There are few more controversial events in the history of railways in this country than the 1993 sale of New Zealand Rail Ltd to a business consortium led by an American railway company and a local firm of investment advisers.
Wisconsin Central Transportation was a Chicago-based railway that formed a consortium with Berkshire Partners and New Zealand investment advisers Fay Richwhite & Company to buy the rail and ferry business for $328.2 million.
It subsequently became Tranz Rail Ltd and was listed on the New Zealand share-market as well as the NASDAQ in the United States.
Ten years later, as it teetered on the brink of receivership, the business was bought by Australian logistics company, Toll Holdings. In its turn, it found running a commercial railway a challenging proposition and in 2008 sold the rail freight and ferry business back to the Government.
Unlike the United States and during the first century of railways in Britain, railways in New Zealand had mostly been owned and operated by the Government. Twenty years after the 1993 sale, the private sector experiment continues to divide opinion and generate strong emotions.
Its strongest critics accuse private-sector owners with running the railway into the ground and walking away with the profits.
Former Treasury official John Wilson, in a 2010 paper on the privatization experience, takes a somewhat different view. “Two different but very aggressive commercial operators have tried to make money out of New Zealand rail freight and concluded it is not possible”, he wrote.
The 1993 Railways sale was a political reaction to mounting debt in the years that followed the deregulation of land transport. Trucking companies that had previously been unable to operate over long distances, could from the mid-1980s, compete with rail on equal terms.
Their share of the freight market grew steadily. Trucks had carried around 50 percent of land transport freight in 1972. By 1993, this had risen to 81 percent.
The international consultancy firm, Booz Allen Hamilton, engaged by Railways in the mid-1980s to make recommendations on improving the business’s efficiency, estimated deregulation would reduce rail revenues by as much as 25 percent.
Governments reacted by giving Railways a more commercial structure and greater freedom from political interference.
It’s a widely held view that as unemployment mounted in the late 1970s and early 1980s, The Government regarded Railways as a useful means of diverting jobless people into work.
Staff numbers of around 21,000 in the early 1980s had dropped to less than 5000 by the time the business was sold.
By the late 1980s, the Railways Corporation’s board and management were agreed that private sector ownership was the best way to make the business more successful. The 1990 decision to consolidate the land-holding function into the corporation and create a Government-owned, limited liability company, New Zealand Rail, to run the business, was widely interpreted as a precursor to sale.
National had replaced Labour in Government by late 1990. Its Cabinet needed some convincing that privatization would not come back to bite it, but by 1992, a process started which led to the investment banking firm Bankers Trust being appointed to manage a sale.
John Wilson says that the documents of the time reveal two views of what might be achieved by privatization. “There’s a view that privatization would make rail more efficient and therefore viable,” he says.
“There was an alternative view at the time that rail was in long term decline and that putting it into the private sector would make it less likely that rail could secure Government financial contributions to keep it alive.”
In his view, the privatisation experience suggested the second theory was the more accurate. As he puts it, “whatever efficiencies were secured by private ownership, they were not enough to make rail commercially viable.”
Privatisation was controversial from the beginning. Railways was one of a number of unpopular asset sales proposed in response to difficult financial times that are remembered best in the form of Finance Minister Ruth Richardson’s “Mother of all Budgets”.
When the Wisconsin-led consortium was named as the buyer of New Zealand Rail, the Labour Opposition questioned the process.
For many unhappy with the outcome of the sale, the role of Fay Richwhite in switching from adviser to buyer has become a popular target. That overlooks the fact that they had withdrawn from an advisory role with Railways within the necessary timeframes and took no part in the determination of the outcome – a job entrusted by the Government to a completely separate advisory firm, Bankers Trust.
So when Labour Leader Mike Moore rose in Parliament to question the Government the day after the sale had been announced, Fay Richwhite’s role was less in his sights than the fact that the Wisconsin-led consortium was not the highest bidder and there seemed to be no provision for a “Kiwi share”.
Ruth Richardson countered: “The bids (received) had qualifications, and if those qualifications would have had an adverse impact on the value, the bids were discounted. I can say that the bid that was accepted was top-dollar, it was clean, and it represented the best value for the Crown by a significant margin.”
On the “Kiwi share” issue, Ruth Richardson assured the House the Government had imposed constraints in the form of retaining rail land in Crown ownership as well as assurances from the consortium about a public share offering and the retention of passenger networks.
When it came to the reasons for the sale, Ruth Richardson’s answer suggests she was more inclined to John Wilson’s second theory, than his first. “The Opposition will know- because the Labour Government corporatised our railways in 1990- that the New Zealand taxpayer had to swallow $1 billion worth of debt.
“Since the time of corporatization, not $1 in dividends has gone to the Crown, and there has not been $1 in tax payments.
“We know that, for New Zealand Rail to play a successful part in a growing economy, it will require hundreds of millions of dollars just from now to the turn of the century, and will require the thick end of $1 billion as we head to the year 2010. The taxpayer is not well placed to make that investment.”
