LAST month witnessed a defining moment in the 145-year history of Queensland Rail, when Australia's last state-owned railway was split in two as a prelude to the sell-off of its freight unit. QR National, which comprises the national railfreight operations of QR together with the 2300km central Queensland heavy-haul coal network and supporting maintenance services, will be privatised by the end of the year.

The second company will retain the Queensland Rail brand and will be a government-owned corporation. It will continue to be responsible for non-coal freight operations and passenger services within the state, together with infrastructure and maintenance.

"The state Premier and the treasurer are the first people to say QR National is not a business that should be run by the government," QR CEO Mr Lance Hockridge told IRJ at the UIC Global Rail Freight Conference in St Petersburg last month. "In the days when the nature of QR was to underpin the economic and social growth of the state, the government had a clear role to play. Today QR National is a mature business and a player with a national footprint, so the government has decided it's best to step away."
With the state government keen to press ahead with the IPO, scheduled for early in the fourth quarter, this separation has been achieved swiftly. "It's a complex task to separate such an old company within such a tight timeframe," Hockridge explains. "6000 staff have transferred to QR Rail, 9000 to QR National. We've had 108,000 assets to allocate and more than 300 major contracts to amend."

This transition hasn't been without its difficulties. In June QR was fined $A 660,000 ($US 580,000) for failing to adequately consult staff on the restructuring plan and future employment arrangements, a ruling QR is now seeking to overturn. "We have been through a huge programme of consultation with employees," says Hockridge. "I go out every six weeks to speak to staff and I think we've been able to work through all the questions. I suspect that with more knowledge there will be more excitement about the IPO. Every QR National employee has the opportunity to be a shareholder, and I think this is a very powerful way of engaging the workforce in the future of the company."

In May a consortium of coal mining companies, the Queensland Coal Industry Rail Group (QCIRG), mounted its own $A 4.85 billion bid to acquire the Central Queensland Coal network. QCIRG comprises 13 companies, including giants BHP Billiton, Rio Tinto and Xstrata, which together account for 98% of the state's coal output. On July 1, Australian Rail Track Corporation, a federal government-owned company also announced it would become an equity partner in QCRIG.

The state government has tentatively agreed to look at the plans, although it remains committed to the IPO, while the Australian Competition and Consumer Commission is also reviewing QCIRG's proposal. The bid has the backing of federal resources minister Mr Martin Ferguson, who said last month: "The Queensland government has now acknowledged that it is going to give some consideration to the privatisation model proposed by the coal companies. I think it is a better model, and in my opinion, it represents a greater capacity for aggressive competition above rail."

By contrast, Hockridge argues coal producers should have more confidence in the privatisation model adopted by the state. "The QCIRG bid has been dealt with by the state government, but there's a long way still to go and it lacks clarity on a range of fronts," he says. "These are the number one customers of QR National, and I think they should feel assured that after the IPO this will be a public limited company. This means investors will be putting money into a sound business leveraged against solid, long-term growth in the resources sector. I feel their concerns are less about vertical integration and access to the network, and more about the strength of QR's balance sheet. The government insists that QR National will be sold with an investment-grade balance sheet."

Another flashpoint in the sell-off is the future of open-access on the coal network. QR National's main competitor in this market, Asciano subsidiary Pacific National (PN), carried 14 million tonnes of coal in its first year of operation, and recently secured a 10-year contract from Anglo American Metallurgical Coal to move a further 16.5 million tonnes of coal from 2012, giving it a market share of 20%. Asciano has voiced concern about access arrangements after the sell-off, and earlier this year applied to Australian antitrust authorities to seek clarification on the impact of privatisation on infrastructure.

Again, Hockridge is quick to offer reassurance. "Access provisions are strengthened under the terms of the privatisation bill, which sets out the tariff arrangements after the IPO," he explains. "QR National simply could not favour one operator over another, and it is a misconception that we are a monopoly provider of rail infrastructure."

Last month Queensland Investment Corporation, one of Australia's largest institutional investors, urged the state government to reconsider the schedule for the IPO due to worsening market conditions, and warned QR National might not achieve the treasury's target price. By early July the Australian stock market had dipped 13% since the start of the year.

Hockridge, however, deflects any suggestion that current market conditions will deter investors, and points to last year's sale of US Class I railway BNSF to Mr Warren Buffett as a sign of confidence in the industry. "This is the time to sell, and investors are overwhelmingly positive," he says. "At this stage investors haven't seen the offer documents, but they are saying QR National ticks all the boxes. This is a well-regarded company that has been allowed to run its business the way it ought to be run. It is 80% leveraged to the resource sector, which is all about growth. It is focused on costs and its relationship with customers."

Hockridge's brief visit to St Petersburg was part of six-week roadshow to garner support for the IPO, and more than 60 presentations were made to potential investors in financial centres around the world. He is keen to stress that the company's future is inextricably linked to Australia's coal and iron exports, which are forecast to grow steadily in the coming decades as demand continues to increase, particularly from markets in Asia.

With that sound footing, QR National could be an attractive prospect for investors keen to buy into a stable long-term business. But under such tough market conditions, it remains to be seen whether the state government's gamble will ultimately bring its rewards.