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KiwiRail To Undertake Major Strategic Review Of Business

Just four short years after the review that resulted in the KiwiRail Turnaround Plan being formulated in 2010, KiwiRail are to undertake another major Strategic Review of their business.
 
What? Another major Strategic Review. Surely not.
 
Well - I have to say I am not at all surprised by this and I believe it is well overdue. Whilst the Turanound Plan ("TAP") has not yet "failed" in the classic sense it has had some material execution issues that have resulted in below par financial performance for KiwiRail. KiwiRail for its part bravely acknowledges this.
 
Let's be frank here - KiwiRail has invested close to a Billion dollars in the TAP since 2014 with very mixed results. It seems the only reason not used for non financial performance against the plan are pestilence and famine and you could hardly say "famine" with the huge amount of Government money pumped in.
 
Yes, Earthquakes have had an effect, as have storms, floods,  mining disasters (Pike River tonnage loss) and coal volumes collapsing but given the money invested in the freight business the results have been quite below what one would commercially expect. If you go back to the Tranz Rail  (Youtube Link here) era, and the then business, had that amount of capital been invested in that business then goodness knows what could have achieved. Maybe a lot more than KiwiRail in its current form!
 
Whilst recognising the privatisation of the rail network did have some very resultant significant issues (mostly shareholder related) - generally what limited capital was pumped into the business was spent a lot more wisely and targeted at real commercial opportunities. Yes the infrastructure was run down under private ownership, and in part we are still paying the price for it, but overall the commercial business was run with a lot  more flair, creativity and innovation than it is now and money was spent wiser. Like it or not the Tranz Rail era (especially the early years 1993-1999 was a period of significant innovation in the NZ Rail sector). We now seem to be paying the price of Government ownership with lack of commercial entrepreneurship and understanding from the owners.

Lets be frank again - the railway should not have been fully renationalised. Yes the Government should own and invest in the track (just like they do with the roads)  - that's what Ontrack was for. Even the unions knew this to be true - their campaign was "Take Back the Track" - not the Operator. Of course they didn't object to it when the Government did take back the Rail Operations. The reality is the Government of the time couldn't swallow the private Operator running the business due to their political ideology more than what was right for the business. Maybe they could have been partial owners of the Operater business like in the Air New Zealand ownership model but still owned 100% of the track and network - that is one business model.
 
Look at the comments at the bottom of this blog from KiwiRail. You have to admire ;-) how they try to put a brave face on what the Government is telling them. Lets be honest though - The Government is "hacked off" with the KiwRail investment. They just haven't returned the financial results expected of them and without major change to the way they look at the business model they likely never will - and I mean never. This is not necessarily the individuals fault running the business - let's be fair there - but it is the buisness model and probably the ownership structure. I have said this before - see blog here. Look at the below news report as reported by TV3.
 
 
Transport Minister Gerry Brownlee has launched into KiwiRail, saying the state-owned company is "fundamentally dead" despite the Government pouring more than a billion dollars into it.
 
"There's no doubt the previous government bought an absolute lemon when they bought back KiwiRail," he told Parliament today.
 
"There's no question about that. This Government has poured over a billion dollars into a recapitalisation programme trying to make the thing work. Sometimes it's hard to kick life into something that's fundamentally dead." Mr Brownlee was facing questions from NZ First leader Winston Peters over the problems KiwiRail is having with its Interisland ferries.
 
Mr Peters said the Aratere was stuck in dry dock in Singapore and its replacement, the Stena Alegra, was out of action after crashing into a wharf on Tuesday.He reeled off a list of previous problems with the ferries, and asked Mr Brownlee whether he still had confidence in KiwiRail's management.
 
Mr Brownlee said the company's management was "dealing with recent incidents affecting the Aratere and the Stena Alegra appropriately".Mr Peters asked him whether "anything short of a sinking" would cause him to lose confidence in KiwiRail's management, and it was at that point Mr Brownlee ripped into KiwiRail.
 
