Yesterday the Treasury released documents related to the government’s budget announced a few months ago. One that has gained a lot of attention is the suggestion from Treasury that the rail network – with exception of Auckland and Wellington – be shut down. The paper can be found here and contains quite a bit of information – although a lot of the actual details such as how much funding Kiwirail want in the future are not shown.
The paper discusses how Kiwirail have undertook a nine month study into its operations last year and the key findings were
- rail’s high fixed costs are spread across the network and do not materially vary with changes in volumes being transported
- revenue earned from train movements on most parts of the network is interdependent with other parts of the network because most freight movements travel across multiple network segments, and
- as a result of the high fixed costs and interdependence of revenue between the different network segments, it is challenging to reduce costs as fast or to the same extent as a reduction in revenue.
In other words this isn’t just a case where you can trim off a few dead limbs and carry on but that those limbs all combine to contribute to the overall network. For example trains carrying milk powder from Taranaki also use and contribute towards the busy Hamilton to Tauranga section on their way to the port. Just like has happened in the past here and overseas in places like the UK, cutting back the network can do more harm than good. As such it was recommended that one of two main options be pursued.
- retain most of the freight network and rationalise unprofitable services and some lines on the fringes of the network, or
- close most or all of the freight network, with the option of retaining the upper north island section only (Auckland to Hamilton to Tauranga) as this part of the network carries the most freight volumes and covers most of its costs.
Treasury’s preferred option was to close the network and in their argument for doing so they say that over the last 5 years earnings haven’t really changed. They do however note that Kiwirail have been hit by a huge number of external factors which even they suggest the magnitude of and extent of which have been greater than the company could be expected to deal with. These include the Canterbury earthquakes, the Pike river mine explosion, Solid Energy’s financial difficulties, extreme weather events and the Aratere being out of service for a period earlier this year. What’s more the hits keep coming and now it seems the next issue will be looming trouble with the dairy industry.
One aspect the paper does highlight is that Kiwirail are really running a shoestring operation. As part of Treasury looking for ways to reduce funding they note that there is no evidence of “gold-plating” infrastructure or inflating funding requirements. They also highlight the results of an independent assessment by AECOM who say that in comparison to Australian systems, planned spending on infrastructure per kilometre was low. They also couldn’t find opportunities to reduce what was planned without significantly impacting levels of service. This doesn’t surprise me as I frequently get the impression the company is running only on fumes after being institutionally and politically beaten up.
The report claims that shutting the rail network down
During 2014, the Treasury, the Ministry of Transport and NZTA undertook an assessment of the economic and policy considerations for continuing to fund KiwiRail at the levels required. The key findings from this work were:
- if all the freight currently transported on rail was transferred to road, the additional road user charges (RUC) earned by NZTA from the additional trucks on the road would be sufficient to adequately address road capacity and safety issues (resulting from the additional trucks) in most areas
- the estimated environmental and safety benefits from transporting the current volume of freight by rail of ~$10 million and ~$20 million per annum respectively do not outweigh the costs of continuing to fund rail, and
- a national cost benefit analysis estimated the net social cost of continuing to fund rail at the levels sought in this paper at between $55 million and $170 million per annum, which takes into consideration all the costs and benefits associated with funding rail at the levels required (another interpretation is that there is a shortfall in benefits of between $55 million and $170 million per annum at the current levels of funding).
I find it interesting the claim that shifting all rail freight to truck would pay for itself and any capacity and safety upgrades. According to the MoT there are currently around 900 freight trains around the network each week which probably equates to more than 3,000 trucks worth of goods being moved each day. The trucking lobby will be rubbing their hands with glee.
Treasury wanted the government to only provide one more year of funding during which public study would be carried out before what they assume would be a closure of the network. They do say that if the government didn’t agree to that, that they should provide Kiwirail more certainty by way of a three year funding package – something the Ministry of Transport supported. Thankfully the government didn’t agree with Treasury and agreed to keep funding Kiwirail – although only on a two year package.
I personally have no issue with Treasury looking at the issue of whether we should fund something, that is after all a key part of their job. What I do have an issue with is that there doesn’t appear to be a consistency in advice. Where’s the questioning of the RoNS businesses cases – some of which are as low as 0.2, where’s the questioning about why we’re pouring so much money in to new roads when people are travelling less and the assessment of many projects showing major flaws. Then there’s the absurd notion that the rail network should be a profitable business while ignoring the road network elephant in the room. For example the NLTP announced last week shows around $3 billion of funding from outside road taxes to build and operate the network.
In my view Kiwirail should stop being treated like a business and instead the government should stop the madness of the NZTA not being able to fund rail improvements. That would allow rail projects that meet certain requirements e.g. improve safety and/or capacity to compete on a more even playing field. The NZTA should also be required to consider and allowed to build rail projects as part of any other improvements they make to get the best transport network outcome regardless of mode. They are after all the transport agency, not just the road building agency.