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Big changes in store for KiwiRail

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.

Further background

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.

30 comments to Big changes in store for KiwiRail

  • Hamish O

    Might enable lines to be converted to light metro if there is little freight but high passenger demand along the line.
    Overall I agree that this is a sensible move – investment in rail at RoNS levels may be getting closer to reality (but still light years away).

    Edit: Just saw the update at the bottom – oh well, but at least its a step in the right direction.

    • Mr Anderson

      Potentially just an election away.

      • Hamish O

        Transport is too political in this country.

        I am fundamentally right-winged but could never vote for national (or any other right-winged party) as their transport policies are from the 1960s.

        I would fully support giving local governments the transport fund and letting ratepayers vote on transport sensibly instead of based on their political standing.

        One day…

      • Mr Anderson

        The problem is that transport is stupidly political. Most of the money is tied up in central government yet nobody ever votes in national elections on transport matters. So we consistently central governments on both sides of the political spectrum making stupid transport decisions because they’re generally pandering to the trucking lobby who are often the biggest political donors.

        The whole thing stinks of absolute corruption.

  • Swan

    This is just a stupid accounting trick. Does the NZRC get rent for their asset? If not why don’t they sell their asset?

    • Hamish O

      The NZRC, like KiwiRail itself, is a SOE and therefore is (theoretical) more interested in the benefit of the population than money. Selling the rail land = no freight or passenger service = ruined economy and ruined NZ as a place to be.

      (Excuse the exaggeration)

      • Matt Clouds

        a SOE and therefore is (theoretical) more interested in the benefit of the population than money

        Very, very theoretical, and mostly only that much by misunderstanding. The principal objective of an SOE, as set out in section 4 of the State-Owned Enterprises Act 1986, is “to be a successful business”, starting with being “as profitable and efficient as comparable businesses that are not owned by the Crown”. The requirement to be a good corporate citizen is tempered with “when able to do so”, and comes after the requirement to be profitable. The scholarly debate about just how much heed SOEs should pay to anything beyond being profitable is lengthy and colourful, and the vague consensus is that the ordering of the words in that section subordinates everything to profit, just as is the case for private companies.

        • Hamish O

          If the only goal of an SOE was to make profit many of them would change there businesses radically.

          For example, Vector would start charging huge amounts of money for use of it’s power lines by power company’s because they are a monopoly, owning the only power network in this country.

          In this case the railways would sell off all of quay park to a keen developer ready to build new buildings in the CBD.

          What you are pointing out is that within the guidelines of what the SOE is for they are supposed to try fore-mostly to make a profit.

          • Matt Clouds

            uh, Vector is a private company. I own Vector shares. If you mean Transpower, they’re regulated heavily precisely because they’re a monopoly infrastructure owner; exactly as should be the case with any monopoly.

            Also, making a quick profit is not necessarily good sense long-term, especially if you’re constrained as to what activities you undertake to make money. Selling up Quay Park might make money now, but at what cost to future activities?

          • Hamish O

            Vector is listed on the New Zealand Stock Exchange. Our majority shareholder, with a shareholding of 75.1%, is the Auckland Energy Consumer Trust (AECT).

            This, from the vector website clearly shows that vector is owned as a majority by Auckland Ratepayers. Vector is fully controlled by it’s board members, which are fully controlled by AECT, who are controlled by the ratepayers. Yes it’s not actually a SOE, but operates like one because of this strucure.

          • Hamish O

            Plus the parts of Quay Park not used for the junction could be developed, as stabling yards are hardly an effective use in that prime CBD position.

          • Matt L

            The rest of the land at Quay Park is owned by the local iwi already, along with the land under Vector Arena and many of those apartments between Beech Rd and Quay St. Their confrence centre proposal was to be built over the railway tracks (but obviously Sky City won).

      • swan

        SOE’s are expected to return a profit. Except this one apparently:

        “Finance Minister Bill English and State Owned Enterprises Minister Tony Ryalll said NZ Railways Corporation will continue to hold the 18,000 ha of rail network land, “from which no financial return will be expected”.”

        So zero return from 18,000 ha. You really think that is the best use of the asset?

  • Sean S.

    I wonder if the update is correct. I interpret this line as suggesting that the NZRC will maintain the tracks, and that it will not merely own the land:

    ‘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.’

    The last sentence of the release is also interesting, and suggests that KiwiRail is quite willing to see the network opened up to competition. It also suggests that there is hope for the provincial lines that currently face mothballing:

    ‘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.’

    Perhaps Gisborne and Whangarei should prepare to petition the NZRC rather than KiwiRail in order to keep their lines?

    In general, I think this is a step in the right direction for KiwiRail. If they are to be a profitable business, they shouldn’t have to maintain the track as well. The trucking companies don’t have to maintain the state highways…

  • Stu Donovan

    This may be an accounting “trick” but I suspect it’s one worth doing. From what I can tell, they have split the value of the railway land asset away from the network operations.

