Some interesting announcements by KiwiRail today – confirming that their freight business will essentially be split away from the network business, which is in charge of maintaining, operating and developing the rail network (the tracks and associated infrastructure). Here’s KiwiRail’s media release:
At KiwiRail’s Annual Public Meeting in November 2011, we outlined our intention to make a change to the Balance Sheet that would reflect a standard commercial valuation approach.
We are pleased to confirm our shareholder (the Crown) has supported this change and are now putting in place the needed technical and legal process for it to proceed.
“Consistent with our indicative outline last year, the commercial arm of KiwiRail will carry assets valued at approximately $1.1 to $1.3 billion, reflecting the revenue they generate, rather than the current value of approximately $7.8 billion,” said KiwiRail Chairman John Spencer.
“This is a much more realistic valuation of the company’s assets which will greatly assist KiwiRail in meeting its commercial objectives and provide more discipline in driving improved performance. We are amending our accounting methods to align to those objectives.”
To enable this change a new State Owned Enterprise (SOE) will be created which will own and operate the rail and Interislander businesses under the existing KiwiRail brand. Crown land held for rail purposes will be retained by New Zealand Railways Corporation (NZRC) and made available for use by KiwiRail.
According to Chief Executive, Jim Quinn, staff and customers won’t experience any change to their current situations.
“It will be business as usual for our relationships with customers and stakeholders, and our staff will simply be transferred with all their current entitlements to the new SOE,” said KiwiRail Chief Executive, Jim Quinn.
The revaluation of the assets to be vested in the new KiwiRail SOE is expected to result in a write-down in the net value of those assets, estimated to be approximately $6.7 billion. NZRC has revaluation reserves of approximately $5 billion, which would be written off first as a result of a write-down in the assets’ value. Any write down in excess of $5 billion would affect NZRC’s bottom line.
As the KiwiRail Board now consider the assets to be held primarily to generate profits, and are managing them on that basis, the write-down of assets will occur in the accounts for the year ended 30 June 2012. The final amount of the write-down will be determined after independent valuations are completed, approved by the Board and disclosed in the year end accounts.
The company will work with the Government to use a statutory process under existing legislation to vest the new KiwiRail SOE with all the rail and ferry operating assets and liabilities of NZRC (other than Crown land).
The composition of the Boards of the new KiwiRail SOE and NZRC has not yet been determined but they are expected to include a majority of common directors.
Splitting up the freight side of KiwiRail’s business from the network makes sense because they’re two very different things. One part should be looking to operate as a profitable business shifting bulk freight around New Zealand while the other needs to look after a core piece of the country’s infrastructure. In the future, I don’t necessarily see why other rail freight companies couldn’t – if there’s a market – start running their own trains on the network ensuring the best utilisation of the rail network.
Not having to worry about generating sufficient freight business to maintain a whole massive piece of the country’s infrastructure should enable KiwiRail to operate better. Similarly, having NZRC (I wonder if it will return to being known as Ontrack) focus on its role is sensible and should mean that the rail network is properly considered a core part of the country’s transport infrastructure.
The next logical step is to have NZRC incorporated into NZTA – giving the rail network a similar status to the state highway network as core infrastructure.
Updated: Closer inspection of the media release suggests that the tracks will remain in the ownership of KiwiRail while the land underneath goes with NZRC. This suggests that the whole exercise is just a stupid accounting trick rather than a strategic shift to make rail work in a more sensible way – which is disappointing.