Friday, October 28, 2011

Told you so - Kiwirail's bullshit asset valuation is written down

The NZ Herald has reported that Kiwirail has proposed writing down its asset value of NZ$13 billion by NZ$6 billion, and splitting the firm into a property company (with a NZ$5 billion value for the rail corridor and land), which is essentially the old New Zealand Railways Corporation and the operating business (with a NZ$1 billion value).

The NZ$12 billion book value of rail on the Treasury accounts is a nonsense, equating it to all other SOEs combined (e.g. 3 power companies, Transpower, NZ Post) which all make profits. Most of the value is based on a replacement cost if it was built today, which of course would never be done. I'd argue it is probably worth 4% of that at best.

That was based on a presentation by David Heatley from the NZ Institute for the Study of Competition and Regulation called"The Future of Rail in New Zealand".

I would still argue Kiwirail is grossly overvalued.  Its business and related assets are not worth NZ$1 billion, indeed they are probably about a third of that.  The value of the land is more significant, but I would question the NZ$5 billion for that, especially given the Surface Transport Costs and Charges study valued the land in 2001 as being worth NZ$462 million.   Property prices haven't inflated over 1000%.   Indeed there may be more value in the scrap of the track.

The key point is that The Treasury was being seriously disingenuous accepting that ridiculous over valuation of Kiwirail in the first place.   To consider an infrastructure business as being valued on a replacement cost basis is ludicrous, for it would see all of the electricity SOEs valued on the basis that you would - once again - build a Clyde Dam, for example.

The real asset value of Kiwirail is the optimal value that can be gained for the business either as a going concern, or if it was split and sold for the sum of its parts.   As much as there is much romanticism about it (and I carry a fair bit myself, as I have loved trains since I was a child, and have many fond memories of riding on them), that shouldn't be allowed to distort objective appreciation of what Kiwirail is as a business.

I believe it has a future, providing a core freight service on higher density lines, and given the fortune poured into the black hole of commuter rail in Auckland (and not so much in Wellington), it may as well be used for that until those assets need replacement.  However, it is telling that, at a time of high fuel prices, and with RUC rates having recently been increased, the railway still struggles.   The reasons why are partially explained by Heatley's presentation, and are in part because there simply isn't enough freight with enough frequency being moved in New Zealand on the routes serviced by railways, to make most of the lines sustainable in the long run.

Could it be that a further writedown will be on the cards, and is the reason it hasn't happened that much yet is to protect debt related to Kiwirail?


JeffW said...

Michael Cullen's superannuation should have been invested in Kiwirail.

Jeff W

ZenTiger said...

There should be an inquiry into who was responsible for accepting the inflated values and the impact that has had, and heads should roll for this.

Again, the tax payers of NZ are ripped off by Government ineptitude.

Your thoughts on a further write-down seem quite astute.