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"Back To The Future" or is it "Groundhog Day"? - Is Closing Kiwi Rail A Serious Option?

Like a scene from the classic 1980's films "Back To The Future",  or maybe even better an all time favourite of mine "Groundhog Day", as one Tranz Rail stock analyst once said, we all it seems, have been here before.
 
In many ways there is not a lot further I want to say on the matter that I haven't said before!
 
The New Zealand Government's Treasury recommendation of pretty much full closure of the Railfreight operation and Rail network in New Zealand is nothing new and I have been warning about this for the past three and half years on this blog for anyone that cares to have noticed. 
 
I think more than anything it is simply time to repost my earlier blogs of February 2012 and the later ones in 2014 explaining my position.
 
One thing I am bit sick and tired of is the Rail support fraternity simply supporting Rail because they "Love" it. The Love of something you care deeply about  is all well and good - I do too. Romance can bring a glow to the mind and so it does for many in regards to New Zealand Railways but don't  let the starry eyes you have for New Zealand Railways fool you. Clearly anyone that follows this blog will know my undying love for New Zealand Railways but don't rely simply on that to save it by using unsubstantied "facts" that Rail is more efficient than trucking - research like I have done and put it under the microscope. I have made my views here clear on that many a time.
 
Look at the analysis and issues before you put your hand to key board uttering one liners that "Rail is the most efficient transport mode - the externalities are always better". As I have outlined Rail has been, is, and will likely always be a real challenge in New Zealand. God knows it is many other parts of the world too and in New Zealand it is especially challenging. I have little sympathy anymore for the whimiscal utterances that many make on this matter having spent 25 years working in the industry in New Zealand trying to make it viable and save it.
 
The political claptrap that is issued by certain politicians is even worse. Utterances about getting people in that know how to "Run Railways" sack the current Railways management. Where have these people been for the past 30 years? How many "sackings of Railway Management's and Boards" does it take?
 
People that know how to run railways - yeah right - Oh I forget - Road transport companies executives, Shipping companies executives, logistics companies executives, Engineering management company executives, courier company executives, overseas railways experts executives, New Zealand railways experts - the list goes on. Every single one of these types of management "teams or types" has been tried in New Zealand and here we all are still in the same place looking for that Nirvana management team - Go figure please. What about history never repeating itself. I think I will now go play my favourite Split Enz song "History Never Repeats" - I tell myself before I go to sleep. Or maybe it is "Groundhog Day" after all - he did get the girl in the end you know!
 
Oh New Zealand Railways how I Love You!
 
Oh and before I forget - Those that say Fay Richwhite or privatisation of New Zealand Railways in the 1990's caused these problems. Utter rubbish they did not - you are wrong and I can prove it.
 
Treasury had the same advice in 1989 to close Railways in New Zealand down. Privitisation of Rail as lead by the managment team of Dr Francis Small with Wisconsin Central and Fay Richwite as shareholders, saved Railways in this country when no politician or anyone else seemed to care.
 
Funnily enough back in public ownership here we are again talking about closing it down. Go figure.
 
What happened after 2000 in private ownership was a issue between shareholders more than a railway issue. Sure capital expenditure was curtailed for three years from 2000 onwards but this did not destroy the railway - what happened would have happened anyway - surely anyone can see that now.
 
Someone simply has to pay the bills and for quite a few years when the Government didn't care it was the long suffering Tranz Rail shareholders. You should be grateful they did!
 
I rest my case - so here we are then - see my blogs below for my considered views on these matters.

One more thing I really did enjoy Richard Prebbles  commentary in today's New Zealand Herald - he is right and by the way for those you that don't know - He did save Rail - yes I know you may not like it but he did, along with many others, but as in anything you save you don't save it for all eternity only until its next threat comes along and so it does.
 
Now my previous blogs on these matters.
 

The Transport Analyst: Posted on Saturday, 14 January 2012 3:54 p.m
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Much has been written about the financial performance of Rail in New Zealand over the past few years but few seem to understand, at least from the writer’s perspective, the true economics, or dare I say it the bigger picture of Rail in the broader economy and in the socio / political environment. This post is about the former, the broader economic justification for Rail in the macro sense.
 