He said Mr Peters, who was part of the previous Government, had supported the decision to buy the company bac
 
 
Having a look at the main routes - Right now the following lines are most likely uneconomic :
 
  • Everything North of Auckland (Probably not commercially fixable in the near future - but maybe should be kept for future development north of Auckland - but would have to be underwritten by Government understanding that)
 
  • The Central / Lower North Island Main Trunk and the Christchurch Picton Line (Maybe fixable but internally to the business it self - probably not currently commercially viable. The Clifford Bay new ferry terminal could have perhaps helped but now that is not going ahead - Auckland - Christchurch Rail freight is probably too costly a investment for the Internal Business Rate Of Return required to sustain it. This will be a National NZ Inc call to continue, or not as the case may be, and a brave one at that. Maybe it is right for the Government to underwrite this in the national strategic interest - especailly in a uncertain world. The study should definitely look at the broader economic value of that and NOT just the value to KiwiRail commercially - Strategically it is probably wise to think "outside the square" on this one)
 
  • The Northern Wairarapa Line - a dead duck - only used as a alternative route for now
 
  • The Gisborne, the Rotorua and the SOL lines are effectively closed for the forseeable future and currently they are unlikely to reopen without major political intervention
 
 
Other problem lines include the historic poor returns from Solid Energy or the "Coal Route"  from the West Coast. Sure they have enough tonnage but do they get enough revenue yield per tonne to cover their total operating and ongoing capital costs. This line should commercially work very well with the West Coast export coal, Westland Dairy tonnage, the Gold Slurry and the world famous Tranz Alpine passenger train. If it doesn't commercially work then that is surely a issue the way the business (or business model) is run or setup.
 
The route to/from the Taranaki is probably also sustainable providing Fontera  underwrite them (and stick with them) and they probably should. Is the central NIMT commercially viable? Well it might be if Fontera keep volumes on there from the Taranaki. What goes from Hawera to New Plymouth now? Not much I suspect as it all seems to head down to Marton and the NIMT or Napier. The recent National Freight Demand Study shows traffic on this line has increased a lot in recent years with changes in shipping patterns for dairy exports.
 
As stated above the whole NIMT and MNL (Picton to Christchurch) needs very close analysis to see if Interisland Rail is viable in its current form (including rail decked ferries) and whether the cross use of the NIMT with ex Taranaki tonnage for Fontera is also commercially viable and not vulnerable to the whim of future Fontera port changes.
 
My gut feeling is the NIMT could possibly be viable within itself but can it do so without South Island bound traffic? This needs very close analysis and I will be looking for that in the report when it comes out. I think that as a National Strategic call the route should be maintained but the Government needs to recognise this and simply look after it once it done its own economic report if it supports that conclusion. For the long term good of the business these questions must be answered. Afterall is KiwiRail a full national network business long term or a collection of lines with traffic flows from hinterlands to ports that happen (almost accidentally) fall into a network shape.
.
The line to Napier seems to have been given a boost due to changes in Fontera export dairy flows ex Taranaki and Winstone Pulp in the central North Island to Napier port flows that used to go to Wellington port. But are these companies simply using the rail option here as a bolster to their own returns and trade off the ports or shipping lines against each other at the expense of fundamental rail commercial viability. Is the rail business getting a adequate return on these changes in traffic flows? Again I await to see the answer.
 
Probably what is commercially viable currently is the Golden Triangle/Waikato/BoP lines in the Tauranga / Hamilton / Auckland area. This includes Auckland - Hamilton, Coal lines, the Steel Mill line to Glenbrook, the Fonterra spurs,  the Forestry lines to Kinleith and Kawerau and the ECMT itself to Tauranga. I also believe the Main South lines South of Christchurch to Invercargill and Bluff with Ohai line thrown in for good measure may be commercially viable especailly with all the primary produce eminating down there.
 
The metro rail passenger networks in both Auckland and Wellington don't come into this analysis as they are funded by Local and Central Government partnerships which seems to be, for now at least, a sustainable mechanism for their perpetual existence.
 
I hate to say but I think it is time to have another critical look at the David Heatly report from 2009 and even the Luke Malpass report from around the same time. They can be found at the links here:
 
 
 
These reports don't make happy reading for the rail fraternity and most wouldn't like to see their recommedations necessarily acted on but the issues they raise should be addressed to silence the critics. Rail is a stratgeic investment for the nation as much as it is a simple commercial one afterall but the economic case should be proven as much as it can be anyway. There will always be differing views on the broader economic returns for the railway - that is to be expected but lets get the information out there.
 
Don't get me wrong I would love to see the total National Rail network continue to its current extent but as stated above it needs to be understood what the benefits and costs truly are and accepted that not all of it may be commercially viable and that some may require broader strategic economic support or simply be run in a different business model. Other bits may have to be let go or at least "rail banked" for future potential development.
 
Have a read of the below blurb from KwiRail and make up your own mind where it's heading.
 
