Christopher Kissling
25th October 2006
What constitutes a fair deal when it comes to rail track access costs? Currently Toll Rail (the monopoly rail freight operator) and On-Track (the Government’s custodian of the rail network) are embroiled in negotiations over track access costs with On-Track, looking to recover in fees costs associated with improving the quality of the rail network. Naturally, the monopoly rail freight operator debates the level of those charges as it will directly affect its profitability.
Historically, the New Zealand Government invested in building a rail network that would help open the country for development as well as provide an alternative to coastal shipping between our many coastal settlements. To minimize construction costs, non-standard track gauge was chosen to allow for tighter track curvature, and tunnels were of minimum dimension. Even so, sections of line still had relatively steep gradients. The railway operations were government owned and operated and for many years highly protected from competition from the increasingly efficient commercial road transport sector. They also acted as a soak for unemployment and a training ground for skilled artisans needed in the private sector.
The structural reforms of the 1980s and subsequent changes in governance and ownership (privatization) of the rail system saw the introduction of stricter business disciplines. Massive downsizing of the labour force took place. There were some improvements in rail infrastructure as well as in information systems that allowed management to find and scrap many units of obsolete rolling stock. Rail started to compete again in the long-haul markets, especially for bulk commodities like logs, fertiliser, coal, milk and containers.
Unfortunately, the privatized rail company, with substantial foreign control, did not reinvest sufficiently in the maintenance of the rail network. Having extracted what value they could, they quit, leaving the country with the real prospect of a bankrupt rail business.
Enter again the New Zealand Government. The rail system, even though the network was never completed, was still viewed as a strategic asset and a vital part of the domestic transport system. Government saw good social and environmental reasons to return rail transport to profitability. It has a policy that actively seeks greater use of rail freight transport to relieve the pressure on road use, and to avoid calls for more capital intensive road reconstruction.
To save rail, a new operator had to be found who would commit to modernizing the business. That operator is Toll Rail, a subsidiary of the highly aggressive and successful Australian based Toll Holdings. In the deal struck with Toll, the Government bought back the track for a nominal $1 with a commitment to undertake the deferred maintenance and to invest in the network to bring it up to a condition that would enable the rail operator to pursue a viable freight haulage business. For its part, Toll had to maintain, and hopefully grow the rail freight volumes or it would lose its exclusive rail freight operator status. It committed to investment in new locomotives and rolling stock that could be deployed on the refurbished track. It is also investing in state of the art information systems to assist management extract maximum utilisation of its equipment.
Track access is the litmus test for how the rail network is to work in the future. The government has found that the $200 million it earmarked for track maintenance is in no way sufficient to bring the entire track up to reasonable specifications. It will take a number of years at $200 million a year to complete that process. Substantial bridgework is needed besides track realignments to allow operations at speeds that will make rail competitive with road.
On-Track is charged with the responsibility for track maintenance and development. It would appear that Government wants On-Track to set track access charges at levels that would help fund the necessary improvements. Some lines have heavy traffic – others are lightly used, but all types have need of costly maintenance and vital improvements.
A uniform tonne-kilometre charge across the whole network inevitably would mean cross-subsidies from one part of the network to another. If, however, track access charges are to be related to specific levels of maintenance required on specific line segments, then the operator may reason that it is not worth operating services on some of those lines. They could obtain a far better return on their equipment elsewhere in the system in similar fashion to the way airlines redeploy their aircraft to the parts of their networks that give the best returns even though the routes axed were profitable.
But Toll Rail is bound to maintain freight volumes or lose its monopoly position. Should Toll Rail decide to withdraw service on a particular line in the network, would that trigger the mechanism for opening that part or the whole network to alternative operators? Could the setting of “excessive” track access charges be interpreted as a deliberate ploy to bring about a multiple operator rail environment?
It is open to debate whether there is sufficient contestable freight business in New Zealand to sustain more than one rail operator. Large scale users of rail have purpose designed wagons that operate in unit trains on a regular basis. Those businesses could well own their specialist rolling stock. Freight-forwarders also can amalgamate a variety of freight items in container loads for haulage in trains of fixed length, again on a regular basis. They too might own their rolling stock. Several locomotive companies could compete to haul those trains. All would share in contributing to the maintenance of the track through track access charges.
In selling the rail network back to the Government for $1 Toll Rail has a reasonable expectation that the Government, through On-Track, will re-establish the rail network to a level that will allow rail to operate efficiently and competitively. Toll Rail should have no objection to paying track access charges related to maintaining standards once the track is refurbished. They could reasonably object to having to pay for the capital costs associated with bringing the rail network back to standard specifications.
For $1 that responsibility passed to government. Government might rue that decision because it will never obtain full cost recovery for new capital works. Nevertheless, in the National Transport Strategy it has acknowledged the vital role of rail, and must therefore commit to substantial investment for the long haul.
Christopher Kissling is Professor of Transport Studies at Lincoln University