A parliamentary committee's recommendation and Labor's pledge to abolish the NSW Transport Asset Holding Entity (TAHE) is "inherently flawed", the state government says.
Unwinding the entity due to predicted negative financial impacts in the future was the first recommendation of the inquiry's April report, and the only one the government has not supported.
"The premise of this recommendation is inherently flawed," the government responded on Friday.
The committee's former chair David Shoebridge, now a federal Greens Senator, called TAHE a "financial and organisational mistake".
It had not achieved its goals to provide a commercial return on rail assets, improve safety and provide benefits to the budget almost two years into its operation, Mr Shoebridge said.
The government says TAHE will, with patience.
"TAHE is one of the most significant reforms to the NSW transport sector in decades.
"Due to the complex nature of this reform, time is needed to allow the benefits of these changes to come to fruition," the response said.
Labor has pledged to unwind the entity if it wins the March election.
"Extra time won't save TAHE," Labor's Treasury spokesman Daniel Mookhey said on Sunday.
The entity is a disaster, and Premier Dominic Perrottet was the treasurer responsible, Mr Mookhey said.
"Dominic Perrottet set it up to hide the true cost of operating the railways from the budget," he said.
Mr Perrottet has said TAHE was "not something that the NSW Treasury dreamed up" and was led by other jurisdictions.
The government response notes TAHE is similar to entities in other states which own assets and lease access to operators, such as Victoria's VicTrack, established 25 years ago.
TAHE's ability to seek commercial arrangements and develop property on its land has the potential for greater, more consistent returns in the future, the government says.
While the committee raised safety concerns, the government says TAHE does not change the framework.
Operational management, including safety and maintenance, remain the responsibility of Sydney Trains and NSW TrainLink as the operators.
TAHE has an interest in ensuring the assets it owns remain safe, adding another layer of assurance, the government argues.
Committee recommendations to independently fund the Audit Office, ensure "consultants are chosen to provide genuine advice rather than to deliver desired outcomes", and that Treasury accept the auditor-general's critique of its performance and asses its processes were all supported or supported in principle.
The Treasury assessment was done and has recommended improvements the department has accepted and will respond to, the government says.
New funding arrangements for the Audit Office were implemented in the June budget.
Auditor-general Margaret Crawford noted "significant uncertainties" remained about TAHE when giving her delayed approval of the state's accounts in January.
One of Ms Crawford's uncertainties was whether the rail operators would be adequately funded to pay access fees to TAHE in the future.
Former NSW Treasury secretary Michael Pratt told the committee in February a $1.1 billion injection for the operators that led to the state's accounts being approved was just "money moving from one part of the balance sheet to another".
He knew that money would be moved within hours of his appearance at a December hearing, but said he was unable to tell the committee at that time.
He also defended allegations from a former KPMG partner who said he had been told to change a report, saying the consultant engaged by Transport used Treasury modelling and data incorrectly.
Ms Crawford commenced an audit on the use of consultants in July, and the government awaits her recommendations.
