My previous post, which commented on an NZ Herald article relating to operating costs of Auckland’s rail system, noted the somewhat bizarre emergence of a $30 million funding gap. While my previous post asked the question of “where the heck did this funding gap come from?” it is fair to say that Joyce has mentioned it a few times now – most recently in his interview on the TV3 programme “The Nation” a few weeks back.

But a bit of digging through the archives of my blog indicates that this matter has been brewing for a while now – as I noted in a post back in May entitled “The electrification battle is not over“. In that particular post I noted how the government’s final funding arrangement for Auckland’s electric trains – which was effectively a loan to KiwiRail – could mean that Auckland’s ratepayers end up funding those trains after all as KiwiRail is now looking to recoup that money from Auckland Transport (and NZTA). Now this is quite confusing, so I’ll run through a bit of history on the rail electrification project to show how we’ve ended up where we are now:

  • Back in the 2007 budget the then Labour government set aside $500 million to be spent on paying for the infrastructure side of the rail electrification project. However, they felt they couldn’t afford to also stump up with another $500 million for the electric trains themselves.
  • Auckland’s local government agencies confirmed that there was not really a hope in hell that they’d be able to stump up with $500 million for the new electric trains either.
  • In this situation, the parties looked at other options for raising the funding – and eventually settled upon applying a 10c a litre Regional Fuel Tax. The money raised from this fuel tax would effectively pay back the $500 million loan for the electric trains and also pay for a pile of other important transport projects.
  • In March 2009 the current National government decided they didn’t like the Regional Fuel Tax, so they got rid of it. However, at the same time they confirmed that rail electrification would still proceed and took on the financial responsibility for making that happen.
  • In November 2009 Cabinet gave its approval of a $500 million loan to KiwiRail to purchase the electric trains. How exactly KiwiRail would pay back that loan was left somewhat undecided.

A very interesting ARC report from May this year outlines that the financial implications of KiwiRail passing on the responsibility for paying back the $500 million loan for electric trains would be significant:

Further insight into the Government’s expectations in respect of the recovery of costs from metropolitan passenger rail is provided in the Minister of Transport’s paper to Cabinet in November 2009 seeking approval for funding for the purchase of the EMUs.2 The paper, released to the ARC in April 2010 following a request under the Official Information Act, contains estimates of the cost of repayment of a loan of $500 million over 30 years. At an interest rate of 6%, the annual cost of repaying the loan would be $35.973 million.

The Cabinet paper notes that such repayments “could not be recovered from current funding sources based on farebox revenue maximisation and NZTA and ARC subsidy assumptions.” It also raises the option of “a transparent Crown subsidy to the region on the understanding that the region increases its contribution to annual operating costs and that a funding glide path is agreed that eliminates or significantly reduces the Crown’s annual operating subsidy over time.” The Minister states that he favours this option.

Taken together, an increase in track access charges and a requirement for the region to repay the costs associated with the purchase of EMUs by KiwiRail could result in a very significant increase in the requirement for rail operating subsidy. The ARC and ARTA have paid track access fees since 2003 at an average rate of $5 million per annum, 60% of which is paid from NZTA subsidy. While it is not yet clear to what extent fees might increase, a threefold increase for example would increase the net cost to the region from approximately $2 million to $6 million per annum. If the region were also to be expected to pick up 40% of the cost of repaying the loan to purchase the EMUs, the annual cost would be approximately $14.4 million. The ARC has allocated $25.364 million in operating funding to ARTA for passenger rail services in the 2009/10 financial year. Adding potential increases in track access and EMU loan repayment costs could add a further $20 million per annum to this amount.

No provision has been made within the ARC’s 2009-19 LTCCP for such an increase, nor does NZTA have additional funding to meet its 60% share of any additional costs.

While KiwiRail’s proposed increase in the track-access fee from $5 million to $16 million shows us where $11 million of this “funding gap” is, it seems to me that the bulk of the rest of the gap arises from the costs of the new electric trains being passed on to Auckland Transport and NZTA. To make matters worse, because NZTA doesn’t have any money for rail (because it’s all dedicated to uneconomic motorways) it seems that the expectation is that Auckland will simply pick up the tab if it has any hopes of advancing its rail aspirations like the CBD Rail Tunnel.

