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Cablegate: New Zealand Labour Party Returns New Zealand Rail to A

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DE RUEHWL #0159/01 1302240
ZNR UUUUU ZZH
R 092240Z MAY 08
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5228
INFO RUEHNZ/AMCONSUL AUCKLAND 1667
RUEHBY/AMEMBASSY CANBERRA 5176
RUEHDN/AMCONSUL SYDNEY 0675
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UNCLAS SECTION 01 OF 02 WELLINGTON 000159

SIPDIS
SENSITIVE

STATE FOR STATE FOR EAP/ANP
PACOM FOR J01E/J2/J233/J5/SJFHQ

E.O. 12958: N/A
TAGS: ECON ETRD PGOV PREL NZ
SUBJECT: NEW ZEALAND LABOUR PARTY RETURNS NEW ZEALAND RAIL TO A
STATE-OWNED ENTERPRISE

WELLINGTON 00000159 001.2 OF 002


1. (SBU) Summary. The Government of New Zealand (GNZ) has agreed
to buy back Australian-owned Toll Holdings Ltd. rail and ferry
business in New Zealand for NZ$665 million (USD$520million). This
completes the renationalization of the railroads which a National
Government privatized in 1982. National Party's opposition leader,
John Key said the repurchase did not make economic sense when
householders were struggling to pay higher food, power and fuel
prices and said the cost to taxpayers could top NZ$1 billion.
Perhaps even more sensitive will the question of whether the Labour
Party can afford to offer a long-promised tax cut after buying
Toll's rail operations. End Summary.

Background to the Buyback
-------------------------

2. (SBU) For most of its history, New Zealand's railways were
administered by the New Zealand Railways Department, with the
Minister of Railways being a member of Cabinet. In 1982, the
Railways Department was corporatized into the New Zealand Railway
Corporation. In 1990, the core rail operations of the Corporation
were transferred to New Zealand Rail Limited, a state-owned
enterprise (SOE). New Zealand Rail Limited was privatized in 1993,
with the new owners adopting the name Tranz Rail in 1995.

3. (SBU) In 2002 shares in Tranz Rail dropped to a record low price
on the New Zealand Sharemarket (NZX) as a result of its poor
financial state and mismanagement. In 2003, Toll Holdings Ltd. of
Australia made a successful takeover bid for Tranz Rail, subject to
an agreement to sell back the rail and railbed to the government for
$1. It took over the rolling stock, freight and passenger
operations. The government committed to NZ$200 million of taxpayer
funding on deferred maintenance and capital improvements via the New
Zealand Railways Corporation, now called OnTrack.

The Buyback
-----------

4. (SBU) The New Zealand Government this week spent NZ$665 million
to repurchase Toll's rolling stock and rail ferries; that is three
times the valuation that Toll put on the trains and rail ferries
when it launched its takeover for the financially stressed Tranz
Rail, in 2003. Under the buyback scheme, Toll gets to keep for
six-years rent-free Tranzlink's freight facilities, the company's
NZ-based freight forwarding business, together with warehousing and
contract logistics operations.. According to contacts at the
Australian High Commission, this six-year control of the freight
forwarding operations could be worth an additional NZ$20 million to
Toll. This segment of the enterprise has been the profit-making
part of Toll's business. The Government has been left with a
collection of leftover assets masquerading as a business, including
outdated rolling stock, one owned and two leased ferries which will
(now be added to the national track the Government bought in 2003)
and a rail track that is still in dire need of major investment.

The Reaction
------------

5. (SBU) The National Party criticized the purchase, saying the
final cost could be over NZ$1 billion once needed improvements are
factored in. National Party leader, John Key said the purchase did
not make sense when householders were struggling to pay higher food,
power and fuel prices. However, if it wins this year's election,
the party won't sell because it doesn't think it could get the money
back and has pledged not to sell State assets. (Comment. The real
reason for Key's promise not to sell is political. Labour has tried
to play on voters' fears that the National Party will sell state
assets if elected. Key knows that issue is a loser for National.
End Comment.). A National Government sold the railways in 1993
after the previous Labour Government first transformed it into an
SOE. Then Labour Transport Minister Richard Prebble (who later led
the right-wing party ACT) said this new buyback would be "the most
expensive purchase that the taxpayer's ever had to fund". He said
Labour botched buying back the rail network and failed to first get
an agreement on sharing costs with the rail operator.

The Way Forward
---------------

6. (SBU) In announcing the deal, Finance Minister Michael Cullen

WELLINGTON 00000159 002.2 OF 002


said preliminary work was being done on how much more the Government
would have to spend on the rail system upgrades, which would be
measured "in the hundreds of millions rather than the tens of
millions." Toll boss, Paul Little said "if we'd had a choice, Toll
would probably have preferred not to have sold the rail and shipping
assets but it had been unable to reach agreement with the Government
over a raft of important issues." Prime Minister Helen Clark says
the renationalized railway system will be run in a business-like
manner, but the Government was not doing it for financial returns.
"We are not going into this to make money," per PM Clark. Cullen
has admitted the Government paid more than it would like for the
rail stock, but said that when Toll bought the business 4-1/2 years
ago, the Government had not been seriously looking at buying it
back.

7. (SBU) According to some local journalists, the Beehive
(Executive Offices) has talked about getting the country's national
rail business back in Government ownership since early 2001.
Despite seven years of a Labour-led government, there have been no
published documents showing where a renationalized rail could add
value to the development of the economy. It did not figure in the
Government's 2007 sustainable transport strategy which aims to halve
greenhouse gas emissions from that sector by 2040. That strategy
also expected coastal shipping to double its share of the
intra-regional freight market which would have boosted the country's
ports businesses. There will be considerable angst if the
Government uses its rail assets as a loss leader to attract business
away from existing road transport operators.

8. (SBU) This buyback is being contrasted with the Government's
decision to bail out Air New Zealand in 2001. Then, the GNZ did
extensive analysis to backup its economic rationale for investing
NZ$885 million in the ailing national flag carrier. It had also
mapped out how the airline would be governed. In contrast, the
government requested business consultant Beca to do a cost-benefit
analysis only after the deal for the rail had been concluded. PM
Clark announced this week, "the deal was good for New Zealand but
not because of its financial implications."

Can the Government Afford a Railroad and a Tax Cut?
--------------------------------------------- ------

9. (SBU) Comment. Despite the Labour Party's belief that the
buyback will generate social dividends, it cannot escape the
business challenges of running a profitable railroad whose chief
competitor is an already established network of truck and ship
transport. It is still to be determined whether the New Zealand
electorate will be persuaded that the high costs warrant returning
Labour to office. Most have been waiting for the income tax cut PM
Clark has promised and Finance Minister Cullen has waffled on. If
Cullen offers too small a cut, when next year's Budget is announced
on May 22nd,this sale could come back to haunt them

MCCORMICK

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