In reading the Productivity Commissions draft report on New Zealand “International Freight Transport Services”, released this week, it struck me that once again there was a challenge as to the wisdom of further major Rail investment in New Zealand. This is quite a widely held view of academic economists and ex Treasury officials in New Zealand and is a matter of the public record. It is also not surprising as one David Heatley has written much on Rail economics in New Zealand (see below) and he is also a key advisor to the Commission. David does seem to be trying to make a point somewhere here about Rail viability.
 
It may not be widely known by the Public but in 1988/89 the New Zealand Governments Treasury went as far as recommending the complete closure of the nations entire railway system. It was only the valiant efforts of the NZRC Board and Railways management at the time that saved the day for Rail in New Zealand. Together with a somewhat sympathetic Minister of Railways, by the name of Richard Prebble. Treasury maintained this view well into the 1990’s and off -loading this “liability” business played a big part in the decision to privatise Rail that was to follow a few short years later. Basically if we can’t close it lets sell it! I will write more about this history in due course and what lead to that view and conclusion but back to the present.
 
More recently a strong view is still held by certain interests that a wholesale closure of parts, or even all, of the current network is desirable. What is interesting is that this is a view held by otherwise broadly well informed, intelligent observers rather than the users of the Railway system, the public or the politicians.
 
Big companies like Fonterra, Solid Energy, the nations major export ports such as Port of Tauranga, freight forwarders such Mainfreight and Toll, the forestry industries are keen supporters of Rail and lobby the Government for investment in Rail assets and upgrades. What is it they see that the academic, research fellows and ex Treasury officials don’t seem to see? Is it just big business promoting its own self interest as some might say? That they see a way of getting cheap freight rates below economic costs at the cost of taxpayer investment? Thank you Mr Taxpayer! Or is it more about broader economic comparative advantage and lowering supply chain costs in order to make our supply chain to the worlds markets for our produce cheaper than our international competitors? So that in turn we export more produce overseas and therefore have a higher GDP for the good of the nation’s economic prosperity overall? The truth most likely is that it is a combination of these factors. It is good for their business’s growth but also a way of subsidising their transport costs through government intervention by public investment of taxpayers money in Rail. This in turn leads to a stronger export lead economy and a higher profit for those businesses and a better performing New Zealand overall from which we all benefit. In a pure efficient market this may sound like a nonsense, but other countries we compete against do it so we seem to be forced into a corner.
 
It seems Rail in its history has so often been wedged into this somewhat uncomfortable position itself as it is in many other parts of the world. New Zealand at large, it would seem, should generally benefit from these investments in Rail infrastructure much like it does in Roads. But many struggle to see the public good in Rail that they can easily see in Roads because Rail is more of a closed system not open to causal users like the Roads. Only the Rail operating company has access to the tracks. When it comes to Roads everyone seems to be a socialist as it enables us all to put our “snout in the trough”.
 
Surely we have got past the Road vs. Rail arguments in 2012. Where the more neo classical academic economists seem to struggle is the allocative efficiency of this “intervention” in the freight market by the Government and the investment of scare public funds in Rail. It is after all a more Keynesian approach and the Government trying to help pick winners. Pity for Coastal Shipping as they currently seem to, unfairly, miss out on any of these economic welfare transfer payments - except maybe the local body owned Ports. Welfare economics has always been a difficult area for these types of investments – it sees these “welfare transfer payments” to Rail as having lots of economic leakage and waste. But what is your choice? Is there a welfare gain or loss from the investment in Rail? Someone needs to do the “Gods work” on this. Certainly if we are just talking about the market for Railfreight you could say that over the last 30 years the private and public provision of this market for Railfreight services has failed for the Rail business, and its markets for that matter.
 
An interesting view on this failure is a report by Ross Clark, Rail Performance Manager for Transport, Scotland. Ross used to work in the Rail sector in New Zealand and is more qualified than most to form a view. His report makes a very interesting read. It can be found at the following links.
 
