*This is a guest post by Roger Blakeley, Bob Norman, Alex Gray and Keith Flinders.
Dr Roger Blakeley, former Secretary for the Environment; Bob Norman, former Commissioner of Works; Alex Gray, professional civil engineer and Senior Project Manager; Keith Flinders, Electrical Services Consultant
KIWIRAIL’S NIMT DECISION EXPOSED IN LEAKED DOCUMENTS
Roger Blakeley, Bob Norman, Alex Gray and Keith Flinders
Leaked documents show that KiwiRail’s decision in December 2016, to replace electric locomotives on the electrified section of the North Island Main Trunk (NIMT) with diesel locomotives, was based on flawed logic and justified by misleading information.
Under the Official Information Act (OIA)1982, we applied in March 2017 to the Minister of Transport for the business case on which the KiwiRail decision was based. In response, we received a heavily redacted version of the Better Business Case dated 21 December 2016. Recently we received a leaked copy of the unredacted version of that business case. It is revealing.
We are releasing this information because the decision will exacerbate climate change. It will result in an extra 12,000 tonnes of carbon dioxide per year being released into the atmosphere – a giant step backwards when New Zealand has committed to reduce its greenhouse gas emissions under the 2015 Paris Climate Change Agreement. The decision does not stand up to scrutiny, now that we have the redacted sections of the business case.
1.The KiwiRail Decision
What was the decision? The KiwiRail better business case states that it considered four options: 1) electronic control system upgrade to the electric fleet, 2) second-hand electric locomotives, 3) new electric locomotives, and 4) replace electric locomotives with diesels. The first two options eliminated were the upgrade of the electric fleet electronic control system ($10m cost) and purchase of second-hand electric locomotives (a fraction of the cost of new electric locomotives). These were the two lowest-cost options. They were rejected because: “they did not meet the business objectives of simplifying the operating model and standardising the asset fleet”. Long-run Net Present Value (NPV) cost cash flow was calculated for the two remaining options. The diesels were assessed to have a lower cost, and the decision was made to replace the electric locomotives with new diesel locomotives.
2. What the Leaked Documents told us
a). Delays due to changing locomotives at Te Rapa and Palmerston North
KiwiRail said that a reason for the switch from electric locomotives to diesels was to “improve reliability and efficiency for KiwiRail’s customers”. Reducing delays caused by switching locomotives from diesel to electric and back again at Te Rapa and Palmerston North was an objective. The scheduled delays are for 40 minutes at each location. The redacted sections of the business case included four trials in July 2016, which found that the delay for each locomotive change was on average 5 minutes, rather than the 40 minutes scheduled. The average 5-minute delay at both Te Rapa and Palmerston North is negated by the faster speed of electric locomotives on the electrified section of the NIMT, which makes up 10 to 20 minutes. Therefore, the decision to switch from electric locomotives to diesels does not save time.
b). Assessment of actions taken to resolve criticisms in the WorleyParsons Report
KiwiRail commissioned WorleyParsons (WP) to conduct a peer review of a late-2015 board paper and cost model. It identified serious flaws in the Board paper. The leaking of their peer review report, and another internal report, was referred to in a TV1 6pm News item on 12 May 2017: “KiwiRail says the reports were written in 2015 – a year before it made a final decision. Chief Executive Peter Reidy says there were three or four reviews.’It matured all the way through, so the initial information that we were looking at at the start looked very different towards the end,’ he said.’It’s not our job to cook the books – we are very comfortable that this is the right decision for our business”’
Our analysis shows that many of the flaws identified by WP in their 2015 report on the board paper do not appear to have been corrected in the final better business case. We checked that against the unredacted version. Three examples are:
- (Example 1) WP said: “The overall performance of the DL project has been, by any rational industry measure, extraordinarily poor. lt is remarkable that additional DL locomotives could be recommended as the solution to a locomotive reliability problem without first recognizing this state of affairs, and secondly, conclusively demonstrating that all problems, current and potentially arising have been identified and satisfactorily managed”.
