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Volume Increases Up To 100% Possible With Gov Plan

Statement July 2, 2003

Rail Freight Users Say

Volume Increases Up To 100%

Possible Under Government Plan

The Rail Freight Action Group says members could increase their rail freight volumes by up to 100% from current levels over the next five years if the Government's planned restructuring of rail is implemented.

Several major exporters surveyed say they would like to increase their rail freight volumes by between 20% and 100% over the next few years, which would result in millions of tonnes of additional rail freight a year.

This is up to three times the rate of volume increase implied in Tranz Rail's recently revised forecast for the year ending June 30, 2004. Rail freight is by far the biggest source of revenues for Tranz Rail, but the company is budgeting for only a 5% increase in freight revenues in the coming year despite the wish of major users to make greater use of rail.

RFAG members, who contribute the bulk of Tranz Rail's current freight volumes, say their projections should be considered in any assessment of the worth of the Government's restructuring proposals, together with the significant sustainable benefits they would also deliver to a range of key industries and the wider New Zealand economy.

RFAG says the projected volume increases will come about only if the Government's restructuring proposals are accepted, and urges Toll Holdings to vote in favour of the package and then encourage Tranz Rail to take a more customer focussed approach to deliver improved service levels and drive up volumes.

The RFAG members surveyed say that despite ongoing negotiations with Tranz Rail they have so far been unable to commit these extra volumes to rail and believe the barriers to doing so will be progressively solved if Tranz Rail shareholders vote to approve the Government's restructuring plan prior to any other changes to ownership or operations of Tranz Rail. These barriers include: -

- The limitations caused by the current inferior and inadequate condition of the rail network including tracks, bridges and tunnels, significant portions of which have weight and speed restrictions and continuous welded tracks prone to summer buckling. RFAG notes that the substandard nature of the rail network was identified last year in an Independent Report commissioned by the Land Transport Safety Authority and prepared by international consultants Halliburton KBR. The report also identified various areas requiring attention to return the network to a "Fit for Purpose" adequacy level. Rail users have evidence of deferred maintenance and significant underperformance on a number of routes that can be attributed to inadequate maintenance. The proposed Government restructuring and the accompanying commitment to undertake ongoing investment in network improvements goes some way to addressing these critical issues.

- The need to extend the existing rail network to enable significant volumes to move by rail in selected areas not directly served by rail at the moment.

- Investment in modern locomotives and rolling stock generally could be accelerated if the operating company is relieved of the burden to bring the rail network up to standard and maintain and extend it on an ongoing basis.

- A need to change the current business strategy which has failed to attract the significant incremental volumes available. The operating company needs to work actively with its customers to increase freight volumes, and earn greater revenues to spread over fixed costs. This will generate value for all stakeholders, particularly shareholders.

- Confidence that the chosen transport mode can perform reliably and efficiently is a key factor for major users, whose business operations are, in part, configured around their selected transport and logistics modes. The prospect of competition on particular lines, if the rail operator cannot deliver - a key feature of the Government's proposed restructuring - will be an important factor in future decisions to use rail freight. Some volumes are simply not considered for rail presently because customers refuse to become captive to a monopoly service provider and then have to incur the costs of changing modes if that monopoly provider does not perform. Performance, service levels and pricing strategy have all been major factors in preventing significant existing and potential additional volumes not being carried by rail.

The Rail Freight Action Group believes the planned Government restructuring gives rail by far the best opportunity of increasing volumes and to generate increased and sustainable returns because it fundamentally changes the basis on which rail operates.

Toll Holdings gaining a shareholding in Tranz Rail does not solve rail's fundamental problems. Toll may be able to offer some management strengths to Tranz Rail, but a simple change in shareholding can not deliver any of the potential benefits from higher volumes and higher returns available from the Government's restructuring plan.

It would be a big ask for Toll and its shareholders to fund the urgent network expenditure required to achieve "Fit for Purpose" status alone. Additionally, extra expenditure will be needed to upgrade, extend and rectify deferred maintenance for nearly 4,000 kilometres of track and, including bridges and tunnels, acquire new locomotive and other rolling stock, and to keep marginal regional lines open. RFAG members believe upgrading the network to a satisfactory standard could require an investment of more than $300 million.

If Toll incur these costs it is difficult to understand how they could achieve a commercial return on them from users since, in addition to their initial investment, they would need higher prices that will not be forthcoming. In fact, higher prices will have the opposite effect of inhibiting the potential growth in volumes, or seeing volumes fall. Clearly this would not only be detrimental to Tranz Rail's shareholders and key customers but have a severe impact on the regional and national economic growth.

Meeting customer needs is key to the success of any business. RFAG members want, and indeed need, to see a financially sound, customer oriented rail company focused on growing volumes. We urge Toll Holdings to support the Government's initiatives as the starting point of any strategy to revive rail's flagging fortunes. Increased volumes should have a strongly beneficial impact on Tranz Rail's current financial projections. Everyone can be a winner in this.

We note the reported statements of Toll Managing Director Paul Little that he is open to the Government owning and maintaining the rail network, and in particular his reported justification for Toll being able to increase its offer to Tranz Rail shareholders because the Government would be owning and maintaining the rail network."

RFAG believes the Government should not "raise its offer". The proposed restructuring gives rail every prospect of flourishing, and any funds available must be put to use in restoring the state of the track infrastructure, not in sweetening the pie for shareholders.

All stakeholders, including Toll shareholders, will be best served by Toll voting in favour of the Government package.

There will be no winners if Toll is determined to defeat the Government initiative, own the network and have monopoly rights to provide freight services without any possibility of competition or the need to achieve agreed key performance indicators and safety standards.

That approach is likely to lead to years of acrimony. It is likely to lead to freight volumes falling to a point where rail becomes a minor player in the transport scene servicing only those customers who have no realistic alternative.

This would be a sad outcome for all stakeholders and the country overall.

CO-ORDINATOR AND SPOKESPERSON - CEDRIC ALLAN - PORTER NOVELLI NEW ZEALAND LTD

Level 16, Lumley House 7 City Rd Auckland


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