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Business > News & Opinions > NZPA > Article

NZPA

Will railroading toll come back to bite us?

Friday May 9, 2008, 6:25 pm

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By Pam Graham of NZPA

It hurts any New Zealander to say it, but the Australians running our rail company were quite good.

It is true that it wasn't hard to do better than the lot Toll Holdings took over from and Toll NZ had a lot easier ride after Toll Holdings effectively became its banker.

Toll didn't buy new locomotives and didn't sell themselves to the media very well but they did fix up a few broken things and get more freight on rail.

They started training new train drivers and the work flowed into the Hillside workshop in Dunedin.

The Government has bought the rail assets back off them for $655 million and many people are saying the Aussies did alright out of it. But Toll is disappointed because the sale has broken up a good supply chain it had in New Zealand.

The Government's position is that it has to buy the assets back to get the funding structure for rail right. It couldn't pump any more money into the rail network when the only company running trains outside Auckland was private, Australian and quite likely to pass a government subsidy all along its supply chain.

There is some unhealthy nationalism at play here too. New Zealand is now in charge of an asset that has been stuffed up by a string of private sector foreign owners. In an election year Labour is playing the race card with respect to business ownership.

This is naughty not just because Toll were good managers but also because time and time again I hear that the problem supply chain operators have here is Fonterra.

The biggest business New Zealand has drives such a hard bargain its service providers say privately they struggle to make much money.

We know the power major customers exert from the stories we hear about supermarkets. Mainfreight used to do logistics for The Warehouse and they did a lot of work for not very much money. To this day Mainfreight founder Bruce Plested won't go in a Warehouse store unless he can help it.

Fonterra said this week about half its freight currently goes on rail and it wants to increase it to 80 percent.

This kind of business, not the Government, will save rail. But the major customer is going to have to cut its service provider a profit.

My understanding is that a lot of people have been telling the Government that Fonterra is so mesmerised by its global footprint it is forgetting about who it stands on at home.

Toll wouldn't say this week how its relationship with Fonterra was, but we know it has turned Solid Energy, one of rail's biggest critics, into its biggest supporter.

The other problem with this great political play that rail is now back in New Zealand ownership is that if the business is given back to Government track owner Ontrack to run, it will be run by some of the people who stuffed it up before Toll came on the scene.

Ontrack thought it was going to get the above rail business to run but my understanding is it isn't going to. The Government is considering what structure there will be in the future and there is an eight-month long transition period.

There has always been a possibility that Toll could stay on as an operator of the trains it no longer owns, but no one was talking this up this week.

Also, being in local ownership doesn't mean something is going to make money. Ports of Auckland is now wholly owned by Auckland Regional Council (ARC) and delisted from the share market. This has been celebrated as a great thing for Auckland. The city can now get on with developing a world class waterfront and infrastructure system funded by the profits from its now locally owned commercial port.

Only problem is if rival Port of Tauranga is right in a submission to the Royal Commission on Auckland Governance this lovely celebration of local empowerment is about to explode.

Port of Tauranga's theory is that the commercial port is too loaded with debt, it has spent too much on equipment it won't get a return on and the returns of owner Auckland Region Holdings, the commercial arm of ARC, have been inflated by property revaluations and asset sales.

Port of Auckland appears to be in breach of its equity ratio, the ratio of shareholders' funds to total assets and is close to breaking the interest cover level on its debt covenant. This means it might struggle in future to provide the returns its council shareholder is expecting and has not got much capacity to fund further capital investment.

Port of Auckland has picked up a lot of Fonterra's freight in all the port call changes.

As New Zealand is so reliant on the movement of goods -- both exports and imports -- these issues are very important for the whole economy.

Interestingly, Port of Tauranga argues the Ministry of Transport has to take on a bigger role to stop investment going into the wrong places in ports. In much the same vein, senior doctors welcomed Health Minister David Cunliffe's pledge to get the Ministry of Health taking a more hands on role in sorting out structural problems in the health system that have led to overuse of locums and doctor shortages.

Finance Minister Michael Cullen is promising to sort out the structural problems with rail that have held up its revival. We await his decisions. Local ownership might get him some votes but it does not necessarily fix up a business.

Source: NZPA

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