I am not at all surprised about the BERL report on the Napier Gisborne rail line or KiwiRalis highly, almost comical, reaction to it. I could say a lot but I wont except to say that the way that this line has been looked at is a national development let down.
The BERL report can be downloaded here. They make some excellent observations.
KiwiRail should not be making these types of decisions on their own given they can't see past their own noses on it. And I am not saying it's their fault. They have no mandate to - they are simply a rail operator who has a commercial mandate to operate a commercial railway. They are simply looking at reasons why it should close - this is so obvious.It is like being prescribed reading glasses to read the really near stuff but not having the correct lensese to see clearly in the distance. Perhaps KiwiRail needs "bifocals"
What I really want to know is how much KiwiRails viabillity has been improved by making this decision. I suspect none or at most so marginal to be irrelevant.
Anyway readers should make up their own minds on this. New Zealand fundamentally lacks ambition in so many ways. It's definition of success is more linked to movies produced in Wellington than national development - no disrespect to the Hobbit film - a great piece of artistc work that showcases our creative, film making and IT ability but if that is how we measure a nations success we have serious problems looming around the corner with our ambition for future success.
Wellington needs to get over itself - period. And with KiwiRail now based there I see little hope for a change in attitude.
First the KiwiRail release
KiwiRail Response to Napier-Gisborne Report
15 January 2013
KiwiRail is satisfied that the figures in our report are robust and our view remains the same - if we thought we could run a commercial operation on that line we would be doing so.
However you assess it, the gap between what was currently operating on the line, and the volume required to cover the fixed costs of reinstating and then keeping the line in a fit for purpose state is significant. On top of the $4million to reinstate the line, the overall rail asset is in extremely poor condition and high capital and maintenance costs will be required for well beyond 10 years to ensure it is fit for purpose.
The BERL report is essentially a brief desk-top assessment of a highly complex business case. We have spent over two years assessing the costs and future viability of this line on a commercial basis, as well as extensively and directly consulting with local business and community leaders. We know the business, we know the region, we know the infrastructure and we are confident of our assessment.
For example we agree there is a wide range in the capital assessments, but for such a long and complex line such estimates are normal practice and they generally average out when a detailed engineering assessment is conducted. But even if the capital requirement was at the lower end of our estimate, it would still need to be funded as the margins are not enough to cover the capital that would need to be spent. We have always said that that a more detailed assessment would be required so that the full risk is understood before more money is committed, but we won’t be doing further work on this unless the funding becomes available.
The comparison based on revenue per tonne is flawed. Revenue is directly linked to the distance the freight needs to travel and a large proportion of the freight only travelled approximately half the length of the distance between Napier and Gisborne. For this reason revenue per net tonne kilometre (NTK) is a more accurate indicator for comparative pricing.
The BERL report notes that the capital spend for rail on the line is $9.25 million over 10 years, which is correct for the low projection scenario. But the report doesn’t mention that this is in addition to the $31 million of annual maintenance costs over the same 10 year period. The combined annual cost of the capital and maintenance spend is therefore at a minimum $4 million per annum for the foreseeable future (ie not just for ten years) and it is this level of cash that needs to be generated in freight margins to pay for the infrastructure costs. But we estimate that $6 million per year, as we have previously stated, is a more realistic estimate.
We do not debate the volumes of goods to be moved out of the region over time. What needs to be understood is whether rail provides the right answer to those producers in many different locations in a competitive market. For example road operators can travel directly north, whereas rail has to travel hundreds of kilometres south, before going north. It is a fact that if rail cannot meet the timings and pricing of other transport operators, the volumes will not come to us and our pricing must be on a commercial basis.
The possibility of forestry has always been the promise, however we have not been able to gain any commercial agreement that would deliver on that promise, and nor is the wood on stream in the right areas soon enough.
Our assessment remains unchanged - we do not consider volume growth in the ranges required to be realistically achievable and, therefore, the line is not commercially viable.
Now the BERL release
Gisborne Rail Review Released
Tuesday January 15, 2013
BERL awaits government response
The BERL independent review of a KiwiRail report used to justify closing the Gisborne to Napier line has been released. The key overall finding is that,
“The Napier to Gisborne rail decision is a national one”.
