Transportation Planning Casebook/Transport Asset Holding Entity

Summary
Transport Asset Holding Entity (TAHE) was formed on 1st July 2020 by the New South Wales Government, as a corporation that holds the ownership portfolio ranging from property, stations, rolling stock, rail infrastructure and retail space. Initial discussions about an asset-holding company started back in 2013, when the NSW Government proposed the idea of transforming the existing RailCorp into a commercial body. This body was to manage assets through agreements with the rail operators. TAHE was created as a State-Owned Corporation (SOC), and it took over from RailCorp, the rail infrastructure owner at the time. RailCorp was reconstituted as TAHE. TAHE exists as a custodian rather than operating body as it is the custodian of Rail Assets while Sydney Trains and NSW Trains operate the rail services. Hence, TAHE does not have any network control functions as well. Hence TAHE does not have any say in the operational aspects such as Route Management, development or daily operational management of the Train network. Instead, it acted as the owner of the Asset the Train operators were using which is essentially the rolling stock, stations and the infrastructure. Hence, the Rail Operators paid a Fee to TAHE for the usage of their Assets for Train operations.

With TAHE, the leaders behind its birth were the NSW Treasury and Transport for NSW (TfNSW). From 2014 till its formation in 2020, both of these Government agencies pursued their vision and objectives for TAHE, objectives which were both different in key ways. Whilst TfNSW envisioned an Asset holding entity that was essentially a non trading ‘Shell’ company that owned the Assets and had a structure that would enable future public transport reforms and strategic directions while ensuring vertical integration of operations between asset owners and the rail operators to maintain rail safety, NSW Treasury sought to expand on this idea to create an entity that could generate a return on investment as this would allow the government investment in transport assets to be shown as an equity investment rather than as an expense in the budget, thus improving NSW Treasury budget for General Government Sector (GGS). Both NSW Treasury and TfNSW worked on different roles during the design and implementation stage of TAHE, albeit driven by their own objectives. In order to assist them during this stage, there were multiple consultancy firms hired for various projects, with 16 different firms working on 36 contracts, and is highlighted as an area that was poorly managed during the design stage of TAHE. Hence, by the time the legislation enabling TAHE arrived in parliament, a clear operating model was still unclear and had not been resolved.

After the establishment of TAHE, there were a number of doubters about the creation of TAHE, and its purpose. Whistleblowers testified and leaked documents related to findings from key research plans. These plans, completed by consultancy firms before the creation of TAHE, pointed to uncertainties and high risks. They suggested that TAHE could have a long-term negative financial impact on the NSW Budget due to its structure. The allegations that these warnings and documents had been allegedly covered by the government increased the mistrust of TAHE. This concern was further underscored when the NSW Auditor General published a report on TAHE in January 2023. The report stated that TAHE's design and implementation were neither effective nor transparent, and it might become a burdensome investment in the future.

Timeline
The timeline examines the development of the New South Wales railway operational system from different entities, which the predecessor and restructuring of Transport Asset Holding Entity (TAHE). The State Rail Authority of New South Wales (SRA) was established in 1980, which provided the state government with more systematic management over the regulation of passenger and freight rail operating services. A series of changes of governmental institution structure have been implemented for the railway transportation demands of the populace, industry, economics, technology, and society in various times. The goal of establishing the TAHE is to serve as a SOC (state-owned company) to optimize the transport services for New South Wales. In response, the administration decided to deploy TAHE gradually and the details are shown in the following table. The table of the predecessor and restructuring of the Transport Asset Holding Entity (TAHE).

TAHE’s Governance Arrangements


The Transport Asset Holding Entity (TAHE) is governed by the Transport Administration Act of 1988 and the State Owned Corporations Act of 1989, which were enacted by the NSW Parliament. As a state-owned corporation, it holds and manages the state's rail assets. The Minister for Transport and Roads oversees TAHE's operations and is politically accountable for its activities. The Minister has the authority to issue policy directives and participates in crucial decisions such as board appointments. Transport for New South Wales (TfNSW) is responsible for the strategic planning of the state's transportation system. TfNSW collaborates closely with TAHE and other transport providers, such as Sydney Trains and NSW TrainLink, to deliver dependable and efficient transportation services. It grants these operators operating licenses and monitors their performance. The NSW Treasury also plays a vital role in TAHE's financial administration and budgetary supervision, ensuring the institution's financial viability. The Secretary of TfNSW provides administrative leadership, liaising between TfNSW, TAHE, and transport operators to ensure the efficient operation of the state's transportation system. TAHE manages the assets that rail operators such as Sydney Trains, NSW TrainLink, and light railways use to provide transit services under licences issued by TfNSW.

Policy Issues
Ineffective Use of Consultants: The heavy reliance on consultants during TAHE's development proved to be ineffective. Issues could have arisen due to their lack of experience or inadequate knowledge of the specifics of TAHE's operations, leading to subpar guidance and advice.

