Thanks Sir Michael
June 28th, 2012 at 11:00 am by David FarrarVernon Small reports at Stuff:
The Government has written down the value of KiwiRail’s land and network assets from $13.4 billion to $6.7b and converted $322.5m of debt to equity in a major restructuring of the state-owned rail company.
The change will hit the Budget deficit adding another $1.8b of red ink to the expected operating balance which on Budget day was forecast to be $10.6b deficit for the year to June 30.
Thanks, Sir Michael Cullen. The over the top price you paid (with our money) for Kiwirail was called the Sale of the Century, and it was. Never before has a buyer made such a bad purchase. Toll must still be drunk from celebrating the millions they got from selling a lemon.
Labour or Greens have complained that National is going to sell Kiwirail. If only! There’s no one out there stupid enough to buy it. I doubt we could even give it away for $1.
No tag for this post.
June 28th, 2012 at 11:05 am
Arrogant Sir Michael “Prick”.
He and Helen C only bought KiwiRail to put National further in the poop knowing that they would get their butts kicked very hard at the 2008 Election.
Typicall Socailism – still not changed but with Greenpeace leading the oppsition with Winston it only gets worse.
Vote:June 28th, 2012 at 11:08 am
The last paragraph hits the nail on the head.
I saw something similar on the news last night. I think it was Russel Norman: “National is going to sell Kiwirail.” Funnily enough, he wasn’t asked, “To who?”
Vote:June 28th, 2012 at 11:08 am
So DPF, we got rail-roaded!
Vote:June 28th, 2012 at 11:11 am
This has been the recurrent problem with rail in NZ for decades. Nobody has figured out how to make it profitable despite different business models (state-owned, SOE, private etc).
(Of course Toll has changed that. There is a way to make money of rail in NZ. Buy the rail company, wait- and when you have a Labour government again- offer to sell it back at an inflated price).
Vote:June 28th, 2012 at 11:11 am
Funny how people make such a massive fus because they think National is going to lose money selling assets.
Yet many of those people praised Labour for losing a massive amount of money buying this stupid “asset”.
Vote:June 28th, 2012 at 11:13 am
It’s in such a poor state because your bone-headed mates sold it in the first place to people who ran it into the ground
Vote:June 28th, 2012 at 11:13 am
but Michael was given a job for the boys…from key…and Michael was given a knighthood…ticked off by key…ppfftttt , the whole stinkin lot should lined up and shot for wasting my fucking money. Bastards.
Vote:June 28th, 2012 at 11:16 am
Funny, I can’t remember anyone (apart from one blogger who foments happy mischief) calling it that
And Toll must have been making money out of the milk trains, or else they wouldn’t have built and operated them…?
Vote:June 28th, 2012 at 11:19 am
It’s in such a poor state because your bone-headed mates sold it in the first place to people who ran it into the ground
Even if this is true, it’s irrelevant. The question is whether or not the price reflected the state of the trains that were purchased, and it manifestly did not.
Vote:June 28th, 2012 at 11:19 am
Railways these days are just Cloward Piven stuff.
The left (example Michael Cullen) will never tell you that their real underlying objective is always to destroy capitalism.
Vote:June 28th, 2012 at 11:20 am
It’s in such a poor state, becuase rail is unprofitable to run in NZ.
Wellington rail only exists due to massive subsides provided for by local and central government. If the true cost was passed onto the ticket proce nobody would use rail.
That’s why Len Brown rail loop is a wate of money and will be a continual drain on Auckland taxpayers until the rail loop is closed. It will never make money and it’s only wanted by loopy Labour and loopier Green supporters.
Vote:June 28th, 2012 at 11:21 am
And Toll must have been making money out of the milk trains, or else they wouldn’t have built and operated them…?
Yea… um no.
Whether or not something is profitable is only found out after it’s built. Just because something is built doesn’t mean it’s profitable.
As for the running thereof, it’s entirely possible that they run to reduce the losses incurred by building the trains. So again, not nessessarily.
Vote:June 28th, 2012 at 11:22 am
I have cut and pasted this from part of a comment on the NBR site –the person making the Anon comment seems to know his/her facts
…”and in 2003 was bought out by the Melbourne-based Toll Holdings. In 2004 the government repurchased the rail infrastructure, by then very run-down, for $1, vesting it in a new state-owned enterprise, Ontrack. The government also spent $75.8 million buying a stake in the rail operator, and provided it with a $44-million cash injection. On 1 July 2008 the government spent $665 million buying Toll’s rail and ferry operations outright, renaming the company KiwiRail.”