The decision requires evidence which is broader in economic scope than the commercial financial analysis in the KiwiRail report presently available to government. A comprehensive Cost Benefit Analysis would provide the evidence for a sound decision.The response to this review has come only from KiwiRail. The decision is clearly one involving national and regional interests, so we look forward to seeing central government’s response.
BERL comments on points raised by KiwiRail
Funding ‘deferred maintenance’ and capital costs.
BERL’s section 7 Long term capital for part of the national network says that this rail line is part of New Zealand’s core infrastructure, and the provision of that capital is for the government. It does not need to return a full commercial rate of return to the SOE KiwiRail.
KiwiRail appear to agree with BERL, saying “even if the capital requirement is at the lower end of our estimate, it would still need to be funded as the margins are not enough to cover the capital that would need to be spent.” The implication being presumably that the funding must come from elsewhere, e.g. central government.
The need for a comprehensive Cost Benefit Study.
Kiwirail says, “We have always said that a more detailed assessment would be required so that the full risk is understood before more money is committed, but we won’t be doing further work on this unless the funding becomes available.” BERL agrees and finds that such a study is the preserve of central government, preferably involving other stakeholders.
Revenue per tonne or per tonne kilometre.
KiwiRail says, quite correctly that comparison based on revenue per tonne is flawed, and that revenue per net tonne kilometre (NTK) is a more accurate indicator. BERL devotes section 1.4 Projections of revenue per tonne to analysing the revenue per 100 NTKs of hauls of varying distance in New Zealand. This is applied to the Gisborne rail analysis.
The possibility of forestry freight.
KiwiRail agree that this forest freight has promise, but “we have not been able to gain any commercial agreement that would deliver on that promise.” Given the range of economic development and transport benefits, BERL states that “there is a very strong case for national and regional governments to take some responsibility for restoring the capital which was run down..and .. for investigating the feasibility and costs of achieving effective rail access to the northern Hawke’s Bay forests and the Napier processing plants and port.” If this is not done there will be an additional 83 trucks per day on this section of SH2, an increase by over 33 percent.
The potential impacts on transport and efficiency in the export industries, and on regional economies calls for a response from central government.
Now the Hawkes Bay Regional Council response
Napier-Gisborne Rail line BERL Report released
Tuesday, 15 January 2013, 9:52 am
Press Release: Hawke's Bay Regional Council
An independent review of a KiwiRail report used to justify the mothballing of the Gisborne to Napier rail line has been released.
Known as the BERL Report, the review was paid for by donations from the public and undertaken by economists at BERL, with a specialist international rail engineering consultancy reviewing the capital aspects of the report.
The BERL Review has identified a number of inconsistencies within the KiwiRail report and raised a series of questions about the figures used and conclusions reached.
Hawke’s Bay Regional Transport Committee Chairman Alan Dick says he’s pleased the BERL report has finally been made public, and is looking forward to discussing it with Transport Minister Gerry Brownlee.
Hawke’s Bay and Gisborne’s regional leaders have vowed to continue to fight for the future of the Napier-Gisborne rail line, which was mothballed in early December by KiwiRail.
The BERL Report will be available on the Rail Action Group website (www.rail.org.nz ) from tomorrow. [Tuesday]
Now the Political Parties releases
Gisborne List MP
16 January 2013 MEDIA STATEMENT
Rail rethink needs open mind, not eyes closed
The Government could earn some much-needed brownie points if, instead of dismissing out of hand a report into the viability of the Gisborne to Napier rail line out, it looked at its recommendations with an open mind, Gisborne-based Labour MP Moana Mackey says.
“The BERL report shows the line is far closer to breaking even than previously thought and could even be profitable within a few years.
"How disappointing, then, to hear Economic Development Minister Steven Joyce on radio this morning completely writing it off.
"The reason the community fund-raised for and commissioned the BERL report was because it didn’t believe KiwiRail's case for mothballing the line stacked up. This has been confirmed by the BERL analysis.
“If the Government is to truly engage with the local community it must keep an open mind when reviewing the report and be prepared to make a decision based on the evidence, not on a pre-conceived assumption that the rail line could never be economically viable.
