Transport Minister Steven Joyce wants KiwiRail to move to a more commercial footing.
He has signalled an annual subsidy of $90 million to the state-owned rail operator will end, possibly as soon as the next financial year.
Mr Joyce says it's crucial New Zealand's freight modes can survive without subsidies.
KiwiRail is not commenting on removal of the subsidy, but in its Statement of Corporate Intent for 2009 to 2012, the company assumes it will not get the subsidy beyond 2010.
Mr Joyce says the Government would like to see it either gone then or to be on a downward path.
A Radio New Zealand political reporter says the company's deficit is expected to be as much as $306 million by 2012.
Mr Joyce says KiwiRail must get its high fixed costs down in order to improve its financial results.
But he says the most important thing for a business with high fixed costs is to grow the revenue as quickly as possible.
$690 million payment
The Labour Government paid $690 million for KiwiRail in July 2008.
Four months later, the Treasury issued a valuation showing it was worth $448 million.
The Campaign for Better Transport lobby group says KiwiRail has been underfunded since it was originally sold in 1993 and needs the subsidy to help it rebuild after 15 years of neglect.