 
 
Another very interesting, insightful and well researched paper was released by David Heatley from ICSR. David's, now advising the Productivity Commission, paper was released in 2009 is titled “The History and future Of Rail in New Zealand” . It is hard to fault much of David’s analysis and it is generally a good piece of well researched work. It covers the history well, at least from an economic view. However it does get a few things wrong. For example the lines south of Christchurch are perhaps some of the best Rail in New Zealand outside the Golden Triangle of Auckland - Hamilton - Tauranga. Fonterra traffic has been exploding down there. It is very debatable if Fonterra would be as viable in the South Island in the way it is without the important rail transport links from the Edendale factory or even the Clandeboye (not directly rail served but served from the nearby Temuka Railhead). Then there are the freezing works for export meat at Mataura, Finegand etc, the forestry fibre plants, the coal from Nightcaps, the Gold Slurry to Palmerston to name a few major traffics. Also missing from his work is much commentary on the larger strategic reasons why Rail exists in New Zealand. But from a simple micro economic point of view on Rail in isolation his work is hard to fault. The facts are there. Read it and form your own views. The report can be found at the link below:
 
 
Another piece of work is by Luke Malpass from the Centre for Independent Studies. In his report titled ”KiwiRail: Doomed to Fail?” Luke made some interesting points also and his work has much in common with David’s. But I don't believe he fully appreciates the nature of the broader NZ Railways business well enough to draw the rather dire conclusions he does. He seems to start from the proposition that Rail is and always will be failure in New Zealand. He needs to talk to the customers of Rail and have another look at his work to form a more balanced view. To suggest as he does that much or even most of the network should be closed down and the land sold off would seem indeed to be act of national, if not broader economic, vandalism. However as stated some of what he says is accurate and again it is a welcome addition to the debate. As stated he does have some questions that need to be addressed and answered by the industry. His report can be found at the link below.
 
 
It is not the intention of this blog to criticise out of hand such reports but to critically examine them. As I have stated they have many valid points and in my view are a welcome addition to the debate to tease out once and for all these issues of Rail viability. I will have more to say on this in due course.
 
Some will say this debate shouldn’t happen – having a national Railways in New Zealand is a given. I don’t agree. Rail like everything in society should continually justify its existence particularly as the world is changing so fast. Debate is to be encouraged. There is still much confusion as to what the purpose of the general Rail network in New Zealand is and in my view this doubt places Rails future in peril.The Regional Councils by taking effective "ownership" and responsibility of the nations urban Rail assets, if not literally the rail itself and below infrastructure yet, have at least for now resolved that issue for urban Rail assets and investment. Kiwi Rail needs to get on with doing that with the rest of the national network. It is not just about commercial sustainability for it was the Network should have probably been closed in 1989 as Treasury suggested. There are much bigger issues at play and it will take some bravery on the part of Rail Stakeholders to finally admit this in due course. If you suggest otherwise you just need to look at the proposed write down of Kiwi Rail operating assets (non land) values from around $6 Billion to around $1 Billion. From a commercial view point that may make sense in a valuation sense as that is the value of the commercial asset base that the Rail “commercial business” can support via a simple commercial ROI calculation. But clearly the assets can’t be perpetuated at that written down value unless you go to a Pay as you go (PAY GO) approach for capital where all such expense is expensed to the P&L at time of purchase. This would instantly kill the commercial businesses profitability of the business in one hit. Goodness they are spending close to $400 million outside of Metro Rail capex a year and long range average capital is not that much lower than that for a viable network for above and below Rail assets if it to remain up to date in perpetual state. Are they going to have a several $Billion asset write off every few years in order to keep asset values at a level that can sustain a reasonable cost of capital economic return? This sure would be ammunition to close the business. We have been here before as David and Luke point out.
 
Much to date has been achieved by KiwiRail but make no mistake they need to do a lot more in selling their case for the current National network sustainability. To date they have largely been silent on what they contribute to New Zealand in the broader sense, outside the narrow commercial model purpose, to justify their existence and in particular the large investments of new public money in the business Turnaround. A new fairer way will need to be found to look at the Rail investment in New Zealand if it is to be sustained. A simple narrow commercial sustainability criteria for the national network is unlikely to be sufficient to sustain all of it. It would be simple if it were but life is hardly simple when it comes to Rail.
 
Our network traffic density in a country of under 5 Million people, with barely 15 Million tonnes of current railfreight with average haul length of around 300 km on offer, over 4000 km of network (track density average barely a 1 Milllion tonnes a kilometre!) through tough difficult terrain split by a rough Cook Strait is too low for commercial sustainability of any quality railway anywhere. Even doubling the tonnage would likely be too low by any sort of international comparison. Anway, how would they do that without drastically reducing freight rates to gain market share and be competitive? Freight rates need to rise on the back of better service propositions not lower in a race to the bottom.
 
