Treasury Releases Rail Agreement

http://www.treasury.govt.nz/release/rail/

Rail Network PURCHASE: Summary of agreements

The agreement to purchase the rail network was signed on 30 June 2004 and title for the network passed immediately to the Crown. There will be a two month transition period where Toll will continue to manage the network on behalf of the Crown

This note sets out the key features of the agreement that was reached on 30 June. It starts by referencing the Heads of Agreement with Toll signed in July 2003, and summarises how capital requirements beyond the initial non-recoverable Crown payment of $200 million will be funded.

Heads of Agreement

The Heads of Agreement had the following key parameters:

The rail track and all the equipment needed to operate it, along with all track related staff and contracts would pass to the Crown

Toll Rail would pass back to the Crown its rights over land under the rail lease, except for land it needed for its continuing rail operations

A set of specified land and assets, including Wellington Railway station, some leases, and land rights where some major reconfiguration was required would also pass back to the Crown.

The Crown agreed to pay a nominal $1 for the track assets, and an estimated $50 million, subject to valuation, for the assets in (3) above.

Toll Rail would be granted exclusive access for freight, and Wellington metro. Those exclusive access rights were subject to use-it-or-lose-it provisions. If Toll Rail’s traffic fell below 70% of the average 2002-2004 freight levels for any line segment it would lose its exclusive access. Tranz Rail was required to co-operate with any new operator granted access in such terms. For Wellington metro the use-it-or-lose-it passenger levels were based on those in the existing core lease.

The rights of existing operators on the network (most obviously Taieri Gorge and Heritage operators) were protected.

Toll Rail was to pay the costs of Trackco through access charges. The costs would be set through a process of agreeing Trackco’s budget, subject to an arbitration provision.

The Crown committed to spend $100 million on upgrading the network, and $100 million over 4 years on replacement capital (e.g. line and sleepers). Neither of these sums was to be recovered from Toll Rail. Toll Rail committed to spend $100 million on new rolling stock.

Consultation mechanisms were established to enable this capital spending to be co-ordinated as appropriate, but each party retained final decision rights over its own spending.

It was agreed that further capital expenditure on the track, above this initial $200 million, would be recovered from rail operators through the track access charges.

TrackCo would be an independent and efficiently run entity. In recognition of the fact that TrackCo’s efficiency was a key input for Toll Rail’s operation, Toll Rail was to nominate one director for TrackCo.

There were to be service level agreements and key performance indicators for both TrackCo and Toll Rail. A bonus and penalty regime would apply.

Long-distance passenger services were not covered by the Heads as rights for long distance passenger services were held by a third party - Tranz Scenic.

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