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 30^th, 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 Holdings’ Managing Director, Paul Little, claimed that Toll did not intend to take advantage of this opportunity (Dominion Post [DP], 17/6/04,"Cullen talks tough over rail agreement"), 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 (New Zealand Herald, 2/7/04, "New era in rail services right on track"). 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 (DP, 21/7/04, "Toll NZ rail payments revealed"). 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 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 (DP, 2/7/04, "Track record"). 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.

But agreement was only reached at the very last minute, after drawn out, tense negotiations. On June 16^th, 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 weren’t, in our view, included in the Heads of Agreement have been placed on the table" (DP, 17/6/04).

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 (DP, 29/6/04). 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 (NZ Herald, 26/6/04,"Rail races to the crossroads"). Government officials also warned Toll that its current share price depended on the rail network receiving Government investment, suggesting Toll’s 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 Toll’s 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 Toll’s consent. The details of the access change became public on July 20^th, 2004, in a large wad of documents reported to be 12cm thick when bound.

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.

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 can’t be sued for negligence. On June 23^rd, 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 (Press, 24/6/04,"Rail link to West Coast at risk").

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" (Press, 2/7/04, "$200m rail track upgrade"). 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 (NZ Herald, 26/6/04, "Rail races to the crossroads"). While it is not doubted that urgent work is required, the profit making nature of this line suggests it should not get the lion’s 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.

A comparison of the documents released on July 20^th 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 Rail’s 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 (DP, 23/9/04, "Railway line safe for a year"). 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.

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

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 Toll’s buy up of shares in 2003 (ibid.).

New Zealand’s 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, it’s 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 Government’s 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" (NZ Herald, 1/7/04). No it hasn’t, 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.