KiwiRail is unlikely to ever turn a profit on its own, so the government will continue to subsidise it into the future, Prime Minister John Key says.
A report by the state transport company has shown it considered cutting costs by closing its freight business and pulling out of operating the Cook Strait ferries.
KiwiRail makes a profit on its operations but needs $200 million a year for its track and tunnels, which the government currently provided.
Mr Key said it had been long recognised that KiwiRail was not commercially viable.
"I think ultimately what it means is the government is going to be contributing to the fortunes of KiwiRail for a very long time. They have an enormous amount of infrastructure that still needs to be upgraded.
"Of course that doesn't mean they don't have a responsibility to try and run KiwiRail as efficiently as they can and to make savings where they're appropriate, but no-one's arguing there isn't a place for KiwiRail and rail in New Zealand."
The company still had hundreds of bridges that needed upgrading and heavy maintenance requirements on the network, he added.
The government encouraged freight to be moved off the road onto rail wherever possible, he said.
"But I think the probability that KiwiRail will be somehow profitable and paying the government a dividend is something that's pretty unlikely in the foreseeable future".
Mr Key said the benefits rail provided went beyond commercial returns.
"They take trucks and otherwise freight that would be carried on the road and put it on the rail. I think New Zealanders support those environmental benefits, and having an integrated transport network makes a lot of sense for a country like New Zealand."
The government has been funding KiwiRail out of the Future Investment Fund, which was money raised from this term's partial asset sales, but Mr Key said once that was depleted the government would have to look elsewhere.
"There are always options for us to recycle capital, for instance. That may well be the case that ACC and NZ Super buy into KiwiBank, for instance - we could see a return of some capital to the government.
"But in the end, we have to have a capital budget and, if we don't get it because we recycle capital from one other part of the government's balance sheet, then we'll simply put in the money from either surpluses or borrow that."
Call to put rail and roads on equal funding footing
Labour Party state-owned enterprise spokesperson David Parker said the government needed to provide a sustainable funding model for KiwiRail.
"It competes with road in a way that's unfair because roads are provided for through the National Land Transport Fund, and rail isn't supported in the same way.
"We need rail because without it there'll be more trucks and more roading costs. The answer lies in using the National Land Transport Fund to support the infrastructure - the rail and the tunnels and the bridges that the railway needs."
The current "ad hoc" funding meant KiwiRail could not plan for its future, Mr Parker said.
"The annual amounts that the government has been putting in have been spending the money they got from the sale of the power companies. They've run out of that money and they haven't got an alternative funding stream for it yet."
Between $10 and $13 billion was available for transport funding over the next four years, and KiwiRail would require only 5 percent of that, Mr Parker said.
It would be a "terrible outcome for New Zealand" if rail was lost, he said.
"The roads get closed and you have to spend more money on motorways and people have to put up with these juggernauts on the same roads they're driving on in cars."
Green Party finance spokesperson Julie Anne Genter agreed KiwiRail should be able to call on transport funding.
"I think most New Zealanders would say money should go to the projects that have the greatest overall benefit to the network. It's silly to evaluate them separately and to treat rail as though it should be making a profit, when it's part of our core transport infrastructure and has benefits for the road network."
Rail was on an unequal funding footing with roading, she said.
"So for a state highway project, there's guaranteed over $1 billion worth of funding a year, and many projects that are being funded at the moment have extremely low benefit/cost ratios; if you applied the same analysis to rail projects, it's certain that many of the investments that KiwiRail needs to make in the infrastructure, to make the network work, would actually stack up quite well."
Shadow of past privatisation
New Zealand First leader Winston Peters said the review of KiwiRail did not acknowledge the severe impact past privatisation has had on the company.
"And until that is done and the guilt pointed in the right direction, we'll go on making these silly decisions which are against our national transport strategy interest.
"KiwiRail can't continue with the present political oversight and it can't continue with the present business management - their record is simply one of scandal after scandal and covert decisions away from the public.
"Above all, before it was privatised, it was making $100 million in rising profits, but the National Party privatised it, it was milked dry.
"Now they're running rail down in favour of road which given our topography, that has got to be one of the stupid decisions they've made."
Mr Key said the government had already subsidised KiwiRail to the tune of about a billion dollars, and the level of annual support would likely stay at about the same level.