However this doesn’t mean it should close for if it did, then surely most of our Road networks and towns across the nation should close also and the nation would ultimately be the poorer for it. The externalities need to be examined and are likely much broader than generally supposed when one looks at the broader GDP effects outlined above resulting from a more internationally competitive supply chain that goes with having a high capacity transport system such as Rail can and does provide. It goes without saying of course that Rail should be as effiicient as it can be. A lot of work remains to be done there and KiwI Rail are, commendably, getting on with that good work but much remains to be done.
 
The world is changing. Markets are changing. Supply chains are changing. Global warming is now. Peak Oil is close. New technology such as ultra-fast broadband is becoming widespread changing transport patterns. Trade and economic allegiances are changing. Transport technology is changing. It is not just about a narrow view of Commercial sustainability anymore. If it is, as stated the future is indeed rather bleak for our national Rail system. Moving towards that nirvana is right and good but in itself is unlikely to be enough to sustain it. It is as Trevor Hayward, former General Manager of NZ Railways, said back in 1979 a “Time for Change” in the way we look at our national Rail network.
 


And then my blog on the Productivity Commission
 

Productivity Commission Release Draft Report On International Freight Transport
The Transport Analyst: Posted on Thursday, 12 January 2012 9:25 p.m
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The Productivity Commission today released its preliminary findings on the New Zealand International Freight Transport sector.
 
Key findings were in the area of Governance and ownership structure of the nation’s Ports. In particular there were findings around accountability structures and a suggestion that Port companies governance should be put under a type of SOE model format with less interference from Councils (more independent directors - no Councillers or Council officers) and independent external monitoring by an agency like COMU which does that for the Crown owned SOE's.
 
Submissions on the draft report close on 27 February 2012 with the final report due out on 1st April 2012.
 
This report is to be welcomed and we look forward to similar reports on the domestic transport sector in due course. This is foreshadowed to some extent as the following comments are made on Rail:
 
"The New Zealand Railways Corporation (trading as KiwiRail) is a state-owned enterprise. Governance and other arrangements are specified in both the State-Owned Enterprises Act 1986 and the New Zealand Railways Corporation Act 1981, which is a potential source of ambiguity and inefficiency. It would be preferable if KiwiRail’s governance arrangements were specified only in the State-Owned Enterprises Act.
 
KiwiRail is currently classified as a ‘multiple objective company’ whose financial expectations are moderated by public good delivery requirements. However, there is little transparency about exactly what public goods are being delivered and at what cost to the taxpayer. The State-Owned Enterprises Act contains provisions for SOEs to receive direct payments for non-commercial activities (s.7), and it would be preferable if these provisions were used to identify expectations delivery of public goods by KiwiRail and the costs incurred in their provision.
 
The transparency of KiwiRail’s longer-term investment plans is less than might be expected from an equivalent private company (at least one listed on a stock exchange). The public justification for the Government’s initial $250 million contribution towards KiwiRail’s $4.6 billion Turnaround Plan was very limited. This is unusual given the poor history of previous large capital injections into New Zealand railways. A full cost-benefit analysis, comparable to the ones produced for major road projects, would be a valuable contribution to the public debate."
 
Further…
 
“A full cost benefit analysis (ie, including all externalities) should be published for government investments in rail infrastructure, including further investment in the KiwiRail Turnaround Plan. These analyses should be directly comparable to those produced for major road projects.
 
Proposals for investment in road and rail should be subject to rigorous investment screening in a coordinated way, which enables the best projects to selected – be they road, rail, or a combination of the two. Without this level of transparency, the public cannot be confident that scarce resources are being allocated to the most beneficial projects."
 
The report has much more to say about Rail and Road. Here are some further extracts
 
"The Commission’s preliminary view is that it is not correct to argue that road freight is subsidised on account of its PAYGO method of funding, which does not explicitly charge users for past road infrastructure investment. It agrees with the Australian Productivity Commission’s response to similar concerns: Capital costs are fully recouped under a PAYGO approach. Under a pay-as-you-go approach… capital spending is recovered in the period in which it occurs. This means that users of roads, rather than road providers, effectively fund the investment. In principle, therefore PAYGO does not subsidise freight infrastructure users compared with an approach where users are charged an amount each year that covers asset depreciation and a return on capital. Australian Productivity Commission (2006), p.xxxii
 