- Our Comment: In the redacted sections, KiwiRail acknowledged that performance was not satisfactory in the first batch of diesel locomotives, but said a performance-based contract (with financial penalties) had been applied to all future purchases. Mean Distance Between Failures (MDBF) rates for the DL locomotives are still lower than expected.
- (Example 2) WP said: “the discount rate for NPV of 8.9% is higher than the NZ Treasury 10-year bond rate of about 3.5% currently (risk free rate, including inflation) (www.rbnz.govt.nz/statistics/tables/b2/)”. WP continued: “It is presumed that this rate includes project risk premium. The basis for the rate used should be stated”.
Our comment: The effect of a very high discount rate in the NPV calculation is advantageous to the new diesels option (lower capital costs) compared with the new electrics option (lower operating and maintenance costs), because it heavily discounts future costs. The better business case of 21 December 2016 did not state either the rate used or its basis, despite the recommendation by WorleyParsons. Treasury’s recommendation for a NPV calculation for long durations is 6%, not 8.9%.
- (Example 3) WP said: “It does appear however that the Board paper is biased towards the DL option at a number of levels.
Our comment: Based on our scrutiny of the unredacted business case, the bias still appears to exist in the final better business case.
c) KiwiRail Internal Review of Financial Modelling in 2015
In the December 2016 better business case, the diesel option was calculated to have a NPV cost range of $204m to $236m (lower and upper bounds, compared to the electric option, which had a range of $242m to $310m.
However, a leaked (early 2017) KiwiRail internal review critiqued the financial modelling that informed the Board paper at the end of 2015. It said that the financial modelling under-represented the cost of the diesel option and over-represented the cost of the electric option. Based on the corrected model, that review assessed the cost of the electric option as $230m cheaper than the diesel option. The final better business case appears to have ignored that internal review.
3. Dual-Mode Locomotive Option
In our opinion piece for The Dominion Post (published 21 March 2017) headed “KiwiRail’s missing option for NI trunk line”, we observed that KiwiRail did not consider the option of dual-mode electric-diesel locomotives – a serious omission. This option would solve the concerns about delays in switching locomotives at Te Rapa and Palmerston North.The benefits of shorter journey times, with a mode share shift from road freight to rail freight, would still have been achieved. The retrograde step of increasing greenhouse gas emissions, by using diesel rather than electric locomotives over the electrified section of NIMT, would be avoided. Although dual-mode electric-diesel locomotives have higher capital costs, they have lower operating and maintenance costs, leading to lower ‘whole of life’ costs.
The Minister of State Owned Enterprises, in response to a written question from Megan Woods, MP (24 May 2017), said: “KiwiRail advises me that it did consider dual-mode locomotives as a possible option to be considered in the business case. However, KiwiRail’s assessment was that dual-mode locomotives would be too heavy and too long for New Zealand’s rail infrastructure and KiwiRail set aside this option quite early in the process as being physically impractical in New Zealand”.
We advised the Minister that developments in the design and manufacture of dual-mode locomotives over the last two years make KiwiRail’s assessment out of date. The Swiss locomotive manufacturer Stadler confirmed in writing (14 June 2017) that recent designs of dual-mode locomotives have an axle weight of 16 tonnes (within the acceptable axle weight limit of 18 tonnes), and they would be suitable on the curves of the NIMT route. We suggested that KiwiRail review their earlier decision, recognising that these locomotive design developments are in their commercial interests, and because reduction of greenhouse gas emissions is in the national interest.
4. Climate Change Impacts
KiwiRail’s decision will increase New Zealand’s greenhouse gas emissions – despite New Zealand’s commitment to a reduction in greeenhouse gas emissions of 30 per cent below 2005 levels by 2030, under the 2015 Paris Agreement on Climate Change. We do not accept KiwiRail’s argument that the decision is justified because “more reliable and efficient services” will achieve a mode-share shift from road to rail freight. The same reliability, efficiency, reduction in travel time, and corresponding mode-share shift would be achieved by new electric locomotives or dual-mode locomotives travelling between Auckland and Wellington.
