KiwiRail valuation tricky

A valuation report on KiwiRail obtained by NZPA under the Official Information Act reveals that it is a hard business to put a value on.

The report by PricewaterhouseCoopers considered the issue that KiwiRail pays an annual rent of just $1 to the Crown for 1000ha of land its terminals and stations are on.

The company collects $7.7 million a year in rent by subleasing some of this land.

The low rent has a value -- it is effectively a subsidy -- but how much? The lease constrains usage of the land to rail services in many cases.

``The combination of KiwiRail's exclusive use of the land, the restrictions under the lease on the activities that can be undertaken by the leasee, the location of a majority of the land and the poor financial performance of KiwiRail Freight mean the concept of a `market rental' is a misnomer,'' PricewaterhouseCoopers says.

The report was compiled in May for the transfer of KiwiRail to the New Zealand Railways Corp after the business was bought back from Toll Holdings Ltd of Australia.

It also reveals the company engaged WorleyParsons to value the locomotives, wagons and passenger car fleets as at October 1, 2008.

Previously valuations of locomotives were based on North American replacement costs but KiwiRail was considering, and ultimately decided, to buy Chinese locomotives.

This created a valuation dilemma as there ``is not a lot of experience with Chinese locomotives in the West,'' according the report.

The use of Chinese locomotives as a valuation standard reduced the valuation by $108 million.

The valuation of ferries was also challenging. Beca Valuations could only locate one comparable sale to base its valuation of the Aratere vessel on.

The ferries were valued at $60.2m, comprising $13.2m for the Arahura and $47m for the Aratere. The Kaitaki is leased.

A valuation of employee retirement benefits was increased by $14m to $28m.

KiwiRail has ceased a policy of compulsory retirement and has an aged workforce. Actuaries assume more employees will retire under medically unfit provisions of the employment agreement. Medical retirement benefits are substantially higher than standard retirement benefits.

Though the Government is seen as having paid too much to Toll for the rail assets the report considers the national access agreement which existed when Toll owned the trains and the Government owned the tracks.

It considered the agreement Toll signed to be an onerous contract.

``There is no market in New Zealand for rail access in which prices can be observed,'' the report said.

The Government paid Toll Holdings $690m in July 2008 and $18m more for buildings.

KiwiRail was transferred from the Crown to New Zealand Railways Corp in October 2008.

The report calculated a price of $388m for the transfer. This comprised property, plant and equipment of $722.93m and total assets of $864m, reduced by debt of $190m and other liabilities.