So in effect we have three reasons for the funding gap existing:

  1. KiwiRail’s increased track access fee. This is probably justified to an extent given the improvements made to the tracks over the past few years. However, I do note that if a track access fee is meant to cover maintenance issues then there should be far less need for maintenance of the rail network over the next few years, especially once electrification is completed, as basically most things will be brand spanking new.
  2. The shifting of funding of the electric trains from central government back on to Auckland. I find this element particularly disgraceful as the deal was Auckland didn’t apply the regional fuel tax because central government was willing to fund the trains themselves. For the government to now go back on that deal is pretty dodgy I think.
  3. Finally, because NZTA is required to spend pretty much all its money on uneconomic motorways, it apparently won’t be able to contribute the 60% funding to rail operating costs that it would normally do (even though road users benefit hugely from the rail system – I don’t think I need to post the table with the $17 per trip benefit for the 372950327590th time). This means that Auckland is once again seemingly left to pick up the tab.

What’s interesting is that none of these three matters leading to the funding gap emerging are the fault of any ARTA, the ARC or any other Auckland-based agency. All three matters have arisen from central government decisions. It seems pretty rich to now lump the problem on Auckland and say “no more projects until you fix this problem we made for you”.

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  1. Right on Josh! As usual. The Regional Fuel Tax was only ever going to be 2c per litre I think, with the potential for it to increase annually.

    At the time we thought the RFT was a bit of a raw deal and we begrudgingly accepted it (considering Wellington trains were 90% funded from central government) but now it looks like this would have been a good deal compared with what’s on the table now.

    If only the ARC / ARTA had been a bit quicker in locking it in… if only…

  2. Looking at the Financial info in ARTA’s business reports makes this $30mil funding gap even more scary. For the 2009/10 financial year which ended 30 June:
    Rail fare revenue was $20.3 m, up 600k on the budget
    The rail contract was $69.5m, down $1.2m on the budget
    That means the $30m ‘funding gap’ is more than we already collect in fares for an entire year and represents an increase in operating costs of 143%

    Also rereading that article it confirms that the increased Kiwirail costs are not just maintenance costs but track access charges which confirms that Kiwirail will be using Auckland metro services as a way to generate income. Imagine the public outcry if the government tried to do the same thing to roads (effectively tolling)

  3. I don’t mind Kiwirail charging a reasonable access fee as they are an SOE and need to make money. However suddenly dumping the fee on Aucklanders and telling them they have to pay up, and NZTA has no money (yeah right) is down right dirty politics.

  4. Yes that does seem rather interesting guys. Unlike the proposed roading projects there is no mention of the funding gap there is there, even though they cost much more to design, build and maintain? I think the government is trying to find excuses not too fund these public transport projects that are much needed and will benefit the economy much more as well.

    Take “Holiday Highway” for example, this should never have been made a road of national significance as the area to the north of the highway is unsuitable for economic growth, it is very hilly and remote. There is no population base to build this type of growth on or enable it. Only real benefits will be to the tourism industry and or the trucking companies. Not too mention there will only be a few access point along the highway in which to access it from. Must I say any more. The motorway projects are nothing more than pet projects or Steven Joyce’s childhood fantasy’s that he wishes to come true. I recall a moment when he mentioned when he was a kid he used to draw lines on a map trying to figure out where motorways should be built, which is when he decided he wanted to be minister of transport. Says it all really doesn’t it.

    Funny how railway transport can have a shortfall but roads don’t, mmm!!!! very interesting isn’t it.

  5. The funding gap comes from the much higher operating costs for rail in Auckland resulting from the fragmented, multi-party approach to running the trains. The operating costs are something like three times higher per passenger than in Wellington. As I have said many times, Auckland rail needs to be 100% in the hands of one company, not a mix of different companies and council bodies.

    Regarding the comment about lower maintenance of new tracks – most of the new tracks laid as part of project DART are badly out of alignment, and in need of major work. The new double track between Henderson and Swanson is set for a major upgrade over the Christmas break, with all new ballast and both tracks to be fully tamped all the way. It takes a few years for new track to settle, and you have to go through quite a lengthy period of doing the same track work over and over.

  6. The additional KiwiRail Track access charges are apparently required to cover both the additional maintenance costs arising from electrification such as traction power supplies, Overhead wiring etc plus ongoing track renewals.

    The issue however is what is the appropriate split of these costs between passenger and freight services. KiwiRail is trying to run a subsidy free freight operation so will be wanting to pass on as many costs to other parties such as Auckland Transport as it can

  7. Should we start our own wiki page based on the “Great American streetcar scandal”
    Maybe we could call it the “Great New Zealand Rail scandal”?

  8. I realise it’s a bit of an accounting thing where the money is comfrom and being spent — but given that the annual cost of repaying the loan is just over $30m annually, isn’t it safe to say that there wouldn’t be a funding gap if the Crown was picking up the interest?

