Will Abbott copy Fortescue and sell rail assets?

 

News article: Will Abbott copy Fortescue and sell rail assets?

While it is by no means certain that Tony Abbott and the Liberal Party will win government at the upcoming election, the odds would certainly seems to be stacked against Prime Minister Gillard at this stage.

  JimYarin Chief Commissioner

Location: Adelaide, South Australia
While it is by no means certain that Tony Abbott and the Liberal Party will win government at the upcoming election, the odds would certainly seems to be stacked against Prime Minister Gillard at this stage.

With the high probability of a change in government in September, investors are considering how that might change the investment landscape.



A recent article in The Australian Financial Review speculated that shadow treasurer Joe Hockey had identified the interstate railway asset Australian Rail Track Corporation (ARTC) as a potentially saleable asset.

The ARTC owns and manages 8500 km of rail tracks spanning from WA, through SA, Vic, NSW and up to Qld. The public accounts show that last year it made $265 million in earnings before interest, tax, depreciation, amortisation and impairments. Ascribing a multiple of 10 times to these assets, would suggest a sale price of over $2.6 billion, however this would undervalue the assets which are valued on the books at $4.2 billion and include over $1 billion in recent capital expenditure.
Will Abbott copy Fortescue and sell rail assets?


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So the national liberal party if elected are going to sell ARTC?

Another pending disaster

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  bingley hall Minister for Railways

Location: Last train to Skaville
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So the national liberal party if elected are going to sell ARTC?

Another pending disaster
JimYarin
No not at this stage. They've said they might consider it.

This kind of speculation has been around since 1998 when ARTC was formed.
  cootanee Chief Commissioner

Location: Waiting for the sky to fall, the seas to rise... and seeing a train on the SSFL!
No not at this stage. They've said they might consider it.

This kind of speculation has been around since 1998 when ARTC was formed.
bingley hall

Always though this was on the cards given that ARTC was established as a commercial corporation by the Howard government. All leased tracks are in LNP held states so that should make ideology less of an issue.

Will a private ARTC be leaner and meaner than the current entity? How will that translate to track maintenance spending?
  donttellmywife Chief Commissioner

Location: Antofagasta
Grossly simplistic financial analysis in the news article aside, who would buy a business that nearly always makes a loss, that is subject to significant government regulation and involvement, with potentially significant requirements going forward for future capital spend, with assets that mostly cannot earn enough revenue to cover their cost of ownership, that's beholden to basically two main customers and is subject to aggressive competition from alternate modes?
  Sulla1 Chief Commissioner

Grossly simplistic financial analysis in the news article aside, who would buy a business that nearly always makes a loss, that is subject to significant government regulation and involvement, with potentially significant requirements going forward for future capital spend, with assets that mostly cannot earn enough revenue to cover their cost of ownership, that's beholden to basically two main customers and is subject to aggressive competition from alternate modes?
donttellmywife
Who would buy this business? I'm guessing someone who has a business case for it to exist...which narrows it down to two or maybe three companies currently listed on the ASX. And don't forget a sell off of individual parts of the network might make more money than trying to sell it as a single entity.
  djf01 Chief Commissioner

Always though this was on the cards given that ARTC was established as a commercial corporation by the Howard government. All leased tracks are in LNP held states so that should make ideology less of an issue.

Will a private ARTC be leaner and meaner than the current entity? How will that translate to track maintenance spending?
cootanee
IIRC the current arrangements emanated from a 1992 productivity commission report into the industry and general attempt to replicate the UK model of privatisations begun under Thatcher in the 1980s.  That model was discredited following numerous crashes, where it was subsequently found the privatised below rail operator had realised "efficiencies" by cutting back maintenance to less than the absolute minimum required with the adverse impacts of that borne by the above rail operators.

The only way I could see a privatised ARTC making any sense from an investor's point of view is to follow a similar model.  Acquire the exclusive access rights to the infrastructure, jack up the access fees and do absolutely no maintenance bar putting up TSR signs as the problems become too obvious to ignore.  That would generate 10 years of solid free cash flow that might justify the initial purchase.

It would be a suitable investment for a multi-national/non-aussie company doing other business in Australia because it would generate huge tax losses by claiming back the depreciation off ARTC's massive balance sheet.
  RTT_Rules Dr Beeching

Location: Dubai UAE
No No No
For all reasons mentioned above and
- its a loss maker
- they have tried the failed rail infrastructure sales and had to pay to fix their errors
- how do you value it?
- it still needs many billions to bring it up to standard and the LNP feds support future upgrades
- Australia is not the USA. The USA has a large population spread out across the country, we have  a few large scattered cities on the coast. The USA cannot easily ship via sea from east to west, Australia can. The failure of Coastal shipping in our low population is basically what has given the interstate network a new lease of life.
- The ARTC uses mostly contractors to do the actual work, hence they are using competitive bidding.
- ARTC as a monopoly is typically best left with the govt.
- Likewise the profit making Australia Post under LNP was never at risk of privatisation as its a monopoly but uses competitive bidding for much of its non-core work including regional mail delivery.