“It should take on board the recommendation that a comprehensive cost-benefit analysis - that also considers the broader economic benefits of retaining this vital rail link, not just to the Gisborne-Hawkes Bay economy but to the country as a whole – be undertaken.
"As a provincially isolated exporting region transport links are crucial, as is a mix of transport options - rail, roads and coastal shipping. To remove any one of these links without carrying out a proper analysis of the impact of such a move is unacceptable.
"Government Ministers are due to meet with community leaders and representatives in the next few weeks.
“Let’s hope they can put their prejudices aside and listen to the compelling evidence that supports retaining the Gisborne to Napier rail line.”
\Press Release: Green Party
Kiwirail must re-open Gisborne line
An independent report released today confirms that the decision to close the Napier-Gisborne rail line is a result of the Government’s anti-rail agenda and has nothing to do with the economics of maintaining the line, Green Party transport spokesperson Julie Anne Genter said today.
A report by economic consultancy BERL shows that the business case presented by Kiwirail to justify the line closure rests on highly dubious assumptions that screw the scrum against rail. More realistic modelling shows that, with the support of local business, especially forest owners, there is massive potential to increase freight carried on the line and make it profitable.
“The Napier-Gisborne rail line is a vital piece of infrastructure for the region’s exporters; this report shows it can be run economically,” said Ms Genter.
“Kiwirail needs to reverse its decision to close the line and back sustainable transport on the East Coast.
“Unfortunately, the current Government is likely to ignore this new evidence because it is ideologically set against rail. At the same time as it’s shelling out billions of dollars for uneconomic motorways, National is fudging the figures to justify closing rail lines in the name of saving a few million dollars.
“Transport policy should be about getting the best value for taxpayer money but, for National, it seems to be about building gold-plated motorways and squeezing the rest of the sector dry.
“The Green Party will make fixing and maintaining our rail lines and increasing freight services a priority, not just for the East Coast, but for the whole country. Moving more freight on rail is cost-efficient, it means safer roads, it’s better for the environment, and it helps to reduce our dependence on imported oil. It’s the kind of smart, green economic thinking that New Zealand needs,” said Ms Genter.
Press Release: New Zealand First Party
Rt Hon Winston Peters
New Zealand First Leader
15 January 2013
Gisborne-Napier Rail Closure Hampers Regional Development
The decision to close the Gisborne to Napier rail line is another nail in the coffin of regional economic development which is being ignored by the Government.
New Zealand First leader Rt Hon Winston Peters says the Berl economics report which says the line closure is based on flawed analysis should come as no surprise.
“The Government’s malaise is two-fold when it comes to this issue.
“Its KiwiRail Turnaround Plan is a sham which instead of creating a world class system is actually contributing to the destruction of our national rail network.
“But the line closure is also symptomatic of the scant regard National and its coalition partners have in revitalising regional economies in areas such as the East Coast.
“The Government should simply instruct KiwiRail to reopen the Gisborne to Napier line which, according to the Berl report, can be profitable.
“Anything else will be detrimental not just to the manufacturers and exporters of the East Coast but to the country’s overall economy.
“Put simply, National’s record on rail since 1993 has been a disgrace,” says Mr Peters.
This following release is a great analysis
Press Release: Gisborne Rail Action Group
Gisborne Rail Review Released
An independent review of a KiwiRail report used to justify closing the Gisborne to Napier line has been released.
The review was paid for by donations from the public and undertaken by economists at BERL and a specialist international rail engineering consultancy reviewed the capital aspects of the report.
A number of significant inconsistencies within the KiwiRail report have been identified, and a series of questions raised about the figures used and conclusions reached in the report.
“The main finding is that the numbers are a heck of a lot closer to break even than previously claimed and with a tiny fraction of the massive amount of wood coming onstream put on rail, the line will quickly be profitable.
The Government needs to make a small investment now to save provincial jobs and some horrific roading costs if the wall of wood was to travel by road” said Gisborne District Councillor Manu Caddie who led the fundraising campaign.
“With a margin of error of +/- 30% KiwiRail need to provide a more accurate estimate to justify their decision that undermines Gisborne and Wairoa employment and potentially closing down businesses in a region desperate for work” said Mr Caddie.
