Wednesday, March 04, 2009

Worthless asset - Part 2 - what can be done with Kiwirail?

I like railways and I am an economic rationalist. I find it a little sad when a railway line closes, as if its purpose, hauling goods or people, is no longer needed, like a piece of economic history, and that for a long term it served a useful purpose to many people as an artery. However, I also resist vehemently, the idea that people should be forced to subsidise the freight movements or passenger movements of others. Some like railways and don't apply economics to it, like the Greens. Some apply economics, and want the railway shut down.

Some blogs are suggesting that Kiwirail be shut down, which was what Pacific National, past owner of the Tasmanian rail network threatened, until the Tasmanian state government agreed to take over the network. I can understand this view. However, it is NOT a lost cause. Governments have bailed out the railways twice before in my lifetime, now it should be about accepting the massive right down in value on the government's books before trimming it back to what can be profitable.

I've written many times about this already, so I don't want to add too much:
- Subsidising rail freight is subsidising rail freight's customers, which is coal, timber, dairy and shippers of containerised freight. If anyone should be paying for rail it should be them. A subsidy to rail is "picking winners" in those industries.
- A presentation by NZISCR on the future of rail freight, originally linked to by Frogblog. That presentation dismisses many myths about rail;
- Why the Greens are wrong to worship the religion of rail;
- History of previous rail bailouts and Labour's spending of taxpayers' money on railways;
- Consultant's reports to The Treasury on why rail freight in New Zealand is not on a scale or distances that compare favourably to profitable railways in Australia or the USA. Part One and Part Two.

And after that, where IS rail viable.

In summary, I am optimistic about rail transport in New Zealand, if not for the value of the renationalised "asset". Why?

  1. The Auckland-Wellington-rail ferry-Picton-Christchurch-Dunedin route has sufficient traffic to be profitable in the long term. It can carry containerised traffic by the train load efficiently. Similar traffic profitably runs from the Port of Tauranga to the main trunk.
  2. As long as good quality coal comes out of the West Coast and can be sold, it is profitable to send it by train to Lyttelton. Meanwhile, the TranzAlpine tourist train is also profitable on that same route.
  3. Fonterra's milk traffic from Oringi to Longburn, and Hawera to New Plymouth is profitable.
  4. It may be profitable to keep hauling logs out of the Kaingaroa forest, and rail wood products from Kawerau to the Port of Tauranga, and from Kinleith similarly.
Beyond that it needs to be on a case by case basis, and the likelihood is most other rail freight can only profitably run as long as the rolling stock and track can be maintained in a serviceable condition and the revenue from running trains makes a profit on top of that. When trains need replacing or track/bridges on some lines, it will simply be a case of giving up.

If trains aren't to operate anymore, the line can be mothballed, so if anyone else wants to run services they can - at a cost. After a set number of years, if there has been no serious interest (in some cases railway enthusiasts take over the line and run tourist services, such as to Middlemarch in Central Otago, or at Waitara) then the tracks should be pulled up and the corridor reused. If people want to convert them into cycleways, so be it.

Bill English and Steven Joyce should request a report from Kiwirail describing not lines, but freight business by major customers/commodities and route. It should describe how long term the contracts are, their financial position, and any demands for new capital to keep services going, with recommendations for the short term, medium term and long term future for those services. Business like decisions need to be made. If Kiwirail wants more money to invest in profitable parts of the business, it should borrow against those projections and recover it from users.

Oh and while you're at it, think about the state highways being run as a business too, directly charging road users for the cost of using them. The state highways ARE profitable as a whole, but it would be nice if it were explicit, and they were run as a business supplying customers, instead of a bureaucracy following statutory objectives.


Brad Taylor said...

At least part of the reason rail isn't profitable is that roads are heavily subsidised. If people faced the full cost of road vs rail when making decisions, many would choose rail than is the case today.

One could make a second-best argument that given current road policy, it would be more efficient to also subsidise rail by the same amount so as not to distort relative prices. Of course, this would make transport in general artificially cheap relative to other things...

libertyscott said...

Brad - Nonsense. How are roads heavily subsidised? RUC more than recovers the capital and maintenance costs of the state highway network, the network rail competes with. Even if you were to remove the rates subsidy on local roads it would be around a 25% increase in RUC, which given the other cost structures around rail vs road, would make a marginal difference.

Rail doesn't pay its network maintenance costs to the order of about a 30% underpay.

On externalities, the difference is so marginal as to not make any serious impact on modal choice.

Luke said...

Rail can pay its maintenance costs. The real problem is having to commit to long term investment, whcih road doesnt have to do. The real problem with the current situation is that almost no money was put into rail infrastructure for 15 years. Therefore it is very difficult for any rail operator to make money out a network that requires this much investment to bring it up to scratch. If they didnt have to make this investment rail could make money. Therefore there is a good argument that if the government was to cover a portion of this catch up costs, then rail would once again be viable.
In terms of line closures the traffic patterns can easily a line with only a little traqffic could be closed, and then traffic could suddenly come up again. The major factor driving this is port calls by international shipping lines.
For the lines you have listed the Invercargill - Dunedin line can be added as profitable because of the major Fonterra plant at Edendale, near Invercargill, and other meat and timber plants where the goods are exported from Port Otago.
With Napier - Gisborne the only real traffic is Fertiliser at the momnet. However there are alot of forests in the area that will be maturing soon, and the main road is terrible. Spending a small amount on the railway could save major costs imposed on the road by the large number of logging trucks.

Geoff said...

"Brad - Nonsense. How are roads heavily subsidised?"

Because roads externalize a number of costs that rail internalizes.

An NZ Government study looked at all costs imposed by both modes from a neutral standpoint and found road transport in NZ pays 56% of the costs it imposes on society, while rail pays 82%. Road transport is therefore subsidized to the tune of 44%.

The RTF did not refute the figures either. They didn't want public attention brought to the matter!

Luke, Napier-Gisborne has a lot more than just fert. There are many traffics on the route, but mostly on the road, which remains in poor condition and is unlikely to ever be brought up to a high standard due to the nature of the terrain and the fact that bypassing such spots as the Devil's Elbow would cost hundreds of millions. We will continue to have a road falling to pieces under the constant heavy truck use while the railway with a higher carrying capacity sits disused, until KiwiRail starts following the public mandate of getting freight off the roads by accepting all railable freight (which is wagon load or more) instead of turning away customers as it does now.

libertyscott said...

Geoff: Which costs do rail internalise that road does not?

I blogged extensively about STCC here




Your 56% is more like 91% once you take into account rail not being expected to make a return on capital on its infrastructure, the PM10 amount of diesel dropping 97% since 2001/2002, noise being internalised in property values.

Rail meanwhile has been getting ever increasing subsidies.

Every lobbyist said the report justified their view of the world, including RTF.

Geoff, you might be interested to note the report you quoted stated that RUC revenue on the Napier-Gisborne route is significantly higher than the marginal costs of maintenance imposed by trucks on that highway. Moving freight from road to rail on that route will increase the costs of maintaining that road born by other road users.

and why should any business accept customers unwilling to pay the costs of providing the service?