2005/06 Financial review of New Zealand Railways Corporation

Transcription

1 2005/06 Financial review of New Zealand Railways Corporation Report of the Transport and Industrial Relations Committee Contents Recommendation 2 Introduction 2 Tendering for maintenance services 2 Track access charges 3 Developing Auckland s Rail Transport Network 3 Speed restrictions on the North Island Main Trunk line 4 National Rail Access Agreement 4 Wellington commuter rail 5 Network revaluation 5 Ageing workforce 6 Rail freight 6 Appendix 7 1

2 New Zealand Railways Corporation Recommendation The Transport and Industrial Relations Committee has conducted the financial review of the 2005/06 performance and current operations of the New Zealand Railways Corporation and recommends that the House take note of its report. Introduction The New Zealand Railways Corporation, trading as Ontrack, is a statutory corporation established pursuant to the New Zealand Railways Corporation Act 1981 and is included in the first schedule of the State Owned Enterprises Act Ownership responsibility for Ontrack resides with the Ministers of Finance and State Owned Enterprises. Since September 2004 Ontrack has owned, operated, maintained, and managed the railway infrastructure, following the purchase by the Crown of the rail network from Toll NZ Consolidated Limited. It has a vision of making rail a sustainable element of New Zealand s broader national transport and logistics network, and providing a sustainable, efficient, and effective rail network that is safe, reliable, environmentally appropriate, and competitive. During the 2005/06 financial year Ontrack s staff increased from 150 to approximately 780 as a result of bringing network maintenance services in house. Total operating revenue for 2005/06 was $ million, with an after-tax surplus of $ million. Ontrack s revenue consisted largely of track access income of $ million, and grant income of $ million. Of the grant income, $ relates to funds the Government committed to spending when it entered into the National Rail Access Agreement with Toll NZ. Ontrack received one good, and two satisfactory ratings in the Office of the Auditor- General s assessment of its financial and service performance management, a downgrade from last year s assessment. The satisfactory ratings related mainly to transaction pressures caused by Ontrack s integration of maintenance services. The fall in Ontrack s assessment is understandable given the major changes it has made to its workforce, but a return to previous standards is expected in time. Tendering for maintenance services Ontrack decided in this financial year to bring network maintenance services in-house. This service was previously carried out by Transfield Services Limited under a contract negotiated with the former network owner, Tranz Rail. The terms of the contract required Ontrack to put the network maintenance contract out to international tender. Ontrack then tendered successfully for the contract itself. We asked why Ontrack had done this, and what key performance indicators would ensure the efficiency of its maintenance work. At the time of tendering the international market for maintenance services was short of capacity, so the chairman believed that Ontrack was unlikely to receive a competitive tender. To ensure this, Ontrack decided to openly tender itself. To prevent any implication 2

3 of insider trading, the tender was prepared and evaluated by separate teams within Ontrack and the process was overseen by Audit New Zealand, a team of solicitors, and a contract engineering firm. After a rigorous process, Ontrack s tender was preferred in terms of price and non-price-attributes. To ensure it remained efficient Ontrack told us its focus would remain strictly on its core engineering role of supporting the rail infrastructure. Non-specific rail work, such as clearing out culverts and weed spraying, would be done by private companies who tender for the work. Ontrack uses mainly the same key performance indicators that it did in the outsource environment under Tranz Rail. This allows Ontrack to make historical comparisons of the costs of particular types of repair work, and to estimate what they are likely to cost in future. A noticeable reduction in the need for speed restrictions on the North Island Main Trunk Line is an early indication of the benefits of bringing the maintenance work in-house. We will continue to monitor the efficiency and effectiveness of Ontrack s decision to provide maintenance services in-house, and will be interested in how this approach to maintenance serves the rail network in the longer term. Track access charges Negotiations between Ontrack and Toll NZ on new track access charges for the next two years have been lengthy and unsuccessful, requiring an expert determination to reach an outcome. We asked for an update on the situation. An interim access charge had been applied for 2005/06 under which Toll paid $4 million per month and the shortfall of $7.8 million paid by the Crown. At the negotiations, however, significant differences quickly arose over Toll s ability to pay the access charges and remain profitable, and the charge Ontrack consider necessary to ensure a suitable network. In accordance with the terms of the National Rail Access Agreement, an expert determination has been provided on new track access charges; it will be released soon, and will take effect from March this year. Toll has raised issues relating to the determination which Ontrack considers to be without merit, and is unlikely to alter the determined charge. Ontrack told us it is pleased with the outcome of the determination, though it is still working through its full implications. We were told that the Treasury, as lead agency, and Toll are working towards an outcome that serves the Government s aim of having more freight and passengers carried by rail, and that helps Toll achieve its commercial objectives. Any arrangement that results from these discussions would be long-lasting. Developing Auckland s Rail Transport Network The 2006 budget included funding of up to $600 million for rail infrastructure improvements to speed the development of the Auckland network. Ontrack will use this funding over the next three years on a construction programme to increase the capacity of the rail network, so that it can have more frequent and reliable commuter services, in line with the region s transport strategy. We asked if the construction targets were being achieved according to schedule. 3