There is one thing for sure - KiwRail needs some serious help and it needs it soon or else the financial umbilical cord from the Government will be cut.
 
Project 2045
 
We are now four years into our turnaround plan and it is time to look to the future.
 
We’ve achieved a lot in those four years. We’ve made major investments in rolling stock and infrastructure. We’ve consolidated and improved the network. Changed the way we do business. Independent reviews have endorsed our approach and we’ve strengthened customer confidence and engagement. We’ve grown the business but we’ve also suffered some serious setbacks. In the last 18 months,
 
  • Aratere lost a propeller on route from Picton to Wellington,
  • Our new DL locomotives were found to be contaminated with asbestos and
  • Earthquakes,
  • Storms and floods continued to deliver their worst.
 
This has impacted on our performance and slowed our progress towards achieving financial sustainability. That inevitably influences the perceptions of our shareholder. It is logical and reasonable for the Government to question the utility and future viability of its investment in KiwiRail. Equally, it is dependent on us to answer those questions and build a compelling case for rail. To do that convincingly, we need to build a long-term view of the wider benefits rail will bring to NZ Inc.
 
That is what Project 2045 is about — it’s about building a 30 year view of the company. To do that, we’ve established a dedicated team with representatives drawn from all parts of the business. The team is led by independent consultant Simon Aimer who will serve as Strategic Director.
 
We’ll also be engaging with some key external agencies. Treasury has seconded a senior analyst, Ant Shaw, to the project and he is already working with the team in Wellington. We are building a positive and constructive partnership with Treasury and this promises much for the future of Project 2045. We will also be working with other important agencies including the New Zealand Transport Agency and the Ministry of Transport. To re-test our case, we’ll need to map projected freight demand by sector, customer and service. We’ll need to understand performance by corridor and train service and demonstrate how this is complemented by our Interislander and Passenger services and the function of a well-managed property portfolio. Freight volumes are expected to double over the next 20-30 years. We need to outline strategies that will show how we plan to capture that future growth. To do this we’ll have to consult with our customers and draw on the support of independent data such as that provided by the recently completed National Freight Demand Study. On that basis, we can then confirm train plans and rolling stock investments.
 
We’ll also need to look at all modal options and assess the risks our business may face. Port developments, changes in coastal shipping, industry relocations, the introduction of trucks with vastly increased capacity and the development of new transport hubs, all have the potential to impact negatively on our business. We need to articulate how we will meet these challenges and still drive our business forward.
 
We plan to complete and deliver Project 2045 to our shareholder by September/ October this year.
 
The project aims to provide the Government with greater confidence in the future security of our business and enable it to make informed decisions about the future of rail. This will not only secure a sustainable future for KiwiRail, it will also enable us to make an increasingly important contribution to the future development of the national economy.
 
 
A final footnote commentary from Randal Prestidge from Target Railway Progress makes some great points -
 
 
"The 2014/15 Budget brought a double dose of good news for KiwiRail: $198M of new funding, plus the announcement of an inquiry into the KiwiRail business model. This is potential good news because it might signal a change to the hand-to-mouth nature of this support, which cannot be conducive to effective long-term planning.
 
Some negative sentiments have been emanating from the beltway recently: from Treasury that “the [KiwiRail] business model is wrong”, and Mr Brownlee’s quip that “sometimes it’s hard to kick life into something [KiwiRail] that is fundamentally dead”. If he scrutinised the updated Freight Demand Study he would see that in the last 6 years rail has increased its market share and GTK, whereas road transport has shown a decline. So, for all its troubles rail is far from dead.
 
But we feel his frustration. He has handed over more than the $750M requested by the Turnaround Plan. But more is needed, because both the Plan and the business model are wrong. Many of the benefits created by the existence of the freight rail system actually go to users and funders of the road network, but these good folk don’t get to contribute anything toward the resultant easing of road network congestion and maintenance and expansion costs. The ad hoc Crown funding that makes this all possible is actually a great national investment, but “the system” stigmatises it as a subsidy for a sunset industry.
 
Will the government inquiry come up with a mechanism for facilitating National Land Transport Fund investment in rail, in recognition that “more rail” actually works for the benefit of road users and can reduce their overall costs?"
 
Ends

1 Comment to KiwiRail To Undertake Major Strategic Review Of Business:

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James on Friday, 20 June 2014 11:27 p.m.
Interesting perspective and useful info. Rail always seems to get a hard time in New Zealand but maybe a longer term view being developed will be a positive step forward
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