“National Party MPs have been suggesting ratepayers should pay for the line repairs, next they’ll be expecting councils to fund schools and hospitals.
The rail is public infrastructure paid for by taxes and 100% owned by central government – just like state highways."
Gisborne Mayor Meng Foon said “I ask the Government to give us a chance to prove our ability to use the rail sustainably, it is only $4m for the capital repairs and we’ve seen how quickly KiwiRail committed to repairing the flood damaged West Coast rail earlier this month.
Is it just the East Coast that is no longer important?"
“KiwiRail is in a bind as they have been tasked to deliver a return to government which is very hard to achieve when the asset they were given to do this on is in such a poor state of repair having been neglected for 10-15 years during privatisation.
Freight had increased on this line and potentially there is a lot more to be had if the line was up to spec and well run” said Richard Burke from LeaderBrand, a major food exporter based in Gisborne.
Mr Burke believes there is a compelling case for the government to make a capital investment to protect an essential public asset that benefits the regional economy.
“The costs to both repair and maintain the line vary significantly from what has been reported and give rise to questions of the government’s commitment to rail and even to regional New Zealand” said Mr Burke.
“Little consideration has been given to the impact of forestry on road network, the truck volumes are huge, not the five trucks a day Anne Tolley quoted.
To bring the line out of mothball will not be viable, getting rail to a state where it can be competitive and ready for increase in log traffic has not been properly considered."
“Commitment from more business in and out of region is a case of chicken and egg, wait until the rail is needed before investing, or set up now and be in a position to capitalise.
Government wants assurances from users, users want an efficient cost effective, environmentally sustainable transport system.
Our challenge is to government to give KiwiRail the opportunity to be just that!" said Mr Burke.
When capital costs are adjusted to more accurate figures (based on advice from the assessment of a specialist engineering consultancy), the rate of return on capital is brought into line with similar national infrastructure assets and more accurate existing freight volumes are input, the line is very close to break-even and – with some capital investment and a regular service – will quickly see a transfer from road to rail of some of the vast amount of wood coming on stream1 resulting in Gisborne-Napier becoming profitable.
And this is before the tremendously adverse impact on the roading budget of scrapping the rail line, is factored in.
The likely per annum cost addition to the upkeep of roading from removing the rail option will exceed the per annum cost of retaining the rail by later this decade.
KiwiRail and the Government have an opportunity to relook at the situation before the report is publicly released in early January and reconsider the decision to mothball.
1 There is in the order of 25-30 million tonnes of forestry for harvest within 25 kilometres of Napier-Gisborne rail line (according to MAF, 2008).
MAF forecasts that by 2020 the volumes of forestry being extracted in Hawkes Bay will be 50% higher than today (page 14, MAF report).
A meeting between Kiwirail, the Minister of Transport and a small group of business and community leaders from Gisborne and Hawkes Bay to discuss the reports has been agreed on but we are still waiting on his office to confirm a date.
Full report: berleconomicsnapiergisbornerail11dec.pdf
POINTS TO NOTE:
a) The break-even tonnage for the line is less than 200,000T per annum rather than the 400-800,000 suggested in the report, if a return on capital is not included (as it is not for roads).
If a 5% return is required then the required tonnage is 280-290,000T.
This is on the basis of revenue charges per tonne seen elsewhere in KiwiRail’s NZ network, and holding operating margins at the level projected for FY12 on the Gisborne line by KiwiRail in its report.
b) The figures quoted in the forecasts for capital track expenditure (e.g.
track renewals) have not been based on a detailed survey and a thorough condition assessment of the track infrastructure on the route.
Hence, there is a very wide tolerance on these figures that the engineering consultancy has not been able to independently quantify as part of this review.
However, KiwiRail has stated that the figures may have a tolerance of +/- 30%.
c) KiwiRail identified a major capital expenditure programme was required at the same time as an increase in maintenance expenditure.
The engineering consultancy believes the increase in maintenance expenditure may not be necessary if the capital expenditure was split between sleeper life extension and renewal processes with poor sites being targeted early in the rehabilitation campaign.
