Dialogue: Tranz Rail is not asset-stripping

Tranz Rail, despite misconceptions, continues a significant investment programme, says the company's chairman BOB WHEELER.

Nearly $100 million a year has been invested in Tranz Rail's business since its privatisation in 1993 - contrary to claims the business has been run down and asset-stripped.

Brian Gaynor (Herald, October 13) also incorrectly claimed that Tranz Rail had suffered at the hands of a "me first" style of management aimed at short-term gains. Nothing could be further from the truth.

Since privatisation, much-needed cash has gone into the business - at no cost to the taxpayer.

That includes capital investment of $816 million and a further $100 million invested in restructuring and acquisitions.

The average capital investment stands at $100 million a year over the past eight years compared with average depreciation of $35 million per annum.

This could hardly be called running down the investment.

Compared with its predecessor - New Zealand Rail - the country now has a more modern, high capacity, customer focused railway that has benefited from capital investment and the focus that private investment brings.

New Zealand Rail had previously been a heavy burden on the public purse.

Rail is an asset-hungry business that requires substantial investment from its shareholders and the re-investment of profit.

The company financed its investment by raising new equity in an initial public offering (IPO), and by raising further debt over and above the depreciation levels to fund the capital expenditure (capex) programme.

Some examples of this investment include:

* The new company has invested in a track de-stressing programme to reduce the probability of track distortions in warm weather. The initial investment was $11 million with further capex since.

* Investment in infrastructure included replacing well over 200km of track in less than eight years. Investment was also made in new plant to maintain the track and equipment.

* The company upgraded major routes for the expansion of new traffic flows, including the milk route from Hawkes Bay to Taranaki and the coal route from the West Coast to Lyttelton.

* A $28 million investment in the new freight and marshalling facility at Middleton near Christchurch and investment in warehouse facilities in Auckland.

* Investment in a new ferry, the Aratere, the first since 1983, at a cost of more than $70 million.

* A $20 million upgrade to the locomotive fleet and turbo charging of the DF locomotive fleet to DFT standard. More than 60 locomotives of various classes have been upgraded since privatisation - nearly half of the target mainline fleet.

* Modernisation of the wagon fleet was also carried out with Tranz Rail building 344 new specialist bogie wagons, more container flats, hopper wagons for coal, tank wagons for milk, ice-liners and space runners. The unreliable four-wheel wagon fleet has been retired. Slow goods trains have been eliminated and all trains on major routes are now able to run at express freight train speeds.

* The company spent more than $5 million on new Capital Connection passenger carriages. It was the first big investment in passenger rolling stock since 1982.

Contrary to popular opinion, Tranz Rail has also continued to act in the public interest when at times it may have been more commercially prudent to follow another course.

The company has closed no major rail lines since privatisation. By contrast, in the 10 years before privatisation the Government closed more than 10 per cent of the network.

The company introduced the first regular fast ferry to Cook Strait in 1994 - a substantial improvement that would not have happened under Government ownership. Tranz Rail has continued to provide enhanced services on this route, introducing a year-round fast ferry sailing for the first time this year.

The company's recent decision to sell its long-distance passenger business and close some uneconomical services follows eight years of persevering with loss-making operations.

Tranz Rail continued to operate uneconomical rail passenger services such as the Geyserland Express, Kaimai Express and Bay Express since privatisation and actively cross-subsidised these services for the benefit of New Zealanders with no support from the Government. In the meantime the company continued to upgrade the carriages for no or negative economic return.

Mindful of the need to improve returns to shareholders, but also to ensure New Zealanders have a viable long-distance passenger business for the future, Tranz Rail is selling this part of the business to a specialist passenger rail operator. This will provide the focus this business needs to take it forward.

Mr Gaynor also said that immediately after privatisation the Fay, Richwhite/Wisconsin consortium effectively stripped $322 million of equity from the company. This is not correct. The total amount withdrawn from the company by the cornerstone shareholders of Tranz Rail for the period up to and including June 30, 1995, was $100 million. But, it is important to note the $100 million repayment of capital was principally financed out of the company's $76.2 million sale of its equity in Clear Communications.

This occurred before the IPO of Tranz Rail Holdings.

Tranz Rail was a founding shareholder in Clear Communications and a decision was taken in 1994 that this was not a core investment for the business.

At the time of Tranz Rail's privatisation, the debt:equity ratio was around 18.83 per cent and it was decided to utilise the balance sheet to bring about the commercial tension generally associated with maintaining a higher debt:equity ratio.

Since then the company's ratio has settled into a prudent range of 35 per cent to 50 per cent and the company is still rated as an investment grade stock.

Tranz Rail has also increased freight from 8.451 million tonnes in 1993 to 14.461 tonnes this year. At the same time prices, on the basis of revenue per tonne per kilometre (RTKs), have dropped from 13.56 cents/RTK to 10.25 cents/RTK, benefiting New Zealand users of rail.

Tranz Rail has invested prudently in its business and operations.

Independent studies show the initial IPO benefited New Zealand taxpayers and the span of operations has continued to remain at levels similar to the period before privatisation.

Decisions to take some equity out of the company and replace it with debt were made before the IPO and were in line with balance sheet management practices recognised as good practice throughout the commercial world.

Tranz Rail is also nearing the completion of a restructuring programme that will bring further