In New Zealand, 80% of electricity production is from renewable resources such as hydro or wind power, with a target of 90% renewables by 2025. Consequently,
only a small proportion of electricity supply required for an electric locomotive fleet depends on burnng fossil fuels.
KiwiRail will burn an extra eight million litres of diesel per year using diesel locomotives on the electrified section of the NIMT. While we are being encouraged to shift to electric cars, KiwiRail is reverting to diesel rail.
Professor Ralph Sims of Massey University said “the rail network would generate 12,000 tones of carbon dioxide per year by de-electrifying – more than cancelling out the 9,000 tones saved by using 3000 electric cars”.
5. Towards Full Electrification of the NIMT
The KiwiRail decision involves retaining the electrified infrastructure required for electric trains on the NIMT, and keeping the lines energised, at an estmated cost ot $2m – 3m per year. This funding could be at risk from future budget cuts, which could jeopardise any future opportunity to electrify the whole NIMT.
KiwiRail estimate it would cost more than $1 billion to complete the electrification of the whole NIMT, and more than $4 billion to electrify the entire North Island network. An OIA release shows that these are extremely rough order costs. Our preliminary analysis is that the costs would be much less. A more rigorous analysis of fully electrifying the NIMT is warranted, to inform future consideration.
In Cabinet papers released under the OIA, Treasury reported that it had raised a number of questions and had asked for additional material from KiwiRail, which had not been provided in time for consideration in their report.
The options of a new electronic control system for the electric fleet, new electric locomotives or dual-mode locomotives would all potentially be part of a transition to a fully electrified NIMT. A first step could be electrification from Papakura to Te Rapa. This would also allow the extension of the EMU commuter service from Auckland to Hamilton.
The KiwiRail Board appears to have approved the diesel locomotive option from the 2016 better business case for five key reasons. We challenge each of them here:
- Lower overall cost – not accepted by the KiwiRail internal review of November 2015, which said that the total cost of the new electric locomotive option is $230m cheaper than the new diesel option.
- Reduced delays at Te Rapa and Palmerston North – the redacted sections of the business case record trials which showed on average a 5-minute delay for locomotive change at each terminal, rather than the 40 minutes scheduled. This is negated by the 10 – 20 minute speed advantage of electric locomotives over the electrified route.
- Standardisation of fleet – yet KiwRail already has different diesel locomotives in the South Island. Air New Zealand matches the aircraft to the operational task to optimise their operation, using large, wide-body aircraft such as the Boeing 777 on long-haul flights; narrow-body Airbus A320 on domestic and short-haul international flights; and turbo-props to service regional markets. When using electric locomotives, KiwiRail currently operates a similar business model to Air NZ. The steep topography in the central North Island section of NIMT is covered by powerful electrics and the flatter country is served by the less powerful diesels..
- Faster implementation time for DL locos – WorleyParsons’ 2015 peer review points to significantly less time than 4 years for completion of the electric locomotives’ upgrade programme, referring to a KiwiRail document that states 2.5 – 3 years for 17 electric locomotives. For a lesser number of electric locomotives, this period would be substantially reduced.
5. Greater reliability and efficiency – contradicted by WorleyParsons’ peer review: “The overall performance of the DL project has been, by any rational industry measure, extraordinarily poor”. Although KiwiRail has taken measures with the Chinese manufacturer to improve reliability, the redacted section of the better business case says “Mean Distance Between Failures (MDBF) rates for the DL locomotives are still lower than expected”.
We recommend that the KiwiRail Board reconsider its decision to replace electric locomotives with new diesels on the electrified section of NIMT. Upgrade of the electronic control system of the electric fleet would be the most cost-effective solution. If that is not acceptable, we recommend that the Board resolve to purchase new electric locomotives or dual-mode electric-diesel locomotives.