Joe Hendren

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Toll Rail:

Secret Deals Close to Witching Hour Revealed

Foreign Control Watchdog 105, August 2004

After months of protracted negotiations, Toll Holdings and the Government completed their agreement to transfer the track network to public ownership. The deal concluded just before the deadline of June 30th, 2004. At two minutes to midnight. If an agreement had not been reached by the deadline, Toll was in for making a lot of money. By selling the track for the symbolic sum of $1, Toll could claim a considerable book loss. If the deal had been concluded a mere two minutes later Toll could have gained a significant tax advantage, with estimates ranging from a benefit of $10m to $70m dollars, depending on how long they dilly dallied. While Toll Holdingsí Managing Director, Paul Little, claimed that Toll did not intend to take advantage of this opportunity (1), it certainly did not stop Toll from using it as a threat to bully the Government into a position friendly to the Australian owned transnational corporation (TNC).

Toll ended up getting a symbolic $2 for the rail network, as the Government official found he did not have a dollar coin in his pocket (2). One hopes he got a receipt. The negotiations conclude a Heads of Agreement made between the Crown and Toll in July 2003. Under the final Agreement, the Government pledged to spend $200 million on the rail network, with $100 million of this money spent on replacement capital (line and sleepers), and the remaining $100 million allocated to upgrading the track. The Government will give Toll an estimated $50 million for property assets and leases, but it is possible that this will now be less than $50m as Toll intends to keep more land (3).  A Crown entity called TrackCo, part of the newly created NZ Railways Corporation will manage the rail network and make decisions on spending the $200m on behalf of the Government (4). The Government agreed to spend $200 million over five years to upgrade the track, as well as give Toll $50 million for property assets and leases. In return, Toll agreed to sell ownership of the tracks to the Crown for $1 and spend $100 million on rolling stock and locomotives. A new Crown entity called TrackCo will manage the rail network, and Toll will have the right to appoint one director to the TrackCo board.

Toll gains sole use of the track until 2070, subject to access fees and maintaining freight levels. If freight levels on certain lines are increased, Toll will get an access charge holiday. If freight levels fall below 70% of current levels on any one-line segment, Toll will lose its exclusive access. There will be no new passenger operators for three years, a move that will affect heritage operators looking to run scheduled services. After three years, Toll is only required to run three return passenger services a week to keep other operators out (5).

Toll Keeps The Minister Up Late

But agreement was only reached at the very last minute, after drawn out, tense negotiations. On June 16th, the Minister of Finance, Michael Cullen, told a Parliamentary Select Committee that he was not confident that an agreement could be reached by the deadline. "Negotiations with Toll are proving quite difficult and a ranger of other issues which werenít, in our view, included in the Heads of Agreement have been placed on the table" (1).

Toll knew the Government wanted the track, and did not want to let it go until details of the access agreement had been agreed. Core sticking points were the price Toll pays TrackCo each year for access to the rail network, and issues surrounding the lease of land, both under and beside the tracks (6). It also concerned Toll that the Government may upgrade lines for other than pure commercial reasons and then increase track charges. Toll demanded that such upgrades be funded separate to the access charge.

Visibly annoyed at being held to ransom by Toll, Cullen threatened legislation to enforce a deal or even nationalisation of the company (7). Government officials also warned Toll that its current share price depended on the rail network receiving Government investment, suggesting Tollís value could fall if the deal fell through.

Following the midnight conclusion of the deal, Toll asked for the details of the Agreement to remain confidential, along with the "access charge" it will pay the Government for the use of the tracks. While the Government appeared to go along with Tollís need for secrecy at first, a couple of weeks later Cullen had a change of heart and indicated he planed to make the charge public, with or without Tollís consent. The details of the access change became public on July 20th, 2004, in a large wad of documents reported to be 12cm thick when bound.

Toll will pay the Government $38.379 million plus GST for monopoly access to the track network for the year ending 30 June 2005. But the Government will pay Toll nearly the same amount ($33.5m plus GST) in order to buy out leases of rail land that Toll has been subleasing to other parties; and $15m for capital expenditure on the track since Toll took over from Tranz Rail, with this money to come out of the $100m capital spending pot.

Complete Nationalisation Would Have Saved A Lot Of Bother

All of this was so unnecessary. In June 2003 the Government announced that it planned to buy back the track from Tranz Rail for $1 and purchase a 35% stake in the company, which would have given it effective control if not outright ownership. But in July the Government announced it was dropping its bid for 35% of Tranz Rail in favour of allowing Toll Holdings to launch a takeover bid at 95c a share. The Government missed its first opportunity to partially or fully renationalise Tranz Rail in the public interest.

