Kiwiblog

Duncan Bridgeman at NBR has written on the purchase of Dr Cullen’s train set:

Documents posted on the Treasury website reveal that in late 2006 officials valued the New Zealand’s rail system at $120 million, some $570 million less than the price the government paid for the business in July this year.

Yes we paid around six times the estimated value of the trains. My God.

The papers reveal that in December 2007, government agency ONTRACK made an indicative offer for equity held by Toll NZ of up to $350 million.

So Toll pushed Dr Cullen up from $350 million to $690 million. No wonder they call it the sale of the century.

The Press wonders how much the train set will cost:

When he announced the deal to great fanfare in April, the Minister of Finance, Michael Cullen, said the Government would pay $665 million in the deal. That has now become $690m and covers only the rolling stock and a passenger rail ferry, plus leases on two other ferries.

The Government has also taken on $140m of debt. In addition, it has announced that hundreds of millions of dollars more is to be poured into the company and into the associated rail network company, Ontrack, which the Government bought four years ago. At the moment, Cullen’s trainset looks like costing at least $1.3 billion in the near future, and goodness knows how much after that. The Government has already said the company will need large subsidies to survive. It is no wonder that Treasury was kept out of negotiations.

Cullen has boasted that the Government paid a premium to buy the company back, as though there were some virtue in spending more money.

Oh when you spend other people’s money there is great virtue in paying a premium. Funnily enough less so when spending your own.

Truly Toll looked like they won Sale of the Century.

Hidden in the depths of detail in the budget documents are the true costs of the train set Dr Cullen purchased. It is projected to be $1.47 billion by 2012.

So how did Toll get the deal of a lifetime?

Simple. Dr Cullen got Mike Williams to buy it, rather than the Treasury!

Treasury you see were too tough in negotiating rail access prices with Toll, so OnTrack were given the job to negotiate the purchase of the trains. Yes, he deliberately sent in the “weaker” team. Toll must regard their $25,000 donation to Labour last year as their best ever investment.

Now who is a Director of On Track? Labour Party President Mike Williams. So what role did Mike “confused” Williams have in buying the trains? Is there not a conflict of interest in being Labour’s chief fundraiser who accepted a donation from Toll and also being on the board buying the trains off Toll?

Secret aspects to the deal with Toll are starting to come to light, and the price tag for taxpayers just keeps rising. The Herald reports on how the taxpayer has also taken on responsibility for a $200 million loan to the parent company of Toll NZ. So what are the details we know of, to date:

1. Taxpayers pay $665 for just trains and ferries – around double what the trains, ferries and freight business cost a few years ago
2. Taxpayers pay $200 million loan to Toll Australia
3. Toll NZ keeps profitable freight business
4. Toll NZ gets rent free office for six years
5. Taxpayer responsible for several hundred million of stock upgrades
6. Rumours of a price discount for Toll’s freight business

From Toll’s point of view, this really has been the sale of the century. They’ll never ever find another history lecturer with so much money to give away.

Fran O’Sullivan writes:

The Sydney Morning Herald’s Matt O’Sullivan joked “you only get one Helen Clark in your life” as he told the story of how Toll’s Paul Little stitched up the Kiwi Government for a whopping $665 million to buy back the nation’s trains and rail ferries.

Yes, we are no doubt the toast of the Australian business community for donating so much money to
them.

The reality is that Little’s $665 million Government-backed cheque 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.

Toll also gets to keep Tranzlink, the company’s NZ-based rail and road forwarding business, together with warehousing and contract logistics operations and gets a six-year rent-free period on its existing premises.

This is where they are very smart. They will still make money from sending freight over rail, and they know the Government will not put prices up because they want more use of rail.

It gets the profit-turning part of the business and despite the fact it was required to pump $100 million into new rolling stock under the agreement it reached with the Government in July 2003, much of what the Government has now bought on the taxpayers’ behalf is a mere hotch-potch of assets masquerading as a business.

I wonder who will be silly enough to accept appointment as a Director.

Surely the Government – as owner – would want the national railway to at the very least break even? The proposed state-owned enterprise may not have to post a dividend and commercial returns to shareholders (like Toll has to) but the reality is that unless some strong financial disciplines are instituted it will simply be another sump-hole for taxpayer funds for years to come.

The dividend policy, if there is one, will be interesting.

The problem is that this is really an election year move by the Labour-led Government to try and make ownership of state assets a campaign issue.

If the Government was truly serious about strengthening the role sustainable transport will play in a carbon-constrained future it would not have stymied plans for regional councils to apply local fuels taxes to fund projects like the $500 million proposal to electrify the Auckland suburban rail network.

As it is it has mopped up an out-of-date railway with taxpayers’ cash – but effectively put a blocker in the way of proposals that would get more people out of cars.

Not a very bright outcome really.

Very astute. Helen giveth to the environment on one hand and taketh on the other.

It gets scary when you start to add up the total cost of Dr Cullen’s buying spree.

Now one can always argue about what an asset is worth, but we actually know that Toll purchased it for $394 million in 2003. And the book value is $430 million.