I’m not an accountant but it seem to me that somewhere along the line an accountant / finance “whiz” has done some massive revaluations of the assets if suddenly there is $13.4 billion on the balance sheet.
I hope someone more qualified than me can explain it.
Vote:June 28th, 2012 at 11:22 am
Ditch the railway and sell the land corridors.
Vote:June 28th, 2012 at 11:26 am
@Mark has it correct.
NZ Rail has been manifestly unprofitable since the early 80s (at least, and then they benefited from a monopoly on long-distance freight). The combination of coastal shipping and road out-competes rail by a large margin. People have lost a lot of money trying to prove otherwise.
Vote:June 28th, 2012 at 11:31 am
Actually what is happening is the government is creating an SOE – (actually changing the existing NZRC) to have 18000ha of land from which the government expects zero return.
“Finance Minister Bill English and State Owned Enterprises Minister Tony Ryalll said NZ Railways Corporation will continue to hold the 18,000 ha of rail network land, “from which no financial return will be expected”.”
All so Kiwirail can pretend to run at a profit. The question is – if an SOE has 18000 ha of land that it isnt making any money from, shouldnt it sell that land?
Vote:June 28th, 2012 at 11:47 am
swan
Vote:That’s fair enough. If the land holdings are integral to the rail network, I see no reason why they should be excluded from the balance sheet.
June 28th, 2012 at 11:47 am
And yet, the said Cullen was knighted by a National government.
If ever there was a mystery, entirely shrouded from logic and wrapped in an enigma – that must be it.
How on earth did he qualify? What on earth possessed National?
Does anyone know?
Vote:June 28th, 2012 at 11:53 am
You really are full of it DPF, others have explained here what the government is up to and how Kiwirail has been revalued.
Best not to let a few things like facts get in the way of a bit of gloating.
Vote:June 28th, 2012 at 11:57 am
I expect more honours, awards and directorships being awarded to the socialist Cullen by Labour’s lite piss-weak government.
Vote:Show the other cheek, Mr Key.
June 28th, 2012 at 11:59 am
“You really are full of it DPF, others have explained here what the government is up to and how Kiwirail has been revalued.”
Ah, so you are in favour of liquidating the assets too YWD? Good to see a bit of pragmatism from the left.
Vote:June 28th, 2012 at 11:59 am
I think Cullen’s new job and knighthood are a fitting tribute to the man. He has totally betrayed his Labour beliefs, such as they were. The private school boy can’t resist the baubles and Key cleverly offered him what he couldn’t refuse. So an enormous ego is satisfied and a potentially critical voice silenced. Every man has his price and Key found Cullen’s.
Vote:Cullen is a contemptible little man. Remember him saying he was going to leave the cupboard bare?
June 28th, 2012 at 12:12 pm
@swan – I think the revaluation was sensible, blaming it all on Cullen is not.
Vote:June 28th, 2012 at 12:18 pm
@Beab – ‘He has totally betrayed his Labour beliefs’
What are those beliefs Beab? That you should always be poor or never aspire to anything?
I can’t speak for The Labour party but my understanding is ‘provide people with the opportunity to make the most of themselves while at the same time looking after those at the bottom of the heap’.
Vote:June 28th, 2012 at 12:28 pm
“@swan – I think the revaluation was sensible, blaming it all on Cullen is not.”
What is sensible about pretending 18000ha of land doesnt matter? Is it right to have an SOE with 18000ha of land returning exactly zero to the taxpayer?
Vote:June 28th, 2012 at 12:37 pm
If only Cullen could be jailed for gross negligence.
Why on earth did he get a knighthood considering the financial damage he did to the country. He is right up there with michael fay badness.
Vote:June 28th, 2012 at 12:42 pm
Thank the Lord for Kiwirail. All you moaners and groaners.
If not for KR shifting containers and logs to and from Tga Port you would be on the bones of your arse and Tga would be an unlivable place because of the trucks that would clog the roads.
Still live in your wonderland. Whats necessary is to charge exporter’s a proper cost of freight but then you would whinge at that. If we stopped subsidizing trucks that would be good as well.
Vote:June 28th, 2012 at 12:56 pm
Confused on three points
1. “After the previous government bought back the rail network infrastructure for $1 in 2004, the company’s assets – excluding land – were revalued upwards in 2007 by around $5 billion to reflect replacement cost.
