed to agree to get even close to it with Tranz Rail."

The pricing component could have been sorted out within half an hour, he says, but instead there has been no agreement, which means no expansion for Solid Energy.

Despite paying for its own experts who found that the price paid to Tranz Rail should actually drop when the new business began, Tranz Rail insisted it be paid substantially more - suggesting price rises of 30 to 40 per cent.

It also told Solid Energy that coal was not "core business" for it.

"We were flabbergasted," says Elder.

It was about then that the media started getting interested, he says, so he and other big customers began talking publicly about how bad their relationship with Tranz Rail had become.

"We've always attempted to have discussions with them - we have no other options, they are our rail provider.

"Finally, in total frustration after failing to have any sensible discussions on the big picture principles, we simply went back to Tranz Rail and said, 'Enough's enough, we are no longer in discussions, we are now at the point where we have to make decisions to stop growing. We can no longer open new mines or expand existing mines because we do not have a long-term rail contract that allows us to do that.

"'We have the capital ready to invest, we have got the planning done, the mine planning is in place, all we have to do is press the button and go ahead."'

He says that when negotiations broke down recently, "We just threw our toys out of the cot at that stage, we just said, 'Enough's enough. We've spent two years talking about details, four months negotiating around a spreadsheet."'

Elder says he is not overly concerned whether the Government takes over ownership of the tracks or whether it runs the system under an "open access" deal.

"It is irrelevant to us, to be honest. I've continually been told by people over the past two weeks that Solid Energy is behind the rail user group pushing Government to buy the track or buy the company or whatever - it's absolute nonsense."

Cedric Allen, who writes press releases and gives interviews on behalf of the major users, says he does not think the relationship with Tranz Rail has broken down.

"We went along and had a perfectly pleasant chat just the other day. But we come from different points. Tranz Rail is saying, 'Listen, we own this network, we own every wagon and every locomotive in this country. If you want to use rail freight, come to us, we'll give you a price, and if it's cheaper than you can move it by another transport mode, then we can do business."'

The big users respect Tranz Rail's property rights, says Allen, but are moving partly in response to the increase in political agitation, particularly in the Green party and NZ First, to buy back the rail network.

Allen accepts that the group is not making things any easier for Tranz Rail as it copes with a number of other business problems.

"The fact that we exist, the fact that we are out there and making comments to people and the media - I agree it's not helpful to public perceptions of Tranz Rail.

"Because with any public company, if the bulk of the customer base is expressing concern, then that's not helpful to the company."

The users group could not be held responsible for credit rating downgrades, derailments and crashes, major asset write-offs, or Securities Commission inquiries.

"I think we are a convenient whipping boy for their problems, to be honest," says Allen.

He and the other users know that if they want to be included, and have their voices heard in the debate over Tranz Rail's future, they must come up with a plausible scenario for how things should change.

One of Tranz Rail's major customers says it is not claiming any overcharging and is, in fact, quite happy with the service it receives.

Regardless of this, there is a fundamental flaw in the way Tranz Rail is expected to operate. And it is this supposed flaw that gives the big customers a hook for their vision of a newly nationalised rail network.

The argument runs like this: Tranz Rail claims repeatedly that it does not operate on a level playing field with its competitors - if a flood washes out a section of rail track and a road, what happens?

The trucking firms sit back and wait for the taxpayers and ratepayers to fix the road, while Tranz Rail has to pay for repairs to tracks, bridges and tunnels out of its own pocket.

A simple solution is offered by the big users. Remove this millstone from Tranz Rail's neck and hand over responsibility for maintaining and extending the tracks to a Government agency.

But the removal of this obligation must be coupled with the loss of monopoly rights to run trains on the newly nationalised tracks, a privilege Tranz Rail now enjoys.

Removal of monopoly privileges need not cripple Tranz Rail, say the customers. It would, for years at least, enjoy the benefits of incumbency - it would be the only company in New Zealand with rolling stock and locomotives. It has existing contracts, it knows the customers and can enjoy a few years basking behind some high barriers to entry before rivals make a serious dent in its business.

If money is needed to fix tracks, rebuild bridges or extend the network, then taxpayer money can more easily be given to a state-owned track owner.

Major users say that while Tranz Rail has the drain on its bank balance of maintaining the network, it will never be able to keep its shareholders or customers happy. It will never have the money to improve the network - improvements that happen every day of the week on the national road system.

"We have one model operating for the road, one model for coastal shipping, one for air freight - they are the same model, rail is the odd one out," says Allen.

He said there was only one rail operator, and it also owned the network.

The "open access model" the Rail Freight Action Group proposes would make it easier for the Government to make objective decisions about where to spend infrastructure dollars - whether on road or rail.

Booz Allen Hamilton's head of transportation practice for Australasia, Robert Williams, says that if the Government spends money on rail now, it is to the advantage of private interests - Tranz Rail shareholders.

"Under an open access model, it is generally considered more of a public benefit. Tranz Rail may well be advantaged by it - but they don't have it exclusively.

"While Tranz Rail has a monopoly on rail, if the Government puts money into the track, there's no guarantee that the benefits wouldn't be appropriated by the monopoly train operator."

So while at first glance it might seem out of character for some of New Zealand's biggest corporations to be arguing for Government intervention in the economy, the result they are looking for is more typical - freedom.

Freedom from one rail company dictating terms, freedom from the fear of that operator going bust and leaving wagons and locomotives rusting on the sidings. And if that means the Government taking over again what it once owned, so be it.