CHAPTER 4
THE OPERATING POSITIONS OF AUSTRALIAN NATIONAL
RAILWAYS (AN) & NATIONAL RAIL CORPORATION (NR)
Background
4.1 The Committee received information concerning the serious
financial viability of both organisations and the history of how this situation had
arisen.
4.2 The Brew Report concluded that '... the review of AN and NR has identified
a serious deterioration in the financial viability of the former and calls
for a review by the Shareholders of their Agreement in setting up the
latter'. [1]
4.3 It was further noted of AN that '... the position of AN is so serious
as to warrant the shutting down on a large scale of significant parts
of the enterprise'. [2]
4.4 In relation to NR, the report observed that '... an analysis of the
financial statements show that NR is highly reliant on subsidies and non-operational
revenue'. [3]
Australian National Railways Commission (AN)
4.5 The Committee received evidence from AN that indicated it had an
interest debt burden for 1995/1996 of around $70 million, that in 1978
the number of employees at AN was 13,000, that this figure had been reduced
in 1989 to 7,000 and is currently 2,200. [4]
4.6 The Committee also received consistent evidence from other
witnesses concerning the operating position of AN which appeared to validate much of the
conclusions reached by the Brew Report in relation to the organisation's current financial
situation. (Refer to the Government Senators' alternative position appearing at the end of
the report).
4.7 Although the book value of the debt had rendered the operation 'technically
insolvent', it was noted that without various government subsidies, most
railway services in Australia would also be considered technically insolvent.
[5] (Refer to the Government Senators' alternative
position appearing at the end of the report).
4.8 The Committee was given a number of perspectives concerning the
development of the AN debt problem, much of it consistent with the view that such a
proposition had arisen largely as a result of the creation in 1992/1993 of NR. The
Committee understands that establishment of NR as a national freight operator, and the
transfer of AN infrastructure to NR had effectively removed a large proportion of AN's
revenue base which it would have otherwise been able to use to service the debt associated
with AN capital investment programs.
4.9 In 1991, the Bureau of Transport and Communications Economics analysis
of AN (the 1991 BTCE Report) cited an Industries Assistance Commission
report which indicated that '...along with V/Line and Queensland Railways,
AN has been one of the better performers...' [6]
4.10 The 1991 BTCE Report provided an examination and a measure of AN's
performance based on total factor productivity (TFP), which essentially
looks at how an organisation uses its inputs to achieve a given level
and mix of outputs. In short, the efficiency of an organisation is not
measured in financial terms as an indicator of performance. The Report
concluded that "the efficiency gains resulting from the change in
corporate philosophy in AN, as reflected in the high growth rates of TFP,
are to be applauded". [7] (Refer
to the Government Senators' alternative position appearing at the end
of the report).
4.11 At the time the BTCE Report was published, AN had been undergoing
a number structural changes in response to microeconomic reform initiatives
of the previous Federal government. [8]
Part of this reform process led to the establishment of a single national
freight operator, which it has been argued removed the core revenue business
stream of AN. (Refer to the Government Senators' alternative position
appearing at the end of the report).
4.12 The financial implications for AN were not immediately clear.
In its 1994/1995 Annual Report it was noted that
4.13 The Commonwealth and relevant State Governments have made and are
in the process of making a number of strategic decisions in relation to
the future direction of the railway industry in Australia. These decisions
have had and will have a significant impact on the current business operations
and ultimately the long term future of AN....Throughout this process AN
has worked closely with the Commonwealth Government to ensure full support
for this process despite the significant uncertainties involved. [9] (Refer to the Government Senators' alternative
position appearing at the end of the report).
4.14 On the 15 April 1996 in a letter to the Minister, the Chairman of
AN, Mr Jack Smorgon highlighted 'the very serious financial and structural
position of the Australian National Railways...' and ...'to alert you
to the seriousness and urgency of the position...' [10]
It would appear that the operating situation for AN had deteriorated dramatically
as the debt continued to accumulate.
4.15 The extent to which the AN situation had deteriorated, can be
demonstrated in the AN Annual Report for 1995/1996 where the difficulties were highlighted
but not accentuated. It was stated in the report that
on the information available, the Commission has no reason to believe
that AN will not be able to pay its debts as and when they fall due
and therefore it is appropriate to prepare its accounts on a going concern
basis. [11]
4.16 Clearly this was predicated on the assumption that the Commonwealth
would continue to fund the servicing of AN debt. AN's financial situation
was presented to the Committee by a number of witnesses. However, Mr Andrew
Neal, Acting Managing Director of AN summarised best the extent of the
problem in advising that '...the debt burden is the single crippling factor.'
[12]
4.17 On a global basis the operating position of AN is precarious with
a debt ratio approaching 14, but as it was noted in the Brew Report, AN
have historically had a high debt to equity ratio. [13]
4.18 The Department of Transport and Regional Development in evidence
raised the central question of the Governments continued position in relation
to the AN debt. It was pointed out that the Government could continue
to put an operating loss subsidy into the organisation and guarantee its
borrowings, but the Government was unlikely to do this. [14]
National Rail Corporation (NR)
4.19 Under the Shareholders' Agreement which established NR, it was explained
that there are three sources from which the organisation derives its financial
support apart from direct revenue; a cash equity of $406 million, the
transfer of nominated assets and restructuring payments or 'wedge payments'
that are a form of subsidy paid by the Commonwealth, New South Wales and
Victorian governments. [15]
4.20 The issue of 'wedge payments' was a matter of objection in the
Brew Report which recommended that the practice cease. However, under the Shareholders'
Agreement certain financial arrangements were developed that were designed to off-set
losses incurred during the establishment phase of NR (the Transition Period). These
compensatory payments, made under clause 5(4)(b) of the Agreement, are received by the
corporation against amounts payable to shareholder rail authorities for services provided
and will cease on 31 January 1998.
4.21 The Committee learned that although NR was initially not encumbered
with debt, the level of the NR debt had risen substantially as the company
had embarked upon an extensive asset acquisition program, primarily of
new locomotives worth more than $200 million. [16]
4.22 The Brew Report also highlighted a number of areas of dispute based
on outstanding commercial arrangements between NR and AN that was acting
as a disservice to both organisations, that was causing 'unproductive
tensions' in their commercial relationships and which was clearly impacting
upon their financial performance. [17]
4.23 From NR's perspective, its debt situation can be overcome through
competition as part of the rail reform process as well as by access to
the intrastate freight network. Currently NR is limited to interstate
activities but views the ability to become involved in coal and grain
handling within state networks as an important factor in addressing the
debt situation. [18]
Footnotes
[1] The Brew Report, p.11.
[2] Ibid, p.11.
[3] Ibid, p.12.
[4] Evidence, 28 January 1997, p.38.
[5] Evidence, 3 February 1997, p.
335.
[6] Bureau of Transport and Communications
Economics, 'An Analysis of Total Factor Productivity with an Application to Australian
National', 1991, p.43.
[7] Ibid, p.57.
[8] Ibid, p.iii
[9] Australian National Railways Commission
Annual Report 1994/1995, p.17.
[10] Letter to The Hon. John Sharp,
Minister for Transport and Regional Development, 15 April 1996, p.1.
[11] Australian National Railways
1995/1996 Annual Report, p.19.
[12] Evidence, 28 January 1997,
p.33.
[13] The Brew Report, op.cit.,
p.39.
[14] Evidence, 3 February 1997,
p.334.
[15] Evidence, 3 February 1997,
p.377.
[16] Evidence, 3 February 1997, p.
332
[17] The Brew Report, op. cit.,
pp.26-27.
[18] Evidence, 3 February 1997,
p.380.