2. 2008, July 1 – The Government buys back Toll’s rail and ferry business for $665m, after several months of negotiations. http://www.kiwirail.co.nz/about-us/history-of-kiwirail.html
3. “However, because it is a non-cash write down, it will not affect the level of core Crown net debt and the Government’s borrowing programme will not change.”
Now correct me if I am wrong, but ( even after the Asset Revaluation Write-down), but isnt $6.7 billion a wee bit more than $665 million, or $1 ?
Vote:June 28th, 2012 at 12:57 pm
Viking2, you have got a point. We should stop subsidising trucks too. The real-estate on which our roads sit doesnt return anything to the government either. Its not even part of an SOE.
We should start charging a fair rate of return on capital on our road network, and stop subsidising kiwirail. You are right – the runs around TGA would almost certainly be able to stand on their own two feet under such a scenario, and may attract quite a bit more business. But other lines may not survive.
Vote:June 28th, 2012 at 12:58 pm
Quite right Viking2!
Trucking companies for some reason don’t like having to pay to use OUR taxpayer owned public roads as their place of business – here is a photo of them protesting a previous adjustment to the charges…
http://www.teara.govt.nz/files/p-23468-nzh.jpg
I wonder if we’d still need to subsidise rail, if we stopped subsidising dirty stinking trucks…?
Vote:June 28th, 2012 at 12:59 pm
Can someone explain to me why Cullen is supposedly such a genius? I mean for their entire administration Labour just taxed me through the arse. And paid off Govt debt, well whoop de do. My pig could do that. Anything else apart from reducing smoking uptake?
Then left a series of booby traps for the current lot that don’t have the balls to snap off
Vote:June 28th, 2012 at 12:59 pm
oh Ross
Accountants do not revalue, registered valuers do
Fair value is determined from market-based evidence by an external,independent valuer. Valuations are undertaken in accordance with the standards issued by the New Zealand Property Institute with the following bases of valuation adopted:
Vote:▪▪ Specialised buildings and railway infrastructure – valued using optimised depreciated replacement cost.
▪▪ Rail corridor – land associated with the rail corridor is valued based on adjacent use (‘across the fence’), as an
approximation of fair value.
▪▪ Non-specialised land and buildings which could be sold with relative ease are valued at market value.
June 28th, 2012 at 1:02 pm
@ Chthonlid “Nobody has figured out how to make it profitable”
“1996 – Wisconsin Central and Fay Richwhite strip cash out of the business before exiting. They took $322m of equity out before floating 31 million shares to the public at $6.19/share.
2002 – David Richwhite and Michael Fay quit their stake at $3.60/share, netting an $87m profit on their original $31m investment, plus collecting $10m in advisory fees. Wisconsin quits two weeks later at $3.70/share, netting a $100m profit on its $37m investment, plus getting $8m in advisory fees. ” -Stuff
Thanks Sir Michael.
Vote:June 28th, 2012 at 1:06 pm
@Rat – the write down is the value of the land the tracks sit on, the government has always retained ownership of that part.
The current government is converting Kiwirail to an SOE and it will have to make a return on its capital, hence the capital (which is mainly the value of the land) is being revalued so that the return is realistic.
Really not a lot to do with Cullen (as DPF well knows).
Vote:June 28th, 2012 at 1:11 pm
“The current government is converting Kiwirail to an SOE and it will have to make a return on its capital, hence the capital (which is mainly the value of the land) is being revalued so that the return is realistic.”
The land is not being revalued. It is being put into a separate SOE. NZRC will hold the land (with no expectations of profit), and Kiwirail will be the freight business. So basically Kiwirail gets free use of 18000ha of land. That is how it will pretend to be profitable.
Vote:June 28th, 2012 at 1:30 pm
RRM at 12.58
Vote:Spot on.
If you run a mini motor car over a piece of road 24,000 times it will do as much damage to that road as running a big truck and trailer rig over that piece of road once.
Now, consider the $288 annual registration fee on that mini.
Then tell me that the road transport industry is not subsidised. You will need the logic of Russel Norman to do so.
June 28th, 2012 at 1:31 pm
Michael Cullen should have been given Kiwirail to run instead of NZ Post.
You bought it, you fix it!
Vote:June 28th, 2012 at 1:42 pm
Tauhei Notts
Out of that $288 take $198 as ACC levies plus the Admin & GST. As I understand it Tax & levies on petrol funds road maintenance & construction……RUC charges paid on diesel vehicles are probably the biggest source of revenue.
Last time I had anything to do with it a 40 tonne rig was paying about $1 per Km RUC…it’s probably quite a bit higher now.
