The big news for 2010 – the Queensland Rail IPO

By Mark Carter

Initial plans for a sell-off were announced in mid-2009 and while the government, its advisors and QR management tinkered with the structure of the sale, rumours that the sale would take the form of a public float started to surface – viewed with a degree of incredulity within the rail industry.
However, undeterred this is the course of action that the Queensland Government has opted to take, and in what will be a first for the sale of an Australian rail freight business, QR will be sold via an Initial Public Offering (IPO) that will create one of the largest listed transport companies in the country –and valued, the government hopes, in excess of $7 billion.
The government will initially retain 25 to 40 per cent of the new business and in addition to this interim shareholding all Queensland residents will get preferential share allocations. Eligible QR employees transitioning to the new company will be provided with shares valued at $1,000 and will also be given the opportunity to purchase an additional shares on a discounted basis.
To clarify, the entity to be floated will be QR National, a trading name that QR has been using for several years now. It will comprise all of QR’s existing freight operations which include the coal business in Queensland and New South Wales, Australian Railroad Group’s bulk operations in Western Australia and Queensland, the underperforming interstate intermodal business and the remaining regional freight operations in Queensland.
The float also includes a long term lease over the tracks forming the coal rail network in Queensland. The Queensland government says that existing regulatory safeguards will remain in place to ensure the tracks continue to operate under an open and fair access regime.
While there a number of issues surrounding the proposed float, it is this latter point that is the most contentious.
Queensland’s coal miners have indicated they are not happy with this arrangement whereby privatisation will make them beholden to a single entity that is both a monopoly infrastructure owner and major rail service provider.
Although some media reports suggest it is more BHP Billiton than anyone else, the coal mining industry put forward its own proposal to the Queensland government to purchase the below rail assets of the coal network, with stewardship and access provision then vested in the federally-owned Australian Rail Track Corporation.
ARTC was quick to clarify its position in respect to the various media reports surrounding the proposal, while not denying its role in any bid for the below rail assets.
ARTC chief executive David Marchant said that ARTC respects the Queensland government decision to create QR National Limited from QR and sell it, through a public float, as a vertically integrated entity on the coal lines and its above rail freight business generally.
“It is well known that ARTC supported a separation of the above rail coal business from the below rail coal lines. Regardless of this we recognise the government decision and wish it well in the IPO,” Marchant said.
The mining industry believes the current proposal will restrict competition for the haulage of coal, lead to under investment in the network and suggests it would be in the interest of shareholders in the new company to extract higher ‘rents’ through restricting capacity. It has been a rocky road to open access on the Queensland coal network and Asciano, the only ‘alternative’ active above rail operator in Queensland at present, does not see this process as getting any easier.
While not having the headline grabbing appeal of the machinations behind the sale of the coal business assets, scant detail has been provided so far by the government as to the future of regional rail freight operations in Queensland.
Ownership of the regional (non-coal) network will be retained by the state, while the above rail operations and assets will form part of the IPO. Many of the latter are marginal operations and without some form of, as yet unspecified, ongoing Community Service Payments it is hard to imagine these services will be retained by a multi-billion dollar corporate freight juggernaut.
The Queensland government will no doubt cite its 25-40% holding in the new entity as some form of protection for the best interests of Queenslanders, but it would be interesting to see how long the shareholders tolerate a level of government interference in their best interests.
Queensland Treasury says that it expects the listing of QR will take place in the last quarter of 2010, subject to market conditions, but I get the feeling as the sale process unravels and potential shareholders begin to better appreciate the realities if the sale structure then we could see this process extend well beyond that date.