Govt Hops Aboard Toll’s Fleecing Express
May 8th, 2008
The most anticipated Govt buy back since Air NZ has now become reality with Dr Michael Cullen due to sign a cheque on June 30 buying NZ’s rail and ferry services for $665m. Despite the Govt giving the appearance it was playing hard ball, the final sale price and Toll’s admission of what it thought the operations were worth prove Toll definitely got the better of the Govt and taxpayers to the tune of $235m. When it comes to negotiating business deals, Toll is far superior.
Profitabilty Fragile. Toll CEO Paul Little’s claims the higher price reflects the improved financial health of the operations may be true in the short term but Little’s admission the Govt needs to increase its investment in the rail network to make operations profitable proves continued profitability was not assured under the business as usual scenario. Sooner or later Toll would have been faced with having to fork up hundreds of millions of dollars for new locomotives and that would have severely dented profitability. Now the Govt has taken on board this responsibility and Toll walks away with its trucking assets in place as well as a six year rent holiday for all its NZ premises.
Long-Term Investment Approach Needed. It will be very interesting to see what level of financial commitment the Govt is prepared to make. Already pressure is mounting on the Govt to look at reinstating some passenger services so managing expectations will be difficult for the Govt particularly as there are no quick or cheap fixes. Replacing rolling stock and upgrading the infrastructure to make the most of modern locomotive technology is an undertaking which will take years possibly decades rather than months to implement and requires sustained and prolonged investment. Indications are the Govt may spend another $500m on top of the purchase price but this will achieve very little given the scale of the task. It will cost a lot more than that to transform a run down largely Victorian era railway network into a modern transportation system.
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