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Buying back rail only the first step. It is well known that the Government is considering buying back the rail operations from Toll. This is in the context of the Government buying back the rail network in 2004. Following the purchase in 2004 of the tracks, tunnels, bridges, signalling, train control and track maintenance operations by ONTRACK , Toll NZ was given exclusive rights until 2070 for freight, long distance passenger operations and the Wellington metro passenger service. Auckland rail passenger services are provided by Connex NZ. All of Toll NZ freight and passenger rights are subject to use it or lose it provisions. What is the rationale for buying any of this back and what is the best model of ownership and funding? Certainly the current ownership arrangements are a mess with the government owning the tracks and both Toll NZ and regional councils (funded by government) owning the rolling stock. The current funding mechanism is also a mess. Track maintenance, renewals and upgrades are also infrequent (lumpy) and expensive in nature. Toll NZ is expected to pay ONTRACK through the track access charges for maintenance, renewals and capital costs incurred by ONTRACK, and recover the costs from customers against relatively short term supply contracts. Thus the track access charge mechanism is not working. There are some other funding models that might be applied to assets that have many of the characteristics of monopolies. The simple approach is for monopoly assets to be either in public hands or alternatively privatised with some form of regulation, and the competitive elements to be operated with commercial imperatives by the private sector. There is not perfect competition between road and rail because rail is not available to vast areas of NZ so there will always be limitations on how much freight can be moved by rail – currently 17%. This inhibits long haul freight to most of NZ’s rural areas. For door to door freight movements, rail usually requires double handling by road at each end. A lot of freight is perishable and with increasing use of just-in-time deliveries the immediacy of need often makes rail unattractive. For passengers, the reason people may prefer to travel by road rather than rail are many and varied - the need to attend to needs such as dropping children at childcare (multi-purpose trips), the journey times may not be suitable, and the unavailability of convenient rail. On the other hand people may travel by rail because of no car, only one family car, or to avoid parking charges. It is also argued that road and rail do not operate on a level playing field in funding, safety regulation and licensing regimes. Thus price competition for customers is only one element of the decision to use road or rail.
Also the rail line is a natural monopoly – it is not practical to have more than one track. Therefore conventionally this should be in public ownership or if privately owned should be regulated for price, for safety standards, and to ensure its long term integrity. However there can be competition for rail services. There does not seem to be any enthusiasm by anybody for the government to take over the actual operation of the train services – it is generally regarded that a commercial operation would be best. The problem is how to introduce commercial imperatives to an operation that requires long term investments and has many of the characteristics of a monopoly? Again there are international models for this. Put simply the government could enter into a long term contract for the exclusive right to operate these services for a specified value. This is much the same basis as used for bus services. This brings in the elements of competition – competing for the exclusive right to run the service. These are typically known as concessions or franchise agreements. The period needs to be long enough to justify investments in rolling stock and at the same time short enough so the incumbent does not become entrenched. There can also be disagreements in funding new unforeseen rolling stock requirements so there will need to be contractual provisions for negotiating these. The issue of reducing barriers to new entrants at contract renewal time can be problematic. The incumbent will have residual value in their rolling stock, will have an efficient operation, will have information advantages, and there may not be any existing operation that a competitor can leverage from. The incumbent may be the only major player in NZ. Typically operational periods may be for 15 to 25 years as an appropriate investment timeframe. Certainly the current period to 2070 is excessive. The trick is design a contract that reduces the advantages of the incumbent at renewal time. Typical steps including provisions for valuing and compensating for rolling stock at termination, having an open book approach at termination, and allowing other similar services to be operated by competitors (e.g. have a competitor operating rail passenger services). So there is a way that the best features of public sector ownership and competitive private sector services can be combined to get the best arrangement for rail in NZ. Buying back the operation from Toll NZ will be the first step in finally having a sensible and conventional approach to running our rail services in NZ. For more information contact: Prepared by Julie Buchanan, Communications Manager, IPENZ, |
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