Fortescue is a different beast. Its suffering a cash flow crisis but still needs to expand and finish what it started I a tougher market, selling off its rail assets makes sense. They are profitable (ie operating cost + margin gets deducted from the ore sale price) and future expansion will match the customer. ie if the miner wants a new mine it will then provide a guarantee of tonnages from a known entity and if the mine is closed early there would be penalties. The same is not repeated in the box market which is often spot, which makes future investment hard to justify.
  donttellmywife Chief Commissioner

Location: Antofagasta
Who would buy this business? I'm guessing someone who has a business case for it to exist...which narrows it down to two or maybe three companies currently listed on the ASX. And don't forget a sell off of individual parts of the network might make more money than trying to sell it as a single entity.
Sulla1
I agree that some parts of the network would be fine (Hunter Valley coal mainly), but remember that's not owned by ARTC.  I don't know the details of the ARTC lease agreement, but I'd expect that there may be a restriction that says something like "ARTC must not assign ... any or all of its rights under an ARTC arrangement", otherwise "a transaction entered into by ARTC, to the extent that it contravenes this [restriction] is void."  Those words are from the NSW Transport Administration Act.  Obviously, NSW could change that act, but I bet you that it would want some pretty significant compensation for doing so - something of the order of the sale price of that part of the network would be a good starting point.

For the rest of the network, if the companies that you are referring to include the current operators, I doubt they are a) really in a position to cough up the capital for such an asset and b) it still doesn't make financial sense for them in the absence of some way of continuing the effective subsidy that interstate rail operations receive.

It would be a suitable investment for a multi-national/non-aussie company doing other business in Australia because it would generate huge tax losses by claiming back the depreciation off ARTC's massive balance sheet.
djf01


I am not an accountant, but my understanding is that is not the way it works.  If ARTC sold its assets to another company, then the value of the depreciable assets in that other company cannot be more than what that other company paid in total.  If ARTC itself was sold and consolidated into a bigger entity, then similar rules come into play for the value of the assets in the consolidated entity.
  djf01 Chief Commissioner



It would be a suitable investment for a multi-national/non-aussie company doing other business in Australia because it would generate huge tax losses by claiming back the depreciation off ARTC's massive balance sheet.
djf01


I am not an accountant, but my understanding is that is not the way it works.  If ARTC sold its assets to another company, then the value of the depreciable assets in that other company cannot be more than what that other company paid in total.  If ARTC itself was sold and consolidated into a bigger entity, then similar rules come into play for the value of the assets in the consolidated entity.
donttellmywife


I'm sure that is right if for individual assets.  For the sale of a going concern I think it's a bit different, but not 100% sure.
  1978Prime Junior Train Controller

Location: Perth
I don't think selling off major national infrastructure is a good idea. It should remain in governments hands for the sake of public interest rather than trying to make a profit like it would be in private hands. Like you wouldn't sell off the interstate highway network. If they sold ARTC, would there be anything stopping it from merging with above ground rail operators? and therefore creating a monopoly. I know the ACCC can block mergers, but there's no guarantee of that. For example they allowed Greyhound and mc-caffities coachlines to merge to create the one and only national coach operator which in my opinion was a very bad idea. And so that sheds doubt on their willingness to block mergers that shouldn't happen.
  MD Chief Commissioner

Location: Canbera
What does ARTC actually own that could be sold?
Parkeston to Broken Hill and Crystal Brook to Wolseley is the only track they own.
Cant see this being of much interest to anyone.
Cant sell the leases unless the lessors agree.
  djf01 Chief Commissioner

What does ARTC actually own that could be sold?

MD
Access Rights.
  seb2351 Chief Commissioner

Location: Sydney
What does ARTC actually own that could be sold?
Parkeston to Broken Hill and Crystal Brook to Wolseley is the only track they own.
Cant see this being of much interest to anyone.
Cant sell the leases unless the lessors agree.
MD
There is, as part of the lease of the NSW network, provision that if the Federal government sells/changes ownership of ARTC then the lease will be returned to the NSW government.
http://www.artc.com.au/library/Final_Tripartite_Agreement.pdf

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