Vote:June 28th, 2012 at 1:46 pm
Remind me: why was Michael Cullen, pilferer of NZ wealth, elevated to the rank of Sir by Key’s government?
Vote:What was the reason?
June 28th, 2012 at 2:01 pm
Rat @ 12.59 I realise any revaluation would be based on a professional property valuers figures but ultimately it is the accountant or finance person doing the accounts who would recommending to his bosses/board what figure actually goes in the accounts. It would be interesting to know when the $13.4 Bill figure appeared on the accounts as obviously it helped make the Govts overall accounts quite a bit better.
Vote:Your last point @12.56 is right and the dumb MSM journalists have not higlighted the issue of the $1.8Bill affect on the Govt. books is just an accounting figure change and does not mean extra borrowing is required.
June 28th, 2012 at 3:01 pm
What a great way to burn money.
1993: Government wrote of $1.3 billion of debt and sold NZ Rail for $400 million to the consortium of Fay Richwhite & Company, Wisconsin Holdings and Berkshire Partners. The company was renamed Tranz Rail Holdings in 1995.
2003: Tranz Rail’s share price collapsed. The company was separated and taken over by separate entities. The government bought the tracks for $1 and Toll Holdings bought the rest. The government fronted up with a cash injection of $200 million.
2008: The Labour government bought Toll Rail for $665 million with a final price of $690 million.
Vote:June 28th, 2012 at 3:10 pm
@rat
The original decision to rate the assets at their replacement value was based on a flawed assumption. Valuers & Accountants (some) get to play these tricks normally under the direction of whoever owns the business. You can be allowed to value something at its replacement value but that assumes someone would bother to replace it – a dubious assumption based on how rail looks uneconomic here.
The truly honest value is what you could sell it for.
The net value of the business is what could get in return for it – rail would be better off sold for its land based on the current valuation. As rail’s running costs, including maintenance (especially maintenance), and its capital investment requirements mean its value is almost certainly -ve no-one would buy it. Cullen would have been better off letting Toll screw up the business further and then do a forced purchase at fire-sale prices based on national interest. They were getting close to that point anyway.
Vote:June 28th, 2012 at 3:21 pm
Labour or Greens have complained that National is going to sell Kiwirail. If only! There’s no one out there stupid enough to buy it. I doubt we could even give it away for $1.00
And they are trying to sell an Engine on Trade Me for $30.000 thousand dollars, has to be the rip off of the century. What would it be worth for scrap?
Vote:June 28th, 2012 at 3:56 pm
The English Electric units for slae on TradeMe are heritage collectible items. I doubt they will need to reduce the sale price to scrap value, but you never know.
Vote:June 28th, 2012 at 4:16 pm
$30,000 is a lot of money for a decommissioned electric multiple unit that is far too big to go on a truck, and is not even in good enough running order to be towed away by rail.
I don’t know who they think is going to want them at that price…
They might be tempting sheds / out-houses if they were put up for sale at scrap value?
Vote:June 28th, 2012 at 4:27 pm
They could be made into quite cool buildings, but at considerable expense and I’d think the market would be fairly limited. So far, the only bidder has been a 4-year old!
Vote:June 28th, 2012 at 6:22 pm
@slijmbal
The net value of the assets is not what the company can sell for, that is merely a rough value of what would be realised on windup.
The Market value of a business is related to the earnings it generates against its weighted average cost of capital.
The Valuer still has to be independent, and your “Valuers & Accountants (some) get to play these tricks normally under the direction of whoever owns the business” destroys all confidence in the revaluation process.
Youve effectively said that Bill English had a hand in reducing the revaluation reserve for political purposes, as did Cullen during the initial valuation.
Remember that it is a non cash adjustment, thats all, but the way people are portraying it, hell we have to sell small children to pay for it.
From what I see the loss has been as a result of Land transferring to another entity, of course its going to be written down. They wont have the land anymore.
Bet my bottom dollar that the new entity will have a massive Asset Revaluation Reserve as a result.
The interesting thing here is that no-one has analysed whether or not Kiwirail is worth more than the $690 million it was purchased for. With a write down to $1.2 billion and Cash Earnings of $110 million, I suggest it is.
Vote:June 28th, 2012 at 7:18 pm
Some people have suggested that the previous government has somehow lost money by buying back the railways. That of course is impossible to determine unless the enterprise is sold once more.
Vote:June 28th, 2012 at 7:32 pm
“The interesting thing here is that no-one has analysed whether or not Kiwirail is worth more than the $690 million it was purchased for. With a write down to $1.2 billion and Cash Earnings of $110 million, I suggest it is.”
