Part 2: Background

Maintaining and renewing the rail network.

2.1
In this Part, we describe:

Ontrack's responsibilities and organisational structure;
the rail network;
the state of the rail network in 2004; and
commercial arrangements for the network.

Ontrack's responsibilities and organisational structure

2.2
Ontrack has been responsible for the rail network since September 2004. It is the owner and manager of the infrastructure. As the owner of the rail network, its main responsibilities are:

managing and operating the rail network;
providing rail operators with access to the tracks;
providing advice to the Crown on rail infrastructure issues;
managing land and leases on the rail corridor; and
carrying out activities for the public good – for example, putting assets in place to improve the safety of railway level crossings.

2.3
Ontrack is a State-owned enterprise. It has a board of directors, but, unlike other State-owned enterprises, it is not a registered company. The shareholding Ministers for Ontrack are the Minister of Finance and the Minister for State Owned Enterprises.

Ontrack's organisational structure

2.4
Ontrack's Head Office is based in Wellington. Head Office staff provide technical engineering advice and logistical planning support to staff in the field, and perform business and administrative functions for the organisation.

2.5
In February 2006, Ontrack changed from using contractors for rail maintenance work to using its own staff to do the work. It did this by forming a subsidiary company – Ontrack Infrastructure Limited (OIL) – and increasing total staff numbers (including OIL staff) from 150 to about 780. Since then, Ontrack's staff numbers have increased to about 860. OIL staff are primarily based at three Regional Offices and nine Area Offices.

2.6
Roles and responsibilities are fairly uniform in the Regional and Area Offices. Regional Offices co-ordinate and support planning, and oversee maintenance and renewal work. Staff in Area Offices perform specialised maintenance and renewal work on the rail network. Ontrack sometimes uses contracted labour or equipment for maintenance and renewal work.

2.7
Some Ontrack and OIL staff also participate in large upgrade projects. We have not reviewed staff arrangements for the projects.

2.8
Figure 2 sets out Ontrack's organisation structure.

Figure 2
Ontrack's organisation structure

Figure 2: Ontrack's organisation structure.

About the rail network

2.9
The rail network covers most of New Zealand. The Crown purchased the Auckland urban rail network in 2002 and the rest of the rail network in 2004. Figure 3 shows a timeline of significant events for the rail network since 1993.

Figure 3
Timeline of significant events for the rail network.

Figure 3: Timeline of significant events for the rail network.

2.10
Ontrack manages the rail network assets in three groups. They are the:

track asset group;
structures asset group; and
signals, telecommunications, and electric traction asset group.

2.11
Ontrack also owns land, buildings, and mechanical plant and equipment (for particular tasks on the rail network).

2.12
Figure 4 shows a map of the rail network.

Figure 4
Map of the rail network

Figure 4: Map of the rail network.

2.13
There are significant ongoing costs in running the rail network. Figure 5 sets out how much Ontrack has spent on maintenance, renewal, and minor upgrade work.

Figure 5
Spending by Ontrack to maintain and renew the rail network and carry out minor upgrade work

	Maintenance ($)	Renewals ($)	Minor upgrade work (excludes major projects) ($)
2004/05	34,997,000	36,809,000	11,820,000
2005/06	42,702,000	70,279,000	5,467,000
2006/07	41,855,000	65,364,000	27,963,000

Source: Ontrack.

Asset valuation

2.14
In its financial statements for the year ended 30 June 2007, Ontrack changed the way it measures its rail network assets and associated buildings and mechanical plant and equipment from depreciated historical cost to fair value. Ontrack also changed the way it measures its land associated with the rail network and buildings from historical cost to fair value. The change in measurement means that the rail network assets and the associated land, buildings, and mechanical plant and equipment are recognised on a basis consistent with other significant items of property, plant, and equipment of the Crown, such as state highways.

2.15
The fair value of the rail network assets and the associated land, buildings, and mechanical plant and equipment was assessed by an independent valuer in 2006. The fair value of the rail network assets and the associated land, buildings, and plant and equipment was determined to be $10.6 billion. This value was derived based on the fair value of the land and the depreciated replacement cost of the rail network assets and the associated buildings and mechanical plant and equipment.

State of the rail network in 2004

2.16
It has been widely reported that many of the rail network assets were very old when Ontrack took responsibility for the rail network.

2.17
There is some evidence to support these reports. However, there is not enough information to form a clear picture of the state of the rail network when Ontrack took responsibility for it in 2004.

2.18
For example, in 2005 Ontrack assessed the state of the rail network. The assessment set out information, in varying levels of detail, about the age, condition, and historical performance of rail network assets. However, the information was sometimes incomplete, or used different or unclear assessment criteria. It was not always apparent what conclusions could be drawn from the information. The assessment did not include a clear description of the rail network's assets.

2.19
The assessment did not identify what work Ontrack would need to do on the rail network in the long term, or the cost of doing so.

2.20
Toll NZ commented in its 2006 annual report that:

… since October 2003, both Toll and the Crown have found the track to be in a worse state of maintenance than we had believed it to be.

2.21
The state of the rail network in 2004 has significantly influenced Ontrack's management focus. This is because older rail assets often need closer management attention – for example, more frequent inspections might be needed to check that the asset is in a satisfactory state to perform the job it is intended to do. If many assets reach the end of their life within short succession, renewing the assets without undue delay is likely to put pressure on resources, including staff and equipment.

Commercial arrangements for the rail network

2.22
Arrangements for the rail network (excluding the Auckland urban rail network) are set out under the National Rail Access Agreement between the Crown and Toll NZ. The Agreement grants Toll NZ exclusive access rights until 2070 (with limited exceptions) to the track for freight, passenger services on the Wellington urban rail network, and long-distance passenger rights. These rights are subject to “use it or lose it” provisions.

Track access charge

2.23
Under the National Rail Access Agreement, Toll NZ is to pay Ontrack a track access charge. Ontrack and Toll NZ have been unable to reach agreement about the track access charge for 2005-08. Therefore, in keeping with the terms of the Agreement, a track access charge was determined using an independent third party in late 2006. The charge was due to apply from March 2007.

2.24
The National Rail Access Agreement process to set track access charges for 2008-11 was due to start by 31 December 2007.

2.25
Ontrack and Toll NZ did not consider that the track access arrangements provided them with the certainty they would have liked. Ontrack told us that negotiations over the track access charge had prevented meaningful discussions with Toll NZ about future plans for the rail network. Toll NZ had reported that it was:

… ready to make the investment needed to lift rail performance levels and service delivery to customers. We require only the certainty of an access agreement, to allow us to proceed with these plans.¹

2.26
In May 2008, the Government announced an agreement with Toll NZ's parent company to purchase Toll NZ's rail and ferry operations.

2.27
Negotiating the track access charge and future rail network arrangements has been a major focus for Ontrack's senior management team.

1: Toll NZ Limited, Annual Report 2007, page 1.

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