Tranz Rail’s dual share-market listing came in 1996 after the business had been rebranded. But by this time, the consortium had taken almost $100 million out of the business in the form of a capital repayment, considerably reducing their original equity investment.
In its early years, Tranz Rail began making the capital investment that Ruth Richardson had said was so badly needed. Despite growing debt levels, the company’s share price continued to rise, reaching $9.00 by 1997.
During the 1990s the business expanded into new markets, including movement of bulk milk to dairy processing plants and establishment of New Zealand's first inland port. at Wiri south of Auckland, a joint development with the Port of Tauranga.
Fay Richwhite reduced its shareholdng in 1988 and then in 2001, Wisconsin Central was taken over by Canadian National, a company described by John Wilson as having, “a more aggressive approach to investment”.
Founding Chairman, Wisconsin Central’s Ed Burkhart was replaced and a new management team, dubbed the “boat people” because of their previous experience in the shipping industry, took control.
Two parts of the business to suffer were the Auckland and Wellington suburban passenger networks. The Labour Government elected in 1999 stepped in and bought back the Auckland network and then Wellington Railway Station.
“Tranz Rail’s financial problems were now creating visible shortfalls in the capital asset replacement programme,” wrote John Wilson, “leading to pressure from major users and other stakeholders on the Government to intervene.”
This took the form of five of Tranz Rail’s biggest customers - accounting for more than half its freight business - forming a lobby group demanding that the rail company lose its monopoly track rights.
The struggling business also attracted the attention of influential share-broker and media commentator Brian Gaynor. In a 13 July 2002 column in the New Zealand Herald, he asked a number of questions:
“Does Tranz Rail have creative accounting policies? Did Wisconsin Central and Fay Richwhite sell investors a pup when they sold out this year? What are the company's long-term sustainable earnings and does it have a future?”
As Tranz Rail’s share price sank to a low of 30 cents, the Government made an offer to buy into the company and take back control of the network infrastructure.
While negotiations were in progress, Toll Holdings made a $1.10 a share bid for the company and the shareholders opted for the Australian company.
The Government and Toll then negotiated the sale of the infrastructure to the Crown for $1 and a National Rail Access Agreement giving the company long term exclusive access to the network. For its part, the Government agreed to contribute $200 million towards infrastructure upgrades.
Toll pledged $100 million in rolling stock investment and agreed to pay the full capital and operating costs associated with using the network.
In September 2004, ownership and management of the network and its assets was vested in the existing Railway Corporation, which adopted the trading name ONTRACK.
But Toll found it was not immune to the challenges that faced Tranz Rail. As John Wilson puts it: “the long term decline in the economics of New Zealand rail freight soon reasserted itself, and Toll concluded it was unable to pay the full costs of the track.”
A lengthy wrangle between Toll and ONTRACK followed which ended in stalemate and frustration. While Treasury investigated a number of variations on the existing ownership model, ONTRACK developed a proposal for the Government to buy Toll’s rail and ferry businesses.
The Government chose the purchase option and after protracted negotiations with Toll, bought the business in 2008 for $665 million.
John Wilson’s verdict on Tranz Rail provides a useful commentary on the whole private sector experiment.
“The decline in investment in the late Tranz Rail period was a commercial reaction to first of all, the fact that investment in rail was not a good commercial use of funds and subsequently to the fact that Tranz Rail was running out of cash,” he says.
“The shareholders’ withdrawal of equity in 1995 was also no doubt commercially rational to the then Tranz Rail shareholders but damaged the perception of private owners as reliable stewards of utilities.
“In the end, the public was not looking for such a hard-nosed commercial approach to rail investment. It would appear the public is prepared to subsidise rail freight if that is necessary to keep it operating.”
Tranz Rail’s founding Chairman Ed Burkhart had a different view, influenced perhaps by his side-lining. In a September 2001 email he said that Tranz Rail's then management had "no competency in running railways".
As a shareholder he said he was seeing progressively weaker financial returns while the New Zealand economy was quite robust. In his view, it was sad that privatisation would be blamed for problems with rail services, when the real problem was "poor management".
The early architect of the railway network, Sir Julius Vogel regarded railways as a nation builder rather than a business. His views were echoed some 50 years later in the 1925 New Zealand Government Year Book: “The railways in New Zealand have never been regarded, or run, as a profitmaking concern,” it said.
“Even if practicable, there is little doubt that such a policy would not meet with the approval of the public, nor would it bring about any material improvement in the condition of affairs as a whole.”
By the year 2000, Railways was a very different beast to the nation-builder of Vogel’s day or the universal carrier of 1925.
But the rail network remained an important supplement to other forms of transport and as the best means of moving particular goods and people. The large customers who had lobbied against Tranz Rail in 2002 and 2003, were to re-emerge as strong supporters of a return to public ownership in 2008.
Sources: A Short History of Privatisation in New Zealand, John Wilson, 2010; New Zealand Herald; New Zealand Parliamentary Hansard; New Zealand Official Year Book; New Zealand Railways, the First 125 Years, David Leitch and Bob Stott, 1988.
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