Tuesday, July 31, 2012

Urban myths about Kiwirail

Once again the Alliance Party and rail unions' views on Kiwirail are being touted by the Labour Party as truths.

They are not.  Don't believe me? Thought not.  However, you might believe the Institute for the Study of Competition and Regulation based at Victoria University.

I've blogged this before, but it is worth repeating.  The full presentation debunking the myths is in Powerpoint here.

Here's a good summary I wrote before...

1. Rail network shrinked due to privatisation. Wrong. Almost all line closures were under state ownership when rail had a statutory monopoly on long haul freight!  The track network length has barely changed in 20 years.

2. Rail stopped being viable after free market reforms. Wrong, it stopped being consistently financially viable by 1945. It had short pockets of profitability since then. The early 1970s saw it drift from profitability to losses, which weren't recovered until 1983 after debts had been written off and it started being paid by government to run commuter rail services in Auckland and Wellington under contract (and a host of unprofitable freight lines, such as the Otago Central Railway).

3. Track Maintenance was run down after privatisation. Wrong, it was already being run down in public ownership, track was run down more, but sleeper replacement under private ownership increased.

4. Rail is worth a lot as an asset. Wrong. The NZ$12 billion book value of rail that was on the Treasury accounts was a nonsense, equating it to all other SOEs combined (e.g. 3 power companies, Transpower, NZ Post) which all make profits. Most of the value is based on a replacement cost if it was built today, which of course would never be done. I'd argue it is probably worth 4% of that at best.   It's worth noting that this has only been partly fixed as of late.

5. Rail only needed rescuing after privatisation. Wrong. It has been rescued several times before. It has long had serious economic viability issues.   In recent history it was bailed out in 1982 (all debts cancelled, and the operation commercialised), 1990 (had the debt of the North Island Main Trunk line electrification written off as a "Think Big" debt, then NZ$350 million, and another $1 billion wiped off to pay for the restructuring to make it viable).

6. Rail is good to reduce accidents, congestion and environmental problems Wrong. "the optimal level of externalities is not zero – at some point it becomes more expensive to lower them than the welfare created by their further abatement" Rail related deaths are only slightly lower than truck related. No evidence that rail reduces congestion. Sea freight is twice as fuel efficient than rail, but little interest in that mode.  Indeed Greens actively oppose international ships carrying domestic freight along the coast to placate their unionist mates.

Like I said before, the presentation basically says that rail is not as fuel efficient as is quoted, and that only 30% of the current network handles 70% of the freight. It suggests concentrating on the main trunk, and lines to the Bay of Plenty and the West Coast

Point scoring not principle

The paucity of principle in modern politics is unsurprising, so let's just establish the Labour Party's view on state ownership.

1.  The State can buy whatever it likes, even large unprofitable businesses, without an electoral mandate.   Taxpayers are expected to cough up for whatever politicians think they should buy with their money. 
2. Successful privatisations have been erased from history.  Opus, the former Ministry of Works, is now a successful multinational consultancy firm taking New Zealand expertise to the world.  Auckland Airport is a shining success as an airport.  Hardly a peep is heard of Contact Energy, bringing private competition to a state owned market.  State Insurance hasn't been state for 20 years.  NZ Steel continues to be a competitive exporter and productive job creator years after it was sold.  

3. It was ok for Labour to try to sell 20% of a state owned asset to its largest foreign competitor.  Dr Cullen was salivating at the chance to sell part of Air New Zealand to Qantas, which would have ended competition on domestic routes, sewn up around 80% of the Trans Tasman market to one operator.  However, that was "ok".  Only the Commerce Commission stopped this cosely set up deal, although few remember how much effort Qantas made to lobby the Labour Government at the time to delay giving the consent to Singapore Airlines buying 49% of the then privately owned Air NZ/Ansett group, which was a key step in kneecapping the group - in Qantas's interest - as it knew the NZ government wouldn't bail out Qantas's biggest domestic competitor (Ansett), and scuppering the Singapore deal bought Qantas years of dominance on the Australian market.

Either you're upfront and believe the state should own businesses and acquire new ones under certain principles, or that it shouldn't and should divest itself of them over time.

The Greens believe the former, Labour and National believes in none of the above and all of the above, depending on who you ask, and what time of day it is.


Geoff said...

Have to laugh at the 30% of the network carries 70% of the freight bit. You should check out the roading network, where about 10% of all NZ roads carry 90% of the freight. Hey, let's close down 90% of the roading network. Why should road users on the busy roads subsidize the quiet roads, just so some farmers can live out in the whop whops? And please don't talk about wider economic benefits. If WEB's are not good enough for railway lines, they certainly are not good for country roads.

libertyscott said...

Yes, local roads should cost more, in fact properties along local roads should ideally pay an access charge to reflect the access value these roads provide that is the difference between revenue generation from users and the cost to sustain them. Indeed, the CAM has always indicated that local road costs on a per tonne km basis are higher than state highways, so state highway RUC is proportionately higher than it should be.

Some may argue that property owners already pay that through the local share of local road costs through rates (by far the biggest expenditure item of rural councils is the road network).

I wouldn't argue WEBs for local roads, it's absurd. The benefits of local roads in rural areas are almost entirely captured by adjacent property owners, in urban areas the traffic densities are such that the long run capital costs of the local network on a per vehicle km basis are tiny.

Rail's fundamental problem in NZ is insufficient traffic to recover the costs of expensive bespoke infrastructure - except on a core network.

The big difference between the rail and road networks is that rail, mostly, doesn't have the characteristics of hub and spoke network economics that other network utilities have. Coal, milk and timber are point to point freight operations, rail doesn't pick up freight from lots of locations and distribute it to lots of others like it used to 30 years ago - less than 20 general rail freight centres today.

Anonymous said...

It;'s not an asset. Its a liability. a huge fucking liability. The biggest reason why we can't even sell it if - if there was any contract to keep the trains running we'd have to give billions away to bribe anyone to take it on - is that no doubt Labour & The Greens will buy it back again whatever the cost.

Read Don Brash's speech last week. NZ is bankrupt, is long-term outlook is basically worse even than Greece or Portugal - there's no money for our existing super, health or welfare commitments let alone a fucking train set.

The whole thing should be scrapped, all the rails ripped up, frankly chucking everything into the sea and just dumping it (so we would have to pay someone to take it away) is the best move NZ can make with rail - or frankly, with any other "state asset" including power companies, schools & hospitals.

There isn't any money left. Soon we won't be able to borrow. Every government liability should be scrapped as soon as possible - and every payment stopped.

That's about all we can do.