    Why? Because the value of your asset determines how much return you should aim to generate. In this case having the value of land bundled in with the other KR assets was inflating the level of returns they were expected to deliver. Not even the state highway network is priced in a way that delivers a return on the value of the underlying land. Funny how the Business Roundtable always seem to ignore this difference when comparing relative road/rail costs …

    Anyway, with a revised valuation of $1 billion KR only needs to return a profit of $100 million p.a. to be nominally profitable in a sense that is comparable to the private sector. Short story: Probably a good idea (but I may be wrong!).

    • swan

      “Not even the state highway network is priced in a way that delivers a return on the value of the underlying land.”

      Bingo. Same goes for local roads. But it should be priced in this way shouldn’t it? And so should the railways generate a return on the 18k ha of rail land.

      At the moment both of these examples are a massive distortion in our economy.

      • Matt Clouds

        Should be priced that way in some lolbertarian paradise, maybe. Back here in the real world, though, at least we’ve got both land-based transport mode corridors being treated the same way.

  • Andrew

    I don’t see the difference between what has been announced, and how things existed under Tranz Rail, besides the sole (or perhaps soon merely 51% majority) shareholder.

  • Geoff

    Precisely Andrew, it’s just putting things back to how they were before 2004.

    It’s nothing to get concerned about, and in fact it will benefit the business quite a bit. It’s also not new news – this was all announced months ago.

  • Stacy

    @ Geoff & Andrew. I don’t see it any different either.

    They didn’t learn last time around though, don’t sell the tracks and signals.

    Selling KR wouldn’t(won’t) be such a bad thing, the locos, rolling stock (basically the trains) with the staff, but selling the tracks and signals will just be a full circle. Absolutely unbelievable that this country can’t really achieve anything with this type of infrastructure. In 2025 it’ll probably be back to the same thing, please pay for our tracks to get fixed so we can run trains instead of trucks over your lovely roads up and down NZ.

    • Ross Clark

      I don’t know why on earth anyone would even be thinking of selling Kiwirail.

      It’s feasible enough to private an infrastructural monopoly, if that monopoly can pay its way (Telecom, Auckland and Wellington airports). In that instance, what you need is an effective regulatory regime. It’s also feasible to private a service which needs subsidy, as long as that service can be provided competitively, more or less. NZ Bus still comes to mind.

      What is not feasible is privatising a monopoly which will continue to need subsidy. Kiwirail’s freight business is not a monopoly in that sense, but it is a monopoly provider if you think of it in terms of the external benefits a railway system provides. This is even more true for the urban networks. And separating the network from the operations has already been tried in New Zealand and found wanting. An expanded take on this thinking on this can be found here:

      http://www.iscr.org.nz/f630,17980/17980_ETC_2010_paper.pdf

      This paper was presented to a formal transport research conference in 2010.

      • Stacy

        Ross. It should never have been brought back. We got the tracks for $1, and we should have kept it at that. We should have let Toll continue to have access and charged them the agreed fee instead of scaring them off. They were good for NZ, and they were good for rail. At the same time we should have allowed competitors to come in and run trains too. I suppose what I am saying there is, The government should have a seperate entity which owns the Locos(I’m going face about here yes), and employs the operating staff for loco. The companies(Toll as ex) would own their own rolling stock or lease/hire it off a company which either hires or leases that equipment. All the access fees would be calculated per train and accomodate the priority of the train, it’s length, weight, and destination(distances travelled).

  • Simon C

    Disappointing that the tracks remain in kiwirail’s ownership. I’ve wanted to see all the infrastructure be a separate entity and Kiwirail just focusing on the transport service itseld and making a profit ala normal transportation companies. Also if all the infrastructure was separate, I would like to see any company allowed to use the rail, as long as they paid user fees, and came to an agreement with NZRC,like truck companies pay road user charges and airlines pay airport user charges. With Kiwirail owning the tracks they probably still have the power to stop other interested companies from getting on the tracks. it’s interesting but in the last few years there have been a couple of parties interested in passenger operations, including a consortium that was looking to do a AKL-WLG service but was probably stymied by not being able to gain access to the tracks in the first place.

  • The whole exercise is to partially reverse the insane valuation of this “asset” based on replacement cost, which is absurd. That “valuation” justified the renationalisation, when in fact the whole thing is worth a fraction of that based on future net revenues.

    The land under the track has a dubious valuation, because I doubt if there is realistically much of a market for most of the land, especially when you get outside cities. In most instances one or two adjoining landowners would take over the corridor, no others and so they will be prepared to pay for what marginal extra value they see in the use for their adjoining land. It is not the same as other land. Beyond that, most of the surplus rail land in major centres has already been surrendered (and some of it is subject to the Public Works Act requiring the previous owners/successors to be offered the land back).

    The land wont make a return because the land under roads wont, and it is too difficult to figure out how to do that fairly when the presence of local roads has a direct impact on the value of the adjacent land (so their removal would diminish that exponentially). Now the land under future roads (and railways) should be subject to this, but since the demise of Better Transport Better Roads, attempts to put road and rail on the same footing have largely been ignored.

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