Different Objectives: The different objectives that underpinned TAHE's establishment caused internal conflicts. The varying visions of the NSW Treasury and Transport for NSW (TfNSW) might have led to inconsistencies in the planning and execution of TAHE's formation and its long-term operational strategy.

Budget Benefits: The budget benefits projected prior to TAHE's establishment tied the agencies to its delivery despite emerging complexities. This commitment might have overlooked the evolving challenges and the resources required to address them effectively.

TAHE Structure: The structure of TAHE required a circular pattern of government investment to function. This means that the funds invested in TAHE by the government are expected to generate returns that can then be reinvested. This cyclical investment pattern could lead to financial risks if the returns are not as expected.

Lack of Transparency and Clarity: There was a lack of transparency during the design and implementation phases of TAHE. Moreover, the roles and responsibilities of the governance structures assigned to design and implement TAHE were not clearly defined. This lack of clarity might have led to confusion and inefficiency, impacting TAHE's overall effectiveness.

TAHE’s Scandal
=== 1.Bogus transportation budget and "near bankrupt" TAHE ===

Content
In July 2021, the New South Wales government was found to have implemented an Enron-style financial scheme to put TAHE's transport infrastructure assets into a government-owned for-profit company to artificially boost its budget bottom line. In addition, the New South Wales government has been trying to cover up the true financial position of the new company, which could end up costing taxpayers billions of dollars.

Background
In 2020, RailCorp was formally restructured into a new state-owned enterprise called the Transport Assets Holding Entity (TAHE). TAHE has its own board of directors and, as a company, it exists to make a profit. Transport assets are no longer owned directly by the state government, but indirectly through TAHE, thus removing them from the government's financial balance sheet. That means the state sees the asset as an equity investment rather than a cost. The return on investment needs to be recouped through tolls on rail infrastructure and rental income from rolling stock, property and equipment. To make a profit and recoup their investment, customers of the new company, which includes Sydney Trains and New South Wales Trains, will now need to pay full commercial rates for the assets.

Media investigations uncovered a secret report by the accounting firm KPMG. The report warns that the costs of tolls for Sydney and New South Wales trains outweigh the benefits. What's more, since TAHE is unlikely to turn a profit, taxpayers could end up footing the bill for a failing company.

Influence
The outbreak of the scandal reflects the following risks:

1. Shows that the New South Wales government has been misleading and concealing in its budget statements on transport infrastructure;

2. More budget approvals mean taxpayers may end up footing the bill for more transport services;

3. The new company will establish a for-profit co-operative responsible for all tracks, trains, stations and other transport assets in New South Wales and transport safety may be put at risk if this is done to boost the profits of the new company.

=== 2.State government’s secret plan to sell off billions of dollars of public land ===

Content
In June 2022, Sydney City Council tabled a motion opposing the government's plan to secretly sell off large chunks of public land along the Sydney Railway. The New South Wales government's plan would allow a Transport Asset Holding entity (TAHE) to become the developer and owner of the assets, enabling the government to sell the proposed $40 billion Sydney Trains rail assets and rezone more than 50 sites around the railway station.

Secret plan
The motion says public land in Redfern, North Eveleigh and Newtown is at risk of being sold by the state government, as outlined in the uncovered plan. And the secret government plan shows that public land in the city of Sydney is being sold off by the scandal-plagued Transport Assets Holding Entity (TAHE) to raise money for future overdevelopment, with plans to sell and rezone public land near train stations in suburban Sydney to make way for high-density development. Within the Sydney metropolitan area, the plan says, a A $11.6 billion development of 24 hectares of government-owned land near Central Station will be advanced, in addition to 10 hectares at Redferns and North Eveleigh.

Influence
With Sydney City Council and local community groups arguing that government trading enterprises such as TAHE save the government money by devouring the future options of the communities around their developments, rezoning and selling rail assets to make money may again trump community outcomes. If the plan goes ahead, heritage and community benefits will be put on hold because of the need to maximise returns to the government.

Narrative
Transport Asset Holding Entity (TAHE) is a model commonly used in transport-related public infrastructure projects to finance and manage transport assets such as rail, bridges, tunnels, and other infrastructure. TAHEs are often created to provide a dedicated entity that can focus on the management and maintenance of transport assets without additional responsibilities. The advantages of the TAHE model include improved asset management, greater financial sustainability, and enhanced transparency and accountability in the use of public funds.

Establishment of TAHE for NSW
The event that led to the emergence of TAHE for NSW was the reclassification of TAHE's predecessor company, RailCorp, by the Australian Bureau of Statistics (ABS) as a General Government Sector (GGS) in 2012. This reclassification would have taken a significant portion of the GGS budget (860 million dollars in depreciation expenses). The funds provided to the Public Non-Financial Corporations (PNFC) are considered equity contributions and are not counted in the budget, thus reducing the drain on the GGS budget. Consequently, following the successful classification of TAHE as a PNFC entity by ABS in 2015, the structure of TAHE was jointly developed by Treasury and TfNSW and approved by the NSW Government on 11 April 2017. This included the change of name from the previous Rail Corporation to the Transport Asset Holding Entity, as officially announced in January 2020 (Transport Management Act 1988). The Transport Management Amendment Act 2018 provides detailed definitions, responsibilities, services, and functions of TAHE. The transition commenced in 2019, and the company officially began operating as a SOC in July 2020.