The consultancy believes the rate of sleeper replacement implied in the Kiwirail report is likely excessive.
d) The engineering consultancy has some reservations about the manning requirements for this route as stated by the KiwiRail report.
e) The engineering consultancy strongly believes that to determine a more accurate forecast for the route a detailed condition assessment needs to be undertaken to determine the true costs of forward track maintenance and renewal costs.
f) The review concludes that the below rail capital expenditure forecasts were grossly exaggerated in the KiwiRail report“higher” estimates, but broadly accurate in KiwiRail’s“lower” estimates. That is to say, over the next 10 years circa $15.9m would need to be spent on the line in capex.
g) The review has highlighted the erroneous double-counting of an 8.9% charge against the line made by KiwiRail for its own corporate assets, then followed up by KiwiRail further discounting the resulting cashflows from the line at a rate of 8.9% per annum to deduce a claimed“Net Present Value”.
h) The addition of tonnages up towards a total of 280-290,000T p.a.(e.g. by way of capturing say even just circa 10-20% of the massive tonnage of forestry coming from the Mohaka area over the coming decades – see MAF’s 2008 Report projections) will then see a further increase in the item “Line Section Contribution to Other Sections” of the network in KiwiRail’s Report.
i) Together these impacts imply that at a 5% required rate of return for national infrastructure (even this 5% would be in excess of the government’s cost of funds) at 280-290,000T p.a. the line pays for itself.
This is before any allowance is made for the adverse impact on the roading network of the coming volumes of forestry (see k and o, below).
j) In 2011-2012 more than 50,000T was transported on the line, another 50-100,000 is guaranteed and the balance will be quickly found from wood freight, which could within 3-5 years reach 1,200,000T per year should the line: a. remain open with a regular, reliable service; b. provide a cost per tonne (to the freight customer) similar to other parts of the country; and c. have a small amount of capital spent on it to provide access from forests.
k) The impacts on road maintenance costs and safety is a factor that has been highlighted by BERL.
Impacts are likely to be much more significant than the KiwiRail report suggests.
83 trucks per day would carry 750,000T per annum (only half of the wood that the Ministry of Primary Industries projects from Mohaka alone) down SH2.
Using rail provides a significant saving to the roading budget and improves public safety.
l) The Port of Napier is now exporting more tonnage than the Port of Auckland and the transport needs for produce from north of Napier needs to be appreciated by decision-makers.
Industrial users have pointed out that the Gisborne Port is today circa 65% more expensive than the average of comparable New Zealand ports.
The international trend for reasons of port economics is for consolidation into fewer, larger ports serviced by rail.
m) BERL has been particularly conservative in their analysis and have not included freight opportunities like Ravensdown who said they have 2,000T/week to transport north.
A regular service offered at a rate comparable to other lines around the country would quickly see wood transferred from road to rail, and even more so if a short spur line was put into the PanPac mill at Whirinaki.
n) Independent expert engineering advice obtained as part of the review suggests that (based on the line being first repaired) if KiwiRail’s capital expenditure was “well directed and preferably ‘front- loaded’, the annual maintenance could be reduced”.
Another absolutely critical consideration is that railway line is part of New Zealand’s core public infrastructure, and the provision of that capital is for the government – like public roads, it should not need to make a full commercial return to the SOE KiwiRail.
o) Spending on the Napier to Gisborne road in the last ten years has totalled $102 million.
In the last four years it averaged $14.8 million per year.
If the number of trucks, and heavy trucks at that, increases as projected by MAF due to rising forestry harvest by 33% to 38% because the rail line is not available for wood freight, the annual spend on the road can be expected to increase at least proportionately, namely by $4.9 million to $5.6 million per year.
Note that this per annum projected increase in the roading budget dwarfs KiwiRail’s own per annum capital expenditure estimate on the rail line of an average of $1.58m per annum (refer page 38 of their report, note this average of Kiwirail’s includes the initial $3.3m to repair the March 2012 washouts).
This indicates that it would be in the national interest to make the capital expenditure required on the rail rather than having to increase spending on the road, and suffer the negative externalities on the road.
p) With a projected 750,000T (increasing thereafter) of logs annually to move from the Mohaka forestry area to the port of Napier, putting this volume (and weight) on rail would be the equivalent of taking off the highway a minimum of 83 trucks a day.