      1. According to the document in Josh’s post from May, commercial rates are Treasury’s preference.

        Presumably the idea is that either the government will make some money on a loan that is being taken out to pay for something that was supposed to be paid for by the government in the first place. Or the electrification work won’t happen for a few more years or at all and the money will stay in government coffers, an outcome I doubt Treasury would be shedding many tears over.

  9. Why do we think there is a conspiracy theory here? Reading Mike Lee’s comments in today’s Herald’s it seems ARC and the government agreed to review costs and now we have some answers. Perhaps there is a shortfall and this needs to be covered unless we want trains to stop running. I’m a bit tired of the lines the government must pay – ie the taxpayer. If we want these services, we’ll have to pay for them. What’s the problem? NZTA (ie the government) contribute 60 percent. The government funded Dart and the lines for electrification to the tune of $1,100 million. If that isn’t enough, what is? I’m not a National supporter and I’m not peddling their lines. But we do need to get a grip on the reasonable apportionment of costs between the government and Auckland. If we don’t like the price tag, well perhaps we need to alter our aspirations. As for Wellington – I don’t know if they got a better deal – they received something like $300m from the government – less than a third than Auckland. Time to reflect on the facts guys.

    1. For comparison Wellington, look at rates not nominal sums. Central government’s contribution to their new rolling stock was 90%, and it wasn’t a loan.

      Remember that none of these things are being purchased by Auckland. KiwiRail owns the track, the electrical traction systems, and the trains themselves. Auckland’s being asked to buy trains that are owned by a government department!

      Auckland was going to be paying for all this stuff with a regional fuel tax, but Joyce removed that funding option. The only reason we have these “problems” is Joyce, because 1) he changed the rules so that only roading can get NZTA funding for capital projects, and 2) he removed the option for an Auckland fuel tax to be applied to public transport funding. With that in mind, it’s not a big ask, IMO, for central government to stop pinching pennies around things that will actually improve Auckland’s economic performance by helping to deal with the drag that is traffic congestion.

    2. As others have said above I believe the issue is that Auckland *was* in fact going to pay the cost – problem being, the agreed funding mechanism was removed in March 2009 with the promise that the planned projects would be funded by the government, and apparently the latter promise is now off the table, leaving the planned projects twisting in the wind as far as funding goes.

      Also, I know this is a crude measure, but assuming the two situations are comparable it does seem to make basic sense that Auckland would need 3 times the level of funding that Wellington got, since we also have 3.5 times the population and more than 4 times the metropolitan area.

      Having done a fair bit of reflecting on the facts, though, I don’t think this ought to really be about Auckland vs. Wellington rail funding priorities – the issues are really that a) Auckland was denied the funding mechanism that was supposed to pay for these projects and has now been left in the lurch and b) we are reduced to debating loans for hundreds of millions for vital PT improvements, whilst billions are to vanish down the collective maw of several immense motorway projects with apparently highly dubious business cases.

  10. Hey guys I just read the article, Mike Lee is right to keep putting the pressure on Steven Joyce like that, I’m glad that we have this guy on the board for the new Auckland council. It seems that every roading proposal that goes to the NZTA is giving funding. Bit like a spoilt child telling there parents I want this, and the parents give them what they want. If we keep investing heavily into the roading projects it is going to affect our economy harder in the long term!

  11. If they charged a 2% rate of interest then the ratepayer share would drop to “only” $9m pa instead of $14.4m

    But the wacky thing about all this is that KiwiRail are going to own the trains, but Auckland / NZTA are going to pay for them?!

    A better formula would be for Auckland / NZTA to lease the trains from KR, provided of course that Wellington is subject to the same leasing arrangement…

    1. 2% is much too low. It doesn’t reflect the opportunity cost of funding the train purchases from the Crown books. However, 6% is almost certainly above the rate that the Crown would pay if it were to borrow the money itself. Hell, it’s higher than the rate at which the Reserve Bank will loan money to commercial banks if they run short of funds.

  12. I understand the new wellington trains are owned by a CCO of Greater Wellington RC, with the existingo nes owned by Kiwirail as they also have done. It was another great innovation of this govt to make Kiwirail own the Auckland EMU’s, not sure what efficiency gains there are there…

    When comparing with Wellington it is worth noting that the capital spend on track upgrades has been tiny and much less ambitious than has been done/underway in Auckland.

  13. Well it can’t be hard to get funding for new traffic signals. The old Auckland City Council has gone on a rampage putting these absolutely everywhere. The latest ones I have seen are the intersection of Princes Street and Wellesley Street near the university. Its not even a proper intersection!

    1. Scott, if you look carefully the Princes/Wellesley lights are for a pedestrian crossing. Given how far it is from that intersection to the crossings in either direction, and that it’s right next to a bus stop, it’s a common place for people to cross the road. Dangerous, but common. I’ve certainly crossed there many times.