Governance Arrangements for TAHE
In 2017, TAHE's role, as noted by the Treasury, is the strategic, commercial, and financial management of the NSW rail asset portfolio. Key objectives include conducting activities in a safe and secure manner, being a successful business, and maximising the net value of the State's investment in TAHE. TAHE will have primary responsibility for promoting the NSW rail network in line with the NSW Rail Access Commitment, which includes safety, modal integration, and compliance with the network and asset standards requirements issued by the NSW Department of Transport. The Minister for Transport will be appointed to the TAHE Board to support a coordinated approach to safety across the industry, and the Minister for Investment (Government) will have the power to issue binding directions to the TAHE Board to act in the public interest.

TAHE Returns
TAHE's low rate of return is a very serious issue, as often the definition of a Public Non-Financial Corporation (PNFC) requires that the category of company must have a certain rate of return on investment to be recognised as a PNFC. The Ministry of Finance set a return on investment expectation for TAHE in 2015, indicating that an annual return on equity of 7% would be paid for each of the two years 2016-18, and in 2020 the expected rate of return drops directly to 1.5%. Such a return, even below the long-term inflation rate of 2.5%, clearly does not meet the criteria for considering TAHE's investments as equity contributions, and the forced classification would disrupt the budget structure. Whereas the transition period in 2020 results in a 20.3 billion dollars reduction in TAHE's holdings, it would take until 2046 to recover the loss assuming a 2.5% rate of return. In the 2021 financial report, 80 per cent of this comes from train company access and licence fees, whereas in reality, this is funded by a grant from the NSW GGS budget to the NSW Department of Transport. This means that TAHE's operation to bypass the GGS budget cap is still within the GGS budget cap. The 2022 annual report also shows that total expenditure exceeds total revenue by 413 dollars million, while the NSW government is currently committed to providing 1.1 billion dollars in 2023 and 4.1 billion dollars by the end of the 2031 contract to fund access and licence fees for rail operators. With the ABS now confirming the classification of TAHE as a PNFC, and the budgetary drain on the GGS still increasing, TAHE's role as a major budget space raiser will disappear in the long term.

TAHE External Audit
The NSW Parliamentary Public Accountability Committee released a report of inquiry into TAHE on 8 April 2022, which concluded that TAHE was not created with proper consideration of financial implications, accounting standards, and risk mitigation. It was deemed inappropriate for TAHE to focus on property development as its primary business focus and instead should concentrate on the rail system. The final recommendation of the report was to disband TAHE and to reduce controls over the engagement of consultants where there are conflicts of interest, ensuring that consultants are selected to provide truly independent advice. The report was subsequently rejected by members of the government, and a response was issued in October 2022, accepting in principle the recommendation to engage consultants. In addition, the NSW Audit Office issued uncertainties about TAHE in relation to future access and licensing costs, additional funding provided outside of the forward estimation period, and the fair value of TAHE's non-financial assets. Furthermore, the fair value of TAHE's assets was reduced by 20.3 billion dollars as a result of the transition from RailCorp to TAHE. The financial audit also questioned whether TAHE's return on government investments could reasonably be expected. The report also identified the following risks: TAHE's ability to re-contract access and licence fees with rail operators, the possibility that government funding to TAHE's main customer, the rail operator, may not be consistent with the expectations of the current holding minister, and TAHE's inability to increase its non-government revenues.

Discussion Questions

 * 1) What do you think TAHE main role is in the public transportation sector in New South Wales?
 * 2) TAHE's formation was marked by differing objectives between the NSW Treasury and Transport for NSW (TfNSW). How do you think this might have impacted the effectiveness of the entity?
 * 3) The use of consultants during TAHE's development was criticised for being ineffective. In your opinion, what could have been done differently to ensure more effective use of consultancy services?
 * 4) There were allegations of a lack of transparency and clarity during TAHE's design and implementation stages. What measures do you think could have been implemented to ensure greater transparency and clarity?
 * 5) What are your thoughts on the state transferring transportation assets to a holding entity like TAHE? Can you discuss some potential advantages and disadvantages of this approach, particularly in light of the recent scandals associated with TAHE?

Additional Readings

 * 1) AGY-6326 | Department of Transport and Infrastructure (2009-2010) Transport NSW (2010-2011) Department of Transport [III] (2011- )https://records-primo.hosted.exlibrisgroup.com/permalink/f/1e5kcq1/ORGANISATIONS1005788
 * 2) AGY-6535 | Transport for NSW https://records-primo.hosted.exlibrisgroup.com/primo-explore/fulldisplay?context=L&vid=61SRA&docid=ORGANISATIONS1005997
 * 3) AGY-7265 | Transport Asset Holding Entity of New South Wales (TAHE) https://search.records.nsw.gov.au/permalink/f/1ebnd1l/ORGANISATIONS1006989