New Zealand Transport Agency figures in the KiwiRail viability report state that there are 220 to 250 truck movements per day on the road, so this gives an insight into what rail freight could substitute in kind.
q) Precise annual traffic volumes required for profitability are hard to quantify.
KiwiRail’s report lists a number of (conflicting) tonnages required for viability.
r) KiwiRail has added a 30% flat inflation in line maintenance cost to address “a backlog of work”.
Independent engineering advice is that with a proposed increase in capital works of about $925,000 per year proposed for years 1 to 10, there should be no need to increase maintenance expenditure by 30%.
s) BERL provides some calculations on the regional and national benefits of the line remaining open in terms of viability of local businesses, savings on road maintenance, road safety benefits and environmental benefits, particularly lower carbon emissions.
BERL notes that all analysis to date, including that within the KiwiRail report falls a long way short of an adequate cost benefit analysis of the national interest for this decision which has serious and long term economic repercussions.
Press Release: New Zealand Council for Infrastructure Development
Big picture perspective needed on Gisborne transport access
15 January 2013
“The release today of a Berl review of Kiwirail’s decision to mothball the Napier to Gisborne rail line raises some valid concerns about how strategic transport infrastructure decisions are made in New Zealand, but with such low transport demand in the region, both now and into the future, it is difficult to see how three separate yet competing transport connections for Gisborne can be sustained,” says Stephen Selwood CEO of the New Zealand Council for Infrastructure Development.
Last year Kiwirail determined that, following a washout of the only rail connection linking the city to the main line, there was no justification to repair the track and continue running a commercial loss. According to Kiwirail analysis, the line lost $2.4 million in the year before services were stopped. On this basis, the company has determined there to be no business case for spending an additional $4 million to reopen the line and $6 million annually over the long term to maintain it.
“Berl argue that in this instance a wider economic analysis which incorporates environmental and social impacts on the Gisborne community is required before a decision is made as to the future of the line. While such analysis is required from a national perspective in relation to transport connectivity to the region, it is not required by Kiwirail which operates under a more commercial model.
“There are some convincing reasons to take a wider view of the Kiwirail decision. Rail freight will be moved on to the state highway network with at least some impact on safety and traffic volume; environmental impacts have not been extensively considered, most notably carbon emissions; local interests are not measured; and more intangible strategic benefits to the region and nation are difficult to quantify.
“However, while wider factors should certainly be considered by the Government, it is extremely difficult to see under what scenario reinstating the Gisborne line could become a sound policy decision. Even if freight volumes doubled, the demand for which has not yet been identified, there is more than adequate capacity in the existing road connection. State Highway 2 is currently, and will continue to be, maintained for general traffic.
“It would be great to see a plan for the region that justified investment in both road and rail. With as few as 2000 vehicles per day using the route, even BERL's more ambitious projections of potential growth would still have little discernible impact on the road connection except to strengthen justification for safety improvements on the highway that are already needed.
“Furthermore, while this debate has been framed unhelpfully in the context of road versus rail, potentially the biggest impact of continuing to operate uneconomic rail services is on coastal shipping. Coastal shipping produces fewer emissions than rail and, like rail, is most competitive in the transport over long distances of non-perishable items. Road freight, in contrast, maintains a strong advantage in the transport of perishable goods and deliveries over shorter distances.
“So while the Berl report raises some important issues around the need for a bigger picture perspective, it does not create a strong case for revisiting Kiwirail’s decision on the Gisborne line. When public money is involved, an holistic view of transport access and connectivity is required, not a mode specific decision. But in this case, road and shipping capacity appears sufficient to maintain equivalent access to Gisborne and public subsidy of rail is unlikely to be justifiable.
“For the rail line to be reopened, a long term, fundable and economically viable transport and land use plan would need to be developed by Gisborne authorities demonstrating which activities will drive rail demand into the future and how these fit into a wider social, economic and environmental vision for the region. In the absence of this plan, mothballing and not closing the line appears on current evidence to be the right decision,” Selwood says.