Another argument put forward is that rail is subsidised by the government as it does not achieve an acceptable rate of return on the capital invested. This view is supported by Booz Allen Hamilton (2005b), who found that for 2001/2002 rail freight revenues were sufficient to cover operating costs (and track and rolling stock replacement), but insufficient to fund an adequate economic return on the total recoverable assets (including land and other infrastructure assets). The financial consulting firm Rockpoint also found that rail has generated an insufficient return on capital (Rockpoint, 2009). Section 8.2 provides information on the level of government subsidies to rail. The Commission has not undertaken the analysis needed to reach a conclusion on whether current and envisaged levels of rail subsidies are economically efficient, but it is concerned to see the investment of large amounts of public money without the presentation of a full business case.
 
The Commission therefore recommends (see Recommendation 9.1) that a full cost-benefit analysis should be produced for future government investments in rail infrastructure, including those in the KiwiRail Turnaround Plan. Such analysis would make the purposes and amounts of subsidies transparent and help inform public debate. A further concern raised in submissions is that prices charged do not fully reflect the external costs of different forms of freight transport. Such external costs include greenhouse gas emissions, other environmental impacts, congestion and accident costs. To the extent that these external costs are not incorporated into prices, they are implicit subsidies. For example, coastal shipping has the least greenhouse gas emissions and is the most energy-efficient mode per tonne kilometre, rail lies in the middle and road freight has the highest environmental impact.123 124 To the extent that New Zealand’s Emissions Trading Scheme does not fully incorporate the impact of greenhouse gas emissions then, this ordering implies a parallel set of subsidies with coastal shipping disadvantaged relative to road and rail, and rail disadvantaged relative to road.
 
Subsidies and the economics of coastal shipping and rail
 
If it turns out that public investment in KiwiRail has a large subsidy component and so does not earn an economic return, and coastal shipping has smaller environmental impacts than rail and particularly road, then the playing field is indeed tilted against coastal shipping. Despite freight charges for coastal shipping being lower than for rail and road (see Table 4.6), it attracts relatively low volumes of freight because of slow transit times, infrequent services and other features. However, on a more level playing field, coastal shipping (both domestic coastal and international operators) would have an even greater price advantage and could attract more custom. In turn this could make it economic for coastal shipping operators to offer more frequent services, which will reduce transit times and further boost custom. Without a good justification for the current pattern of subsidies, such a change might well improve the overall efficiency of domestic freight transport.
 
As mentioned, coastal shipping is suited to longer routes such as between Auckland and Christchurch. Yet this is just the route that the KiwiRail Turnaround Plan is targeting, including investment in expensive ferries that can carry rail wagons. This deployment of resources does not, on the face of it, seem efficient."
 
These comments are not at all surprising to me and are to be welcomed. Not because I necessarily agree with all the comments or their conclusions but because it is clear to me that Rail has still not sold its business case well enough yet to external parties such as the Productivity Commission. You would have to acknowledge Kiwi Rail has done a great job at selling their Business case to the current Government administration and Crown officials. They did afterall get the Government to sign off on a $4.3 Billion Turnaround Plan - a Herculean achievement by any account but that is still not enough. Life is tough. It must go further if Freight Rail is to survive and prosper in a sustainable way in this country otherwise we will back revisiting the Rails failures of the past in due course. Greater transparency will be required of all major transport participants, especially where Central or Local Government Investment occurs. This is doubly important given the importance of this sector to the economy. From Kiwi Rail's perspective if there is to be long term buy in by future Government’s on their commitment to the future of Freight Rail investment, the business will have to behave more like a Public listed company. This will enable public scrutiny with external analysis of its operational and financial performance. This would be very much welcomed as there are currently huge amounts of public money being pumped into Kiwi Rail for the benefit of their customers. How this benefits New Zealand more broadly needs to be clearly spelt out and hopefully would help secure Rails long term sustainable future despite the winds of political change from time to time. Currently there is much “chatter” that Rail is simply subsidising the freight costs of its key customers via Government capital investment.
 
NZTA too need similar scrutiny for "Roads of National Significance" (RONS) investments by the public although they are ahead of Kiwi Rail generally in Business case presentation due to decades of experience in that field.
 
The report can be found at the following link
 
 
The video presentation is at this link
 
 


And then my more recent blog below:
 
 

KiwiRail To Undertake Major Strategic Review Of Business
The Transport Analyst: Posted on Saturday, 7 June 2014 6:18 p.m.
 