Now Toll convinced the Government to pay $665 million for it. But on top of that you have the foregone revenue from Toll for track use, which has been $48 million a year, but is meant to be $58 million a year. If you capitalise that at 7% that is another $830 million equivalent capital. So the Government has effectively tied up capital of around $1.5 billion. In theory there will be income to offset that, but time will tell as to how much that will be.

But it gets even better for Toll. They also get a six month rent free period on existing premises – must be worth a few million also.

The Fairfax story quotes Toll managing director Paull Little as saying:

“I think we’ve got mixed emotions. We would have preferred not to have sold.

“Today is a day we feel pretty flat,” he said.

I’ll bet you they have no mixed emotions at all. The sale agreement probably included a no gloating clause. Toll have made a massive profit from Dr Cullen. I doubt they can beleive their luck.

I know something about dealing with an Australian company when selling or buying a business. Let me tell you they are the most ruthless bastards around. No matter how friendly and nice it all is, they will aim to screw you for every extra dollar. It is nothing personal – just how they do business. So even if it is a multi-million dollar sale, they’ll take you for an extra $20,000 if they can – just because they can.

And Dr Cullen had shown how keen he was to buy. This was a fatal mistake which strengthened Toll’s negotiating position massively. You have to have the other side thinking you are prepared to walk away if they don’t budge.

I could just have imagined the talk around Toll after each negotiating session. “Oh my God, we have them up to $600 million – who would have believed. Hey let’s go for $650 million just to see how desperate they are. Nah, don’t be a soft cock – I reckon we should ask for $700 million and see if we can get them over $650 million”.

We’re back to the future with the Government giving Toll a huge wallop of cash for their trains and ferries. Toll will be laughing all the way to the bank with their $665 million.

There is a case for the Government to own core infrastructure assets, but I am far from convinced it needs to own the companes that operate on them.

$665 million would do far more for NZ investing in future infrastructure such as fibre-optic cables, than some second hand ferries and trains.

John Key has already said that they won’t be selling any assets in their first term, so I guess we are stuck with them for the foreseeable future. I just hope someone keeps track of how much money we throw into keeping them viable, and what the opportunity cost of investing that money elsewhere is.

Has been a somewhat messy couple of days for John Key as he took a day to clarify National’s position on Auckland Airport and also gave a wrong impression on National’s treaty policy.

I’d guess that with such a huge lead in the polls, there has been a semi-natural inclination to try and avoid saying anything which might upset the pundits.  I don’t mean this to suggest that National will not have any policy which differs from Labour – I am sure it will. But that when Labour manufacture an issue, such as Auckland Airport, an inclination not to be forced into declaring whether or not one will reverse it is understandable. But a failure to clearly state what one will do in response can be worse than taking a position, even an unpopular one.

I’m pleased to see today that this has not happened with Labour’s attempts to buy Toll. Instead of fudging on their position, I am very glad to see NZPA report the following from National:

A National government would consider selling off a renationalised railway company, the party’s finance spokesman Bill English said today.

Finance Minister Michael Cullen confirmed today the Government had made an offer for Toll’s rail and ferry business, but the Crown and company remained poles apart about a fair price.

Mr English said the last thing New Zealand wanted was the Government to own the rail company.

“We certainly wouldn’t be buying Toll. The worst thing for our railway network would be for the Government to take it over using the OnTrack company, (the State-owned enterprise which runs the rail tracks) which is chaired by the Labour Party president Mike Williams,” Mr English said.

“We would be back to strikes in school holidays on the ferries and featherbedding in the system. We need to look after the taxpayers’ interests and the network and the best way to do that is to have a competent operator.”

Governments had a bad record on operating rail companies and he did not think Labour would be any better.

If the purchase was completed then a National government would get out of the business as quickly as possible.

Excellent.  A nice strong attack on the Government, a reminder of the bad old days, and a very clear response.

Now going back to Espiner, he writes:

The wonder, then, is that he did not say this loudly and clearly on Tuesday. There were certainly grounds for attacking Labour. The Government has intervened late in the piece, effectively shifting the goalposts. It has all but admitted it has done so for populist reasons. Allowing foreign investment in our companies has never bothered it in the past – indeed, Labour used to welcome it.

Labour remains responsible for selling some of New Zealand’s most strategic assets of all, such as Telecom, the railways, and more recently, the national electricity grid.

Nevertheless, Labour has snookered National over this one and both parties know it. I’d hate to think that Labour announced the new provisions purely to trap Key, because that would not only be the height of cynicism but terrible government. I’m sure it didn’t. But it would surely have crossed Labour’s mind.

I suspect they did actually. Not solely, but their decision was a terrible unprincipled act. That is why it should have been attacked strongly.

I understand Labour has a series of other traps for Key this year, and it’ll be interesting to see whether National’s leader is a little more careful where he stands.

As I said above, the response to a possible buy back of Toll looks much much better.

Will it make any difference to the polls? The short answer is I don’t believe it will. Not in the short term anyway. The average punter doesn’t watch Parliament with a clipboard keeping score of the exchanges (at least I hope they don’t or they’re as sad as the press gallery).

Heh so true

But it might hurt National during an election campaign.

That is the concern.  There’s only a few months to tighten things up.