Next steps in KiwiRail’s Turnaround Plan

The Government has today announced that KiwiRail’s balance sheet will be restructured in another step towards putting the company on a more commercial footing under its challenging Turnaround Plan.

“Under the plan, the Government is committed to ensuring KiwiRail can fund its business on a commercial basis,” Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall say.

There are two main parts of the restructure:

• New Zealand Railways Corporation will continue to hold the 18,000 hectares of rail network land, from which no financial return will be expected.

• From 1 January 2013, KiwiRail’s freight, passenger, infrastructure and ferry businesses, together with rolling stock, rail infrastructure and plant and equipment, will be transferred to a new state-owned enterprise.

KiwiRail’s land and network net assets will be written down from about $13.4 billion to about $6.7 billion. The Government has also confirmed it will convert $322.5 million of KiwiRail debt to equity.

“This will leave KiwiRail with a balance sheet that better reflects commercial reality and gives the company an opportunity to earn a return over time.

“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.

“The changes we’re announcing today will allow the company to account and report in a way that more fairly reflects its commercially-focused rail and ferry business,” the ministers say.

Of the $6.7 billion net asset write down, about $4.9 billion will be covered by reversing an existing asset revaluation reserve. The remaining $1.8 billion will be written off.

The Government’s preferred position is that this is reflected in both the Crown’s and KiwiRail’s financial statements for the year ending 30 June 2012.

“Under that approach, the $1.8 billion write off would be added to the Government’s operating deficit for the current financial year. The final position will be confirmed over the next few months before the annual accounts are published,” the ministers say.

“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.”

The ministers stress that KiwiRail’s Turnaround Plan remains a difficult task.

“While good progress has been made in lifting freight volumes, there is no doubt KiwiRail has a long way to go before it achieves the Government’s objective of supporting itself.

“We remain focused on giving it the opportunity to do this within clear fiscal parameters, so we can recover value from the cost we inherited from the previous government.”