 
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 back
 
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
 
And then my blog of last year on KiwiRails current difficulties:




KiwiRail's 2014 - A Difficult Operating & Trading Year
The Transport Analyst: Posted on Sunday, 31 August 2014 8:25 a.m.
 

Well Kiwi Rail have announced their 2014 annual result (see here and here) and what a result. It is not good and to be fair they acknowledge this - it is their "Annus Horribilis" as the beloved Queen Elizabeth of Great Britain once said.
 
This is totally expected. I have said for some time now that their current strategy will not make them financially sustainable and at last they seem to be coming to the same conclusion.
 
It is good that the Business is at last doing its "Back to Basics" work and the Strategic Review underway is looking at and realises the following:
 
  • The bottom line is that they cannot rely on revenue growth alone to get them to a sustainable position.
  • To improve their performance and continue to grow they need a more cost effective and efficient business model.
  • Their focus will be on improving asset and labour productivity, making processes more efficient and delivering consistent on time performance for their customers.
  • This can only be achieved by the company operating as a single business across New Zealand.
  • To kick this off they’ve started an internal "Back to Basics" programme and they are also reviewing all parts of the business including their initial turnaround plan assumptions.
  • They are now working closely with Treasury, the Ministry of Transport and the New Zealand Transport Agency to review their forward plans in light of these trends and the need to create a sustainable rail business.
  • They have therefore commenced a comprehensive review of their operations. It’s their intention to improve the performance of the rail business in a way that realises economic benefits for New Zealand
 
But this has taken too long for this realisation. I was saying this on this blog back in late 2011 - over two and half years ago. I am frustrated it has taken them so long to see the innevitiable. Even now I don't believe they fully see it. But see it they must. Rail will always be a economic case in New Zealand - not just a financial business case.
 
Some initial points I make are:
 
First point - Stop Blaming the Past and Privatisation - this is getting very tiring. The network has been funded by the Government now for over 10 years. Yes that's right - it is over ten years since the Government started pumping money into the network revitilsation started by Ontrack in 2004. That is more time than the time the whole network was in private hands. Anyone still blaming privatisation for Rails woes is woefully misguided and uninformed - yes it contributed to some of the run down but it should be clear to all by now that Rails troubles in New Zealand go much deeper than anything privatisation brought and go much further back. I may have further to say on this at a later date. There is strong evidence that the NZ Government Treasury were actively trying to close the whole railway network down in 1988 and 1989 and deliberately were trying to set the company on a course to do so. It was the strength and the many concessions of the managment team at that time that saved the day!
 
Second point - Get Your Facts Right - How can they print rubbish in official press releases like saying it is 35 years since new locomotives were last bought in NZ. The EF new locos were of which there were 22 were bought in 1987 - they were commissioned in 1988. The first DL's locos were bought in 2010 - by my count that is 22 years between new locos being delivered not 35. Even if they are talking diesel locos - the last of the new DF locos bought entered service in 1981 - which is a 30 year gap at most. How bad is that - again trying to shft blame onto the past by exagerating the facts!
 
Third point - Costs go up while revenue goes down - yes I understand the Aratere issue but clearly costs increases are much greater than that cause. Increased maintenance rather than capex on infrastructure - sounds like labour capitalisation policy. If they don't spend the capex they should turn off the labour - period. Anyway with the amount of infrastructure capex spent over the last ten years - infrastructure maintenance costs should be falling by now not increasing!
 
Fourth point - Rule in Railways - Don't Buy Revenue - there seems to be evidence that increased volumes have not covered / contributed that much to fixed costs or may be not even exceeded the marginal / variable costs particularly when the increased capex to serve that new business for new wagons, containers, Aratere refurbishment etc is taken into account. That is not good and value destructive. It is not about volume at all costs it is about increasing financially performance - unless of course they are paid to shift volume below rails costs for some other reason such as economic wider benefits like getting freight off the road - if this is the case then say so!
 
Actually I could go on and on but I wont as most of it I have covered before but I will relink my recent blog on this issue as well as things I pointed out back in early 2012 - it needs to be said.
 
See our Blog posts from 7th June 2014 on NZ's rails future sustainability here
 
See our Blog post from 14th Janaury 2012 on NZ's rails future here


 
If you made it to here well done.
 
I may post more later!!


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