The only reason it will make any money is because it has free use of 18000 ha of real estate. Real estate that the shareholder already owned. I, therefore, suggest it isn’t.
Vote:June 28th, 2012 at 7:41 pm
But the only way to test whether it was worth $690 million would be to sell as a going concern or close it and sell the assets. Seeing neither of those two things will be happening any time soon, we are left with standard commercial valuation methodology.
No doubt swan will be able to tell exactly us where Rat has got it wrong.
Vote:June 28th, 2012 at 7:58 pm
Mikenmild,
When the government bought kiwirail, they bought the freight company. The freight company relies on the existence of the tracks and land on which the track sits. The land on which the track sits is work some $6b. So, let’s do a little thought experiment: The government decides to sell Kiwirail (the assets it bought for $690m). But it say to prodpective buyers “We are not going to subsidise you explicitly or implicitly. So we will expect a return on our land holdings of at least 5%-10% per annum. So that is a rental charge of $300m to $600m. If you can’t afford this, we will sell the land out from underneath you. Or find a tenant who can afford the rent. And if NZ doesn’t have any tracks for you to run your trains on, well you won’t have much of a business will you.”
So a prospective buyer sees earnings of $100m, but additional costs of $300m to $600m.
Tell me, what do you think this prospective buyer might reasonably value the business at?
Vote:June 28th, 2012 at 8:45 pm
I have a blog post coming about this, but I predicted it in 2009 – the Treasury valuation of this has been absurd.
http://libertyscott.blogspot.com/2009/02/no-future-for-rail-freight.html
http://libertyscott.blogspot.co.uk/2011/10/told-you-so-kiwirails-bullshit-asset.html
David’s right. Indeed some real objective analysis about it needs to be spread more widely. Just look at these slides:
http://www.iscr.org.nz/f492,14397/14397_Rail_Seminar_Feb_19_Slides.ppt
The railway wasn’t wrecked, the economically rational thing was to run most of it into the ground because it doesn’t make a return on capital on most of its assets. If that had been allowed to happen, it would remain, be viable, but maybe a third of the lines would be closed – there would be a main trunk line, a West Coast coal line and a line to the Bay of Plenty and that’s about it.
It’s worth noting that Labour and the Alliance opposed the last National government’s attempt to commercialise the roads so they would make an explicit return on their assets, so the claims of the left in wanting to level the playing field are rather fatuous – it is a religious belief that rail is disadvantaged in every way, when the truth is far more opaque.
Trucks are not subsidised for using the state highways that compete with railways. Road User Charges are calculated to recover on a per km basis, the damage and capital consumed by all heavy vehicles using the roads, based on an economic model that has been through multiple reviews.
It remains one of the most oft-quoted pieces of fiction by the Railevangelists that trucks are “undercharged”. It is valid for local roads, but even if it was corrected for that, it would make hardly any difference. The best that can be said is that because RUC is averaged across the country, in some places it charges too much in others too little, because road costs vary across the country.
This whole debate shows up the economic illiteracy of those who constantly plead this case.
and I LIKE railways and I would love it to thrive and be profitable, but not on the basis of fiction and distortions that cost non-rail users a fortune.
Vote:June 28th, 2012 at 9:29 pm
It always amazes me how people who talk about “our asset”, often don’t understand that things like NZ Rail which cannot produce enough income to cover the real cost of all their resources – which means covering both the maintenance and the replacement, are actually liabilities. They seem to think that if it produced a profit of $1million, let alone $100 million, that would be a success. ROA, let alone ROI is a foreign concept.
The sad thought is that if one ripped up most of the tracks and simply turned them into bike paths, the resulting tourism income – small as it might be – would still amount to more than what the railways could afford to pay for the land.
As Liberty Scott points out, the brutal truth for railways in NZ is that they can never pay their way: almost every possible model has been tried and they have all failed (not mentioned so far was the $100 million debt write-off by Muldoon back in the early 1980′s). As much as I loathe Fay & Richwhite the fact is that there “asset stripping” approach remains the most economically sensible thing to do.
Having said that I have no sympathy for this government. If ever there was an argument about a public “asset” that could be won it’s this, but they’re not even willing to spend the time and energy to make it. The more worrying thought is that they’re just not capable of making it. So, blame Cullen all you like: these problems could be solved and right quick, but they won’t be, and sometime in the 2020′s another National government will be in power and moaning about all the money going down the rat hole of NZ Rail. Perhaps only national bankruptcy could ever fix this.
Vote: