Huge Existential Threat for New Zealand’s Rail Network – Again

Introduction

If there is one of my articles that I want you to read about the future of rail in New Zealand, it is this one.

Rail across New Zealand is in an existential fight for its survival as a national network across New Zealand. The recent headlines are endless:

“Government declines to fund Cook Strait mega-ferry cost blowout, project scuppered” - NZ Herald – 13 December 2023

“Picton will be shocked ferry project dead in water – mayor” – Stuff – 13 December 2023

“Christopher Luxon puts brakes on Napier-Wairoa rail during Hawke’s Bay visit” NZ Herald – 8 December 2023

“KiwiRail must be s***ting themselves’: Cook Strait ferry cost blowout lands with Nicola Willis” – NZ Herald - 7 December 2023

“Dozens of Wellington trains could be cut if millions not spent, minister told” - Stuff - 7 December 2023

“City Rail Link set to cost Auckland ratepayers $220m a year to operate once it opens in 2026” - NZ Herald – 4 December 2023

“City Rail Link boss Sean Sweeney slams New Zealand infrastructure costs” - NZ Herald – 1 December 2023

This is all in just the last couple of weeks.

I am sure the cancellation of the Interisland Project IREX has come as a big shock to many – but really is it such a shock? The writing was on the wall many weeks ago it seems.

To be clear I think it is a major misstep to cancel it – wouldn’t it have been better for a pause for at least a few weeks to see more of what could be salvaged. As it stands it is a major threat to the future of interisland rail freight on the Auckland to Christchurch corridor and as a result of that also to the very North Island Main Trunk itself and the Main North Line from Picton to Christchurch – can it survive without RoRo rail ferries?

There is a pattern emerging here that is setting the stage for a massive relook at the performance and future viability of KiwiRail. In fact in the National Party Transport Strategy “TRANSPORT FOR THE FUTURE" on page 25 it states the following;

“Rail has received significant investment in recent Budgets but isn’t performing, with freight volumes decreasing. National will continue to support rail as a critical part of our supply chain but will have very clear outcome targets that we expect KiwiRail to deliver against to maximise these investments”

Toll Rails 2007 “Plan B” Revisited

I believe we are facing a situation where a future akin to what Toll NZ in 2007 called Plan B is looming. This will see the Golden Triangle – Auckland Metro to Hamilton to Tauranga and associated Golden Triangle lines, such as the line to Kawerau and Kinlieth in the Waikato and BoP survive.

The lower North Island Metro rail in the Wellington region with regional rail connections to Wairarapa and Palmerston North should survive due to the New Rolling stock being procured as part of the ?Lower North Island Rail Integrated Mobility (LNIRIM) project underway (assuming that project doesn’t get scuttled) and a few other bespoke sub network lines survive such as Central South Island for dairy and inland Port traffic together with some other hinterland connections to Ports such as Fonterra traffic to Port of Otago and maybe the connection to Napier Port.

Gone perhaps will be all rail beyond Napier, Northland Rail (despite recent investment unless Northport development takes off), South Island West Coast Rail as soon as the coal extraction there declines – Westland Dairy and the Tranz Alpine I am afraid are not enough to sustain such a vastly expensive rail link – especially if the Alpine Fault cracks open. And perhaps the Connector lines through New Zeland from Auckland to Christchurch and beyond – including Interisland Rail. ?

Project IREX, the Interisland connection replacement and upgrade project with two new large RoRo rail capable vessels, has suffered cost blow outs and has now been cancelled. It is now debatable, once again, whether or not the national rail link down the North Island Main Trunk and the Main North Line Auckland to Christchurch via the Interisland connection will be sustainable into the future despite the largely funded Main North Line rebuild after the Kaikoura earthquake in 2016. That ?was funded under an insurance claim. One way this could have been more sustainable was to build the alternative to Picton Ferry terminal by building Clifford Bay – but that wasn’t done and is another story that should be written about some other time.

And this is just the tip of the proverbial iceberg that is threatening to tear a gash in the side of Rail in New Zealand. Make no mistake the knives are not only out for rail in New Zealand – they are being sharpened – I can almost hear the spinning stone wheel grind against the metal of the knives as I write this.

Historical Context, Background and Historic Government Agency Views

First up some context.

The New Zealand establishment seems to have had it in for Rail in New Zealand for decades. Why? Because they don’t understand it - at least not in the way many other nations do – they think they do but surely they don’t.

Many years ago a senior Treasury official said to me

“Michael, the Economics of Rail are the economics of Rail – they never change” – this was fine in some sense but what was implied in that statement was the meaning, more than anything, that rail in New Zeland is hopelessly uneconomic and simply doesn’t work here and likely never will.

As far back as 1987 the New Zealand Treasury was trying to shut the whole network down In 1988 the NZ Treasury wrote in an advice paper to Cabinet ministers:

Despite this being in 1988 similar advice as recent as June 2015 similar advice was being offered by Treasury.

The hard truth for those that believe in Rail is that it has never stopped being the Treasury view despite studies such as the Value of Rail in New Zealand study from EY in 2017. For all the talk of a balanced transport view? there remains a underlying view in Treasury, MoT and NZTA Waka Kotahi ?that fundamentally outside of Wellington and Auckland Metro rail systems, and perhaps the Golden Triangle between Auckland Hamilton and Tauranga, New Zealand doesn’t need a rail network. Yet we trumpet the unrealistic view that Aviation and Air New Zealand can decarbonise in the relative near term whilst the most obvious decarbonisation of a transport network that already exists and is proven already to be able to be decarbonised – electrification and better use of the national rail network – is ignored. It is harmful to our international reputation and there is an argument from some that it should be broadcast to the World exactly what are our true emerging colours are as a nation in this regard – and it isn’t pretty.

Big companies like Fonterra, the nations major export ports such as Port of Tauranga, freight forwarders such as Mainfreight and Toll, coal exporters, steel manufacturers and 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 casual 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 2023. 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 scarce 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?

I had been hopeful that this issue had been put to bed for good after the landmark Economic Value of Rail Report in New Zealand in 2017 which addressed some of the issues I talked about back then. However, some of the same political and central government agency protagonists and core key questioners are still there - likely still asking the same questions.

Back in June 2009 David Heatley wrote in his “The history and future of rail in New Zealand Research Report” for The New Institute for The Study of Competition and Regulation Inc the following:

”Rail has had a net social cost for at least 50 years, soaking up resources that could have been diverted to other, more productive uses. Without that drain on social welfare, New Zealand might today have vastly improved roads, hospitals and other infrastructure.

Given the poor productivity and economic performance of rail in public ownership, private ownership should have been in the public interest. The proper response by a private owner to the economic situation of rail was to increase productivity where possible, and where this was insufficient, to rationalize services and reduce the scale of the network.”

“While completely exiting rail would be more economically desirable than the present situation, such a move would not capitalize on the tasks and rail lines that may be economically viable. A viable subset of the network would seem to be available. It will probably be around 1500-2000 kilometres in length – less than half the present size. Line closures and land sales in other areas could fund upgrading of the core network to 21st century standards. The potential economic and environmental benefits of rail are most likely to be realised in this scenario.”

The full report can be read here at:

https://www.heriot-edievale.com/resources-and-reports

Luke Malpass in September 2009 in the “KiwiRail: Doomed to Fail?” supported by the Centre for Independent studies wrote.

”KiwiRail needs to be restructured and privatised in separate pieces. This way, the commercially viable parts can be privatised and certain lines sold to interested parties like ports and companies such as Solid Energy and Fonterra. The unprofitable parts should be shut down by government and the land put to more valued use.

Land could be set aside for public use, such as being part of the new national cycleway, or sold to private interests. KiwiRail has a difficult future in its current form. With many fiscal pressures looming in the medium term for New Zealand, KiwiRail is becoming an increasing financial burden on the government’s balance sheet. The reform, rationalisation and resale of KiwiRail should be a top priority for the government.”

His article can also be read on my website at

https://www.heriot-edievale.com/resources-and-reports

In March 2009, Bill English, a former Minister of Finance, described rail as follows: ‘‘Billion Dollar KiwiRail investment now worthless” says English - New Zealand Herald (4 March 2009).

How will the rest of the World view this? How will it go down when we broadcast to the World that New Zealand is seriously considering abandoning its national rail network. Will they even care? Well they should – as this could be an indication that we as a nation are generally playing only lip services to our clean green image.

More Recent Advice From NZ Government Agencies

The next bit of analysis is rather shocking from the period around the middle of 2015 for New Zealand Government advice.

The following are extracts from Government agencies, and in particular the NZ Treasury, advice to the New Zealand Government Cabinet in 2015. A copy of the source document titled

“Kiwi Rail - NZ Treasury Response To OIA Request on Kiwi Rail Funding / Possible Closure - 4 February 2016” is available at:

https://www.heriot-edievale.com/resources-and-reports

19. The only real options available to the Crown with respect to KiwiRail are therefore to:

? retain most of the freight network, or

? close most or the entire 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.

49. Treasury believes there is a net economic cost of continuing to fund rail at the levels required. The net social cost is estimated at between $55 million and $170 million per annum based on a national cost benefit analysis. Whilst the assumptions underlying analysis of this nature are subjective and some require further work to validate Treasury believes that it will not change the conclusion that there is a net social cost of continuing to fund rail at the levels required.

50. Treasury believes that a more comprehensive study be undertaken to better understand the implications of closure to enable the Government to make the most informed choice possible. The comprehensive study should be public, and at arms’ length from the Government. Treasury therefore recommends a one-year funding commitment for KiwiRail whilst this process is undertaken. It is critical that any study be done publicly, as it will not only ensure that all relevant stakeholders and information can be accessed, but it will also provide an opportunity to inform the public on the ongoing costs associated with funding rail, and what benefits are being generated from this investment.

And this from the New Zealand Transport Agency (NZTA) at the time:

note that NZTA advises that if all the freight currently transported on rail was transferred to road, the additional road user charges earned from the additional trucks on the road would be sufficient to adequately address road capacity and safety issues in most areas

14 note 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

15 note that a further assessment of the likely impact on the transport supply chain (including the impact on New Zealand’s major ports), KiwiRail’s customers, regional economies, road safety and environmental impacts would be needed before a decision could be made to significantly down-size the rail network

NZTA supports the indicative evaluation outlined in this report, and the conclusion that even taking account of the public good aspect there is currently a significant gap between the financial assistance the Crown is providing to KiwiRail and the value of the public good.

However, it believes that in the event the government has some ongoing investment in the rail network as a public good, NZTA could be the appropriate policy and planning agency for investment decisions across the entire transport system (including rail). This would allow for an integrated ‘whole-of-network’ approach to investing in and delivering on the government’s ‘public good’ priorities for both rail and road transport, over the long term

So there you have it - as at June 2015 NZTA did not believe in the Value in Rail. I suspect there are many in the agency that still have this prevailing view despite the recent years apparent support for rail emanating – but how much of this was just to satisfy the political masters of the day. What is their true “frank and fearless advice” And whilst they have apparently made good progress to being a more mode neutral Transport agency over the past five or six years, indications are is that they maybe are about to return to previous form.

Further extracts from this document are :

157. New Zealand’s freight provides insufficient scale, in both density and distance, for rail to be an economic transport mode. Even though rail carries most coal (90%), dairy (75%), and iron and steel (65%) on a net-tonne per kilometre basis, and 30% of general freight between Auckland and Christchurch, rail remains an uneconomic transport option – many users would not pay the full costs required to supply rail services.

158. The size of this problem is demonstrated by the size of the subsidy required to keep the railway network running. The subsidy required covers around two-thirds of rail’s capital expenditure – a subsidy of $200 million a year compared to KiwiRail’s current operating earnings of around $100 million (EBITDA). This problem is fundamental and determined by the divergence between rail’s characteristics and advantages and New Zealand’s freight needs.

162. We have quantified our assessment of the costs and benefits associated with rail freight in the national cost benefit analysis table 10 in paragraph 85. Rail provides some safety and environmental benefits by reducing the number of trucks on the road. However, these benefits are estimated at around $20 million and $10 million a year respectively (after allowing for a reduction in rail crossing injuries and rail emissions). Compared to the required public funding (around $200 million a year) this represents very poor value for money. Further road safety or road fuel efficiency initiatives and investments would be much more cost effective.

169. However, we expect there would be minimal impact on road service levels on average because the NZ Transport Agency (with the additional revenue received from additional truck travel) would undertake sufficient works to maintain adequate road capacity and road safety levels in most areas (noting that the impacts in some urban areas would be difficult to address). It would undertake more maintenance as a result of the increased number of trucks, and bring forward planned passing lanes or four-laning, and undertake various other works in order to maintain road service levels. This is discussed further below.

174. However, current users are often unwilling to pay more for the use of rail. This shows that there is strong competition for rail by the alternatives from road and sea shipping – which offer other advantages.

178. Initial analysis has shown that the majority of the national State highway network appears to have sufficient capacity to handle most of the rail network freight, if this freight was moved to road (it is possible that some of it may end up being moved by coastal shipping). However, there would be significant ‘pinch points’ around cities and ports.

179. The NZ Transport Agency would receive additional revenue from additional truck travel estimated at between $100 and $150 million a year, which is expected to be roughly equal to, or exceed, the costs associated with the additional truck travel, primarily on State highways, made up of:

? additional road maintenance and renewals

? small capacity improvements to maintain road service level, and

? bringing forward planned works to address major pinch points.

187. The above table shows that the status quo option of keeping rail as currently configured requires a subsidy of between $190 and $230 million (plus the economic cost of taxation, equal to an additional 20%), and that this cost is significantly greater than the benefits we assess as being derived from retention of the status quo.

188. Another interpretation is that closing down rail would produce an economic saving of between $150 and $232 million per annum, or fiscal savings of between $141 and $222 million per annum (cost of subsidy less avoided decommissioning and mothballing costs identified above), both of them after costs of closing down rail and upgrading roads.

189. The net social cost is much lower in respect of the golden triangle. A viable alternative to closing rail down might therefore be to close down everything except the golden triangle

Overall Treasury View

199. In our view, the costs of continuing to subsidise KiwiRail at the levels required most likely outweigh the benefits attributable to the services the company provides. As a result, we do not think this is an industry (excluding Metropolitan rail services which are not covered in this report) that the Government should continue to subsidise in the long-term.

204. We would caution on “institutionalising” (e.g. either by funding through NZTA’s National Land Transport Fund or another operating funding mechanism) a funding arrangement as this would make it more difficult for the Government to exit at some point in the future if the appetite for doing so changes. This is on the basis of our assessment of there being a net economic cost of funding rail at the levels required.

So what does the NZ Ministry of Transport have to say about the Treasury view:

205. The Ministry of Transport supports the views expressed in this report. The Ministry notes that there are no easy options for the Government with regards to the financial future of KiwiRail as all options require a significant amount of Government subsidy.

And what about the New Zealand Transport Agency Waka Kotahi:

New Zealand Transport Agency View

210. NZTA supports the indicative evaluation outlined in this report, and the conclusion that even taking account of the public good aspect there is currently a significant gap between the financial assistance the Crown is providing to KiwiRail and the value of the public good. The evaluation also highlights that realistically that gap will take 10-20 years to close even if significant action is taken.

And here is a killer comment from all:

“note that Treasury, the Ministry of Transport and the New Zealand Transport Agency believe there is a net economic cost of continuing to fund KiwiRail at the levels required”

The National led Government of the day didn’t support publicly the drastic options for reducing the network but I have no doubt it was a close call at best by the Government Cabinet of the day. However the underlying fundamentals continue to be against rail. Increased road investment is about to occur making rails competitive position even weaker.

It has to be acknowledged, though by the rail industry, that it has had a lot of funding over the past few years and the nation has yet to see it perform to the expected standards expected from this investment unfortunately. This is disappointing for the industry so I have absolutely no doubt that all the matters pre examined in the history of Rail in New Zealand will be looked at once again and as such the industry is again under existential threat despite progress in the period since 2015.

Future Outlook

It is probably that further reform of the network is required but fundamentally until the elephant in the room is addressed, Rail in New Zealand will continue to significantly under perform to its full potential.

The elephant in the room is pro -roading investment and incremental improvements to roading networks through Roads of National Significance (four laning of major roads across New Zealand) as this has continued to erode rails competitiveness over time in terms of transit time on road as well as its weight carrying capacity. Not only does it do this but it crowds out capital for Rail – after all there is only so much money to go into Land Transport.

From a customer and user perspective, the problem to be solved is how do we sustain efficient, reliable transport connectivity that delivers the service promise to make our exporters and importers competitive on the international market. Rail is a key enabler and link in the transport network in the same way that roads and the Interisland link are.

As for passenger rail nationally across New Zealand and my Vision on that previously released by me – these will need to be paused for a while whilst we fight for the very existence of the Rail network itself as its very existence is under threat. Without a Rail network there can be no national passenger rail service.

As a final note I have been warning on this for the past ten plus years and the below link to my Blog republished on 12 December 2023 referring to the original blogs made in the 2012 to 2015 period, can be found here.

https://www.heriot-edievale.com/post/flashback-to-2015-is-groundhog-day-about-to-happen-again-to-kiwirail-in-2024

Ends

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