But the takeover bid launched by Toll was not successful. Toll failed to acquire the 90% of Tranz Rail shares necessary for it to be able to compulsorily acquire the remaining 10% of shares for its (low) asking price. Not long before its offer closed in December 2003 Toll held 84.2% of the shares. Despite the Government stating that its offer for 35% of Tranz Rail at 67c would go back on the table if Tollís takeover bid failed, the Government did not resuscitate its bid. The Government could have also questioned the February 2004 decision of the Stock Exchange Market Surveillance Panel, which gave an exemption to Toll enabling it to vote to enforce the takeover, against the wishes of the remaining minority shareholders. So Toll became the new owners of Tranz Rail (now called Toll NZ), and the Government missed yet another opportunity to take back the railways (for more on this sorry saga see Watchdog 105, April 2004, "Tranz Rail: For Whom The Takeover Tolls", Murray Horton). Desperately required track upgrades could have started already, but due to Tollís delaying tactics, Cullen was forced to transfer $30m earmarked for maintenance from the 2003/04 to the 2004/05 financial year.

Toll Should Help Pay To Fix Up The Track

More and more evidence is emerging of the disastrous state of the track network, a situation that can be blamed on the previous TNC owners of Tranz Rail (and a National government). It really is a wonder why they canít be sued for negligence. On June 23rd, 2004, an independent review team from Kellogg, Brown and Root in Australia (itself an infamous US TNC) released a damming report into the main West Coast line between Ngakawau and Lyttelton. The report, commissioned for the Land Transport Safety Authority (LTSA), warned the line will not last two years without major repairs and investment (8). Cullen now says it is "almost certain" that the total cost of upgrading ageing track is more than $200m, as "$75m needs to be spent [on the West Coast line] within the foreseeable future to bring it up to standard" (9). According to Solid Energy Chief Executive, Don Elder, this work will allow the line to operate at 90% or more of capacity, rather than in the low 80s, helping both Solid Energy and Toll make money (7). While it is not doubted that urgent work is required, the profit making nature of this line suggests it should not get the lionís share of the $200m pot that will not be recovered from users. To its credit, the Government realised there would be significant pressure applied to spend a fair chunk on the coal route, and negotiated a $25m cap on "non-recoverable" spending on the line, also to ensure that the $200m of public money is spread fairly across the country. Additional spending will be required, but it will be recovered from Toll and users. Following the midnight deal Cullen admitted that if the Government wanted to upgrade lines with little commercial value for "public policy reasons" it would have to fund the work separate to the access charge (9). But such public policy reasons are precisely the reason for having the tracks, or indeed the railways, in public ownership in the first place. Had the Government taken the opportunity to renationalise Tranz Rail, it would have been in a better position to enforce its public policy interests, as ownership would have given it the ability to nominate directors to the board. Better still, the Government would not have had to deal with Toll.

Government Backs Off Once Again

A comparison of the documents released on July 20th shows the Government has backed off once again. Section 1.3(a) in Schedule 1 (Access Agreement Charges) of the "National Rail Access Agreement" states track access charges were to "include recovery of a return on capital and depreciation on capital expenditure to the extent that expenditure is undertaken;

  1. as part of the replacement of any of the Rail Network or Network assets;
  2. to enable the Access Provider (TrackCo) to comply with legal or regulatory requirements (including any requirement of the LTSA or any other authority); or
  3. at Toll Railís request".

There were two exceptions to a full cost recovery model (Section 1.3(b);

  1. The $200 million capital investment the Government pledged would not be recovered from users.
  2. Capital expenditure by TrackCo that does not provide any commercial benefit for Toll "such as to extend the geographic scope of the Rail Network if such expansion does not confer commercial benefits on Toll Rail". But this concession came with a clear proviso, "to avoid doubt", that lack of commercial benefit did not excuse Toll from paying for anything provided for in the previous section 1.3(a), that being most importantly, "the replacement of any of the Rail Network or Network Assets".

But the "Rail Network Purchase: Summary of Agreements" signed off at the same time included a further concession.

"For those proposals where there is no commercial benefit to operators but which are justified on public policy grounds there would be provision for direct funding from the Crown. In practice, many such proposals are likely to have both a commercial and public policy element and so the funding split would be subject to negotiation between TrackCo and users... $200 million is not expected to cover all the capital investment needs on the network, but the Government expects investment beyond the $200 million (except for any public policy contribution it makes) to be recovered from rail operators. Some of the public policy funding may also be recovered if the track improvements lead to increased use and thus higher track fee recoveries".

So despite it being clear in the access agreement that Toll would not get an access charge holiday on the upgrade of existing lines deemed to be of "little commercial value", it now appears they will get such holidays. The concession that Toll will not be expected to fund such upgrades may restrict economic development initiatives. Say the Government wants to improve the rail links to the East Coast and Northland to facilitate development of the wood processing industry. Toll could take a short-term view and claim the line would have little commercial value for many years, if ever, and suggest the Government pay for the development. Once the backlog of wood arrives, Toll profits from faster trains and the Government may only recover some of the costs involved in the upgrade once a review shows an increase in the tonnage carried on the line.

