Rail deal still to be settled

Haggling over the details of the government buyback of Toll Holdings' rail business in New Zealand will go right to the wire today.

The deadline is midnight today and late yesterday agreement on all aspects of the deal had not been reached.

Plans are in place for a big revelation of the new look of the business at Wellington's railway station on Tuesday.

In May the Government and Toll announced a heads of agreement for the government to buy Toll's rail and ferry assets for $665m. There are another $25m of associated costs.

The heads of agreement, which had to be announced because Toll is a listed company, sets out principles but there was still a lot of negotiating to do on the detail.

NZPA understands that negotiaters were working hard in the offices of lawn firm Russell McVeagh at the weekend and that the talks are set to go on right up to the deadline.

It was minutes before midnight when a government official finally handed over a small coin when the track was repurchased for $1 after a tense negotiation.

There will be no announcements from the Government until the negotiations are concluded.

The Government has not confirmed speculation that former National Party prime minister Jim Bolger will be chairman of the new rail operator.

Rail Corp is understood to be the working name of the business in documents but not its final name. A new paint job on locomotives is believed to drop the green and gold Australian look and include black but not on the front and back for rail safety reasons.

The road transport industry is concerned that Toll's ongoing trucking business Toll Tranzlink will enjoy cheap rents on leased rail land and cheap rail charges going forward.

The refinancing of the rail company's debt will also be an issue as the company benefitted from the parent Toll's credit rating. Debt will be assumed in the transaction as is normal in a takeover.

Railfreight is most likely to have a future on long haul routes and when successfully connecting to ports. Passenger services in cities and tourist routes are also seen as core areas.

"Rail has been a commercial failure," a report on the port sector by Rockport Corporate Finance Ltd said this month.

The report said that long suffering tax payers may be surprised at the scale of a subsidy needed from government.

The buyback of the rail business by the Crown comes at a time Australian state of Tasmania struggles to retain a viable rail business.

Issues affecting rail in New Zealand going forward include:

* the cost of fixing up the track and buying new locomotives and rolling stock to increase efficiency;

* the relationship between track owner Ontrack and the rail operator under government ownership;

* whether capital expenditure will include the building of a new line to Fonterra's Clandeboye plant in Temuka, a line to Northland Port or sidings at Wiri for Ports of Auckland;

* the company has to this year buy back 15 percent of its rolling stock previously sold and leased back by Tranz Rail.

* how the company satisfies major customers like Solid Energy and Fonterra.

* how the company will be affected by a proposed law allowing heavier trucks and a revival in coastal shipping.

A history of rail deals:

1990 - Government transfers all of its rail and inter-island ferry operations into New Zealand Rail Ltd but retains ownership of the land under the track and at depots. NZRL had a 40 year lease with a 40 year right of renewal. It has exclusive use of the rail lines and has to fund all maintenance.

1993 - NZRL is sold to Tranz Rail Holdings Ltd, a consortium comprising Wisconsin Central Transportation Corp, Berkshire Partners LLC and Fay Richwhite and Co, for $328.3 million. The company has about $300m of debt and $105m of equity.

1995 - Tranz Rail makes a $100m return of capital to the founding shareholders, almost equal to the initial equity they have in the company.

1996 - New shares in Tranz Rail are sold to the public and are listed on the New Zealand Stock Exchange and NASDAQ. The sale raises $175m, virtually all of which is used to repay debt.

2003 - Toll Holdings launches a takeover for the company at a time when the Crown has negotiated a heads of agreement giving it a 35 percent stake. A court case reveals Tranz Rail is near financial collapse. Toll signs a separate heads of agreement with the government that leads to the sale of the track and sets up a track access regime that is never adhered to.

2007 - Toll Holdings moves to 100 percent ownership of Toll NZ.

May 2008 - Heads of agreement is signed between the Government and Toll to sell the rail business back to the Crown, leaving Toll with a trucking, warehousing and freight forwarding business.

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Please tell Labour and Russell McVeigh "Don't do it!"

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Please get on with it and get those important linkages in place - Clandeboye and Marsden Point Lines. Think about a more direct route to North Auckland in the future. Cut road expenditure - one doesn't need to be Einstein to work out that growth in medium to long distance car travel is and will be for a long time in negative growth.

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Given the commercial realities and recent history of rail in NZ, the purchase of Toll assets by the State seems inevitable and even necessary. But we should condemn the sale because the NZ Government is paying Toll far too much for this family silver.

As a nation, we Kiwis need to be better negotiators. If one side in a negotiation shows fear or greed, a good opponent will screw a super deal out of them – just as Toll has done to us.

Toll's NZ Rail holding was going to bleed them dry eventually. That is their very real fear. Current market conditions transform that fear into an imminent threat. Picture Nell tied to the railway tracks with the midnight express thundering into view.

The NZ Government, for its part, is scared Toll would let the rail assets crumble - but that would take the time that Toll does not enjoy.

If the deal is not signed, then is it possible to pull out? Realistically, I doubt it, but hope springs eternal.

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