4 Ontrack assured us that its Auckland construction projects were progressing according to the prescribed timetable and budget. Major construction work had been carried out on the duplication of the western rail route from Newmarket to Swanson; and Ontrack is working closely with stakeholders on remodelling the Newmarket station, and on improving the Manukau rail link. We are pleased that these major rail projects are progressing well, and will continue to monitor the improvement of Auckland s rail network. Speed restrictions on the North Island Main Trunk line We asked about the effect speed restrictions were having on the North Island Main Trunk line, and whether the resulting delays have undermined the Overlander passenger service between Wellington and Auckland. Ontrack s current timetable allows for 45 minutes of speed restrictions on trains travelling the main trunk line. It emphasised that some speed restrictions are normal for rail and are needed for safety. We were told that some speed restrictions would always be required, although too many speed restrictions on a particular line will inevitably cause delays. Ontrack is heartened by indications that its intensive maintenance of the main trunk line has resulted in substantially fewer speed restrictions. Ontrack recognises that reducing the transit time of the Overlander would make it a more competitive form of passenger transport, but this would be a longer-term goal than reducing the effect of speed restrictions on the main trunk line. Ontrack noted that almost all of its funding comes from the rail operator, who can therefore largely dictate the priorities for how funding provided to Ontrack should be used. National Rail Access Agreement Under the terms of the National Rail Access Agreement rail is expected to operate on a full cost-recovery model, while roading does not. One of our members asked if this was fair, given the government s commitment to carbon neutrality. Besides the lower incremental costs of rail relative to road, Ontrack believes that some significant externalities favour rail, particularly its significantly lower environmental emissions and its better safety record. In these areas the chief executive believes that rail is not assessed as favourably as it could be. Ontrack is advocating higher expenditure on the rail network to exploit these advantages over roading. User charges Given the dilapidated state of the rail network Ontrack inherited following the repurchase of the network in 2004, one of our members asked if it was fair to expect Toll NZ to fully fund upgrading and maintenance of the network through its user charges. When Toll signed the National Access Rail Agreement it made a commitment to fund the full cost. However, it has emerged that it is difficult for Toll to make the returns it wants in order to make needed investments in rail whilst still meeting its obligations for nationwide rail freight services. Ontrack told us it is working with the Government to try and find a way for Toll to circuit break this difficulty. 4