In the past Tranz Rail has made noises about closing the "loss-making" Napier to Gisborne line. The route was only saved in September 2003 once Government agency Transfund and local councils came up with a year long $267,000 subsidy for Tranz Rail (10). The Napier-Gisborne line is currently subject to significant speed restrictions due to the condition of the track. It has been reported that a truck on the same journey can be halfway home by the time the train arrives. For example, the Government could decide its policy interests would be better served by upgrading the Napier rail line instead of the road, as the road costs more to upgrade and road users would also benefit as more freight moved from road to rail. But it is likely that the Government will have to fork out more money for such an admirable policy, even though the NZ Rail Corporation, a Government agency, has final say on track spending.

Toll may argue that as the new owner it should not be held responsible for the years and years of under-investment in the rail network (when Tranz Rail was under previous TNC management), and the access charge should be largely based on costs associated with ongoing maintenance. But this ignores a key point. Toll bought Tranz Rail at fire sale prices, the disastrous state of the tracks being a key reason for it going cheap. Throughout 2003 Toll increased its stake in Tranz Rail, with more shares selling as Tollís offer increased from 75c to 95c, reaching $1.10 by the time its offer closed in December 2003. This is despite the fact that by this time Tranz Rail shares were being sold on the stock exchange for 165c, above independent valuations of between $1.34 and $1.62, demonstrating that Toll got a good deal. Itís like Toll bought a cheap rust bucket of a car, and now it is moaning when asked to help pay to repair the rust.

Even TNC Lobby Group Puts The Boot Into Toll

Even the Rail Freight Action Group (RFAG), a lobby dominated by Big Business, has little sympathy for Toll. It now emerges that the big users attempted to discourage potential buyers of Tranz Rail, including Freight Australia, Rail America and Toll. They warned Toll that taking over Tranz Rail could mean taking on a much bigger liability than it realised.

Solid Energy boss, Don Elder, says "Even if they passed it [the cost] on to the Government, the time it would take to address the issue would make it difficult for them to achieve the performance they were looking for and we would not give them a honeymoon period. They went ahead against our specific advice" (7).

The lobby group, which includes the likes of Solid Energy, Carter Holt Harvey, BHP Steel and Fonterra called for renationalisation of the national rail network two years ago, an ironic contrast to the Big Business lobby that loudly supported privatisation in 1993. The big users estimate that $300 to $400 million of maintenance was deferred between privatisation in 1993 and Tollís buy up of shares in 2003 (ibid.).

Following the midnight deal RFAG demanded the Government reveal what the access charge to be paid by Toll will be, as this charge will be passed on to rail users. It is even more ironic to see a group that includes many TNCs worried about the prospect of monopoly profiteering from another TNC. Perhaps TNCs will start nominating each other for the Roger Award.

Toll on a Gravy Train

New Zealandís rail system is an official mess due to 11 years of inept and shambolic management by the private sector. The Government is to be congratulated for renationalising the track, itís just a shame it did not take the opportunity to take a direct holding in Tranz Rail and shut Toll out of the picture. The concession by the Government that upgrades undertaken for "public policy reasons" will be funded outside of the access charge is concerning, as it may hamper implementation of the Governmentís land transport strategy and could restrict economic development initiatives. As just about any upgrade proposal will include "both a commercial and a public policy element" it is likely that Toll will ask for more free money in the future.

The day after the gold coin was handed over, Cullen hailed the deal as ending "one of the most disastrous privatisations in New Zealand history" (11). No it hasnít, Dr Cullen. Our railways are still in the hands of a TNC private monopoly, a monopoly that will last until 2070. While taking back the track is a welcome improvement, the only way to "end one of the most disastrous privatisations in New Zealand history" would be to nationalise the entire company.

Joe Hendren 27 July 2004


References

  1. Dominion Post (17/6/04), "Cullen talks tough over rail agreement".

  2. New Zealand Herald, 2/7/04, "New era in rail services right on track".

  3. Dominion Post (21/7/04), "Toll NZ rail payments revealed".

  4. Dominion Post (2/7/04), "Track record".

  5. Observer (25/7/04), "Government divvies up $200m for rail network".

  6. Dominion Post (29/6/04), "Rail talks down to the wire".

  7. NZ Herald (26/6/04), "Rail races to the crossroads".

  8. Press (24/6/04), "Rail link to West Coast at risk".

  9. Press (2/7/04), "$200m rail track upgrade".

  10. Dominion Post (23/9/04), "Railway line safe for a year".

  11. NZ Herald (1/7/04). "Government, Toll silent on buyback".

All documents relating to the Toll deal can be found on the Treasury Website at: http://www.treasury.govt.nz/release/rail/default.asp


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