  14. While KiwiRail’s proposed increase in the track-access fee from $5 million to $16 million shows us where $11 million of this “funding gap” is, it seems to me that the bulk of the rest of the gap arises from the costs of the new electric trains being passed on to Auckland Transport and NZTA.

    We might be jumping the gun here. Apparently Minister Joyce is still considering how the new trains will be funded. So the increase in the track access fee is exactly that and doesn’t include funding for the new trains. This from a source who has seen the letter from Joyce to Len Brown.

    So it will be interesting to see why track access fees have to increase so much…

    1. The issue isn’t how the trains will be funded, it’s how repayment of the loan will be funded. At least that’s my understanding of the situation: Joyce has determined that KR will own the trains but Auckland will pay for them, and that the money KR uses to buy the trains will be a loan from the Government.

  15. While the funding debate is progressed the government is delaying the confirmation of who is going to build the new EMUs its plan Steven but not a good one but its working so far so keep using it! delay and fudge.

  16. Cameron stated that “The Regional Fuel Tax was only ever going to be 2c per litre I think, with the potential for it to increase annually.”

    Land Transport Management (Regional Fuel Tax Scheme—Auckland Region) Order 2008 (SR 2008/368)
    “Rates of regional fuel tax and their dates of application
    The total rate of the regional fuel tax for funding the capital projects and the additional capital projects in the scheme is—
    (a) 2 cents per litre of fuel from 1 July 2009 to 30 June 2010:
    (b) 5 cents per litre of fuel from 1 July 2010 to 30 June 2011:
    (c) 9.5 cents per litre of fuel from 1 July 2011 to 30 June 2039.

    More important to this debate is that the government’s commitment to pay $500m towards electrification but not to provide an additional $500m for the trains was because in 2007 half the petrol tax was being paid into the consolidated account and the government then paid $500m of that into the NLTF on the condition that it was spent on Auckland’s rail electrification. But the government was proposing to hypothecate the entire petrol tax to the NLTF but, for unknown reasons, was not prepared to make this move conditional on Auckland’s share of that hypothecated fuel tax being dedicated to the purchase of the trains even though the Minister could have issued a directive to that effect.

    1. That’s awfully complex Kevyn, but a few questions really.

      1) Was the regional fuel tax going to pay for the $500 million infrastructure share of electrification or not?
      2) Wasn’t a large amount of the petrol tax money going directly to ARTA so they could buy the electric trains?
      3) How come the $500 million for rail electrification (the infrastructure side) shows up as funded in the 2007 budget?

      1. From memory, Labour was going to pay for the electrification infrastructure but was going to do so by imposing up to a 5c per litre regional fuel tax. The ARC was then going to buy the trains (through ARTA) which would be funded by further up to 5c per litre regional fuel tax so effectively Aucklanders would be paying an extra 10c per litre to get electric trains and we would be paying for the infrastructure as well. The current plan means the government will still pay for the infrastructure but that cost will be spread out over the nation which is fair considering it will help to boost Aucklands productivity and therefore the government will get benefits in the way of increased tax however we have no way of funding the trains.

        Now that Kiwirail will be buying them there are also other potential concerns, presumably the EMU’s will be leased to AT who will then allow their operator (currently Veolia) to run them. What happens if Kiwirail decided to try and make some more money off the contract in 10 years time and hike the price like they are doing with the track access charges? its not like we can just get them off another supplier.

  17. The talk of the regional fuel tax is irritating as someone who has been to cities like Wellington and Christchurch and seen their rail and bus networks respectively. Why should Auckland take an economic hit to pay for something, that (if funding was allocated on a per-capita basis) we should have been able to build years ago and have probably paid many times over. It’s funny how deep Auckland’s pockets were for years when other parts of the country had transport projects, but the expectation is that Auckland must pay its own way now. Say what you like about motorways vs rail, but ths is the real issue here – a fundamental lack of respect for the fact that our transport issues have been caused by an underinvestment spurred by a disproportionate allocation of funding for decades.

    1. I don’t think Auckland missed out at the expense of somewhere else in the country, there was a major underinvestment in the whole of the country up until 10 years ago.
      Note other regions had the option of taking up a regional fuel tax, and Wgtn, Chch, BOP and Waikato were all keen.

  18. Admin, I think the answers to your first two questions are in the schedule to the fuel tax order which details what the regional fuel tax was to be spent on and how much was to be contributed from Auckland City Holdings.

    Hopefully the answer to your third question is on page 18 of this budget pdf:

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