5 Lack of incentives Under the National Access Rail Agreement, Toll is encouraged to carry more freight and passengers by rail, but there are no associated targets, measures, or incentives to achieve this. The agreement does not provide any mechanisms for Ontrack to force Toll to do anything that is contrary to its commercial interest. Although Ontrack and Toll try to work together for the good of the rail system, there can be conflict between Ontrack s aspirations to increase rail services and Toll s commercial interests. Ontrack told us it is seeking to renegotiate the agreement, to provide Toll with incentives for investing in and achieving goals aligned with the Government s rail objectives. Wellington commuter rail We enquired into the ongoing signal problems affecting Wellington s commuter rail services and asked what was being done to solve them. Much of Wellington s rail network is run-down and antiquated, with signalling systems dating back to the 1940s. There are also problems with the network s ageing power substations, which are being addressed but cannot be rectified quickly. Weather conditions can also affect the network, with delays caused by wave damage to the lines and signals during several storms in Ontrack told us it is working with the Wellington Regional Council, Toll, and the Government on ways to deal with the problems on the Wellington network. Network revaluation In 2004 the Government bought the rail network from Toll for $1. In order to comply with accounting standards the rail network was recently revalued. The revaluation carried out by registered valuers now values the network at $10.6 billion dollars, a major change from the asset valuation of $394 million included in Ontrack s annual financial statements for the year ended 30 June We asked how this valuation was carried out, and how the resulting large depreciation costs would effect Ontrack s financial viability. The valuation methodology used is internationally accepted, and is the same as that used to calculate the value of the road system. It takes account of the value of Ontrack s total assets, with its land amounting to $5 billion, tunnels at $2.9 billion, track at $1.1 billion, and bridges at $1 billion being its most valuable assets. These valuations of Ontrack s assets differ markedly from those in the annual reports statement of financial position as at 30 June Ontrack explained that the annual report reflected the assets of the Railways Corporation before Ontrack assumed the network from the Crown, and reflected just the costs of assets purchased since the network was transferred from the Crown to Ontrack. Proper accounting standards require that fixed assets are valued at fair value. The valuation method used was Depreciated Replacement Cost. According to this method Ontrack now has assets valued at $10.6 billion. 5

6 With this new valuation of its assets, the cost of depreciation is in the region of $140 million per annum. This is not recoverable from track access charges, as according to the National Rail Access Agreement, only depreciation from Ontrack s cash operating expenses can be recovered. Some of us queried how Ontrack can remain a State Enterprise with this type of accounting system. We were told that Ontrack currently receives Crown revenue in the form of capital grants for investment, and as a result of its significant capital works programme it expects to register a profit by the end of the financial year. Some of us feel that this accounting system will not allow Ontrack to remain a sustainable State Enterprise in the long term, and note there is legislation currently before the House that will change Ontrack into a Crown entity. Ageing workforce Ontrack has recognised that its ageing workforce, coupled with an international shortage of labour, poses significant challenges. It is therefore recruiting new staff, including graduate trainees, and offering apprenticeships to develop itself as an attractive employer; but it admits there is still much work to be done. Rail freight Ontrack told us it had made an error in its annual report by inferring that 40 per cent of New Zealand s freight is carried by rail, when in fact the true figure is approximately 13 per cent. With freight volumes expected to double in the next fifteen years, we asked how Ontrack will ensure a greater percentage of freight is carried by rail. Most of New Zealand s freight is hauled over short distances, and is therefore unsuitable for transport by rail. To increase rail freight, Ontrack and Toll NZ are working to take more advantage of rail s ability to carry large volumes of bulk commodities over long distances, for example transporting containers to and from ports. It is also encouraging Toll to use longer trains on the Midland line, and is working with freight operators such as Mainfreight to establish depots where long-distance freight can be transferred from road to rail. Ontrack has not set specific targets for the amount of freight to be carried by rail, and we were told that it was limited in this regard to facilitating increases with Toll. Whilst it is aiming to increase rail freight, it was ultimately concerned with creating the right climate for Toll to ensure rail takes its natural role in New Zealand. 6

7 Appendix Approach to this financial review We met on 1 and 22 March 2007 to consider the financial review of New Zealand Railways Corporation. We heard evidence from New Zealand Railways Corporation and advice from the Office of the Auditor-General. Committee members Hon Mark Gosche, Chairperson Hon Maurice Williamson, Deputy Chairperson David Bennett Peter Brown Darien Fenton Sue Moroney Lesley Soper Hon Judith Tizard Kate Wilkinson Pansy Wong Evidence and advice received New Zealand Railways Corporation, Annual Report New Zealand Railways Corporation, Responses to Financial Review questions, for the year ended 30 June New Zealand Railways Corporation, Project DART: Developing Auckland s Rail Transport Network, October Office of the Auditor-General, Financial review briefing to the Transport and Industrial relations committee, 1 March