Rail nationalisation?

So Dr Cullen is thinking about buying the entire railway business of Toll NZ, as there is disenchantment with the "network nationalisation" model that the Greens were cheerleading some years ago.

Let's recall what has happened in the last seven or eight years:

1. In 2000/2001 Tranz Rail brought on board a new chief executive, Michael Beard, to try to arrest an ongoing decline in profits, share price and a mounting legacy of infrastructure and rolling stock that would need hefty investment. In short, the company was not making a return on capital that was worth investing further in it - what that means is simple, the average investor was better off putting money in bank deposits than in Tranz Rail. Michael Beard announced a new focus on freight businesses by commodity, and that a whole raft of lines looked like they should be closed, with much publicity surrounding the Napier to Gisborne line - an expensive to run line, with barely enough freight to keep a train a day going. He also announced Tranz Rail would sell off its passenger businesses.
2. Government leaped, various Ministers declared this plan was unacceptable and negotiations began on saving various parts of the network/system with subsidies. Auckland local authorities sought to spend $120 million of ratepayers' money to buy the entire Auckland metropolitan rail network to meet aspirations for a massive upgrade of commuter rail services. Central government did it instead, spending $81 million to buy back the Auckland rail network, despite Treasury valuations at the time, of it being worth no more than a quarter of that. Meanwhile Tranz Scenic was sold, and Tranz Rail agreed to not close any lines while it continued negotiations with government on rail policy.
3. Tranz Rail's shareholders were keen to bail out, and a deal was struck whereby Toll Holdings would buy the company, in exchange for the government taking over the rest of the railway network for $1. The government would own and maintain the rail network, while Toll would have a monopoly on rail freight services as long as it maintained a minimal level of service on each line. Toll was meant to pay adequate track access charges to keep the network maintained, while the government agreed to put $200 million taxpayers' money into the network.
4. The railway network has been transferred to Ontrack - a Crown company - which is meant to negotiate track access charges with Toll Rail. These negotiations have failed, and an independent arbitrator has decided on charges that Toll claim are unacceptable.

So. What now?

Simple. The government should, at the very least, call Toll's bluff. It should insist on Toll either paying the track access charges or buying the network off it. Arguably the government should ask for what it has put into it, minus track access charges, but let's face it - it's a dud investment. Something socialists are good at finding. Either Toll will pay up and make a profit, or buy the network and do so, or buy it and run much of it into the ground, or sell up the business to a coalition of rail freight users (you know, the ones who claim it is "so essential", but wont pay enough to pay the cost of running it).

The clear answer is this - the government is not best placed to know whether the rail network is economically efficient or not. However, some think it is.

Idiot Savant for one, is cheerleading this, based on a number of strawmen:

• Rail services are vital infrastructure: Wrong, countries can exist and thrive without railways. About the only section that can be seen as "vital" is the Wellington commuter rail network, and even then only because the alternative (expensive road widening) is not as cheap as keeping the rail network. Rail services have never made a good return on capital for decades, road transport, by contrast, has been privately run for a long time, and the road network generates a substantial surplus from road user charges that is reinvested in that network. Rail cannot even generate enough revenue to maintain what its got. I don't doubt that some of the rail network could be sustained, but clearly less that what there is.
• the key problem of private ownership - the tendency of private owners to cut back on maintenance spending and run down the infrastructure: Actually this reflects an economic fact, it was not profitable to maintain the infrastructure to do more. For example, when you can only sustain one freight train a day on a segment of around 40km (Rotorua), and a high level of maintenance makes that unprofitable then what should be done? Should non-customers pay for something they don't use? By the way, have you noticed how run down truck fleets and bus fleets are, not? Most long haul trucks in New Zealand are an average of around seven years old, and most major bus companies don't keep buses beyond 15-20 years. There is not a long haul locomotive on New Zealand tracks that is younger than 20 (or a diesel younger than 28) (and yes I know they have a longer service life, but engine technology has moved on a lot since the 1970s!).
• (renationalisation will) allow us to have a properly planned rail network and services again: I wonder when he last thought this happened? In 1990 and 1993 it collectively had NZ$1.3 billion (in 1993 values!) wiped, this happened before in 1982 when around NZ$100 million in debt was wiped (it collected this debt while it had a statutory monopoly on long haul freight). Is this the proper planning that saw investment in new goods sheds that were shut a few years later, or the manufacture of its own rivets at several times the cost of buying them off the shelf?

However he makes one correct point "we're effectively subsidising them, and paying for their profits, by maintaining the infrastructure they depend on to run". Indeed, but the answer to that isn't to pay for the business, after all if YOU were Toll Holdings, wouldn't you ask a good bit of money for the business if the government wanted to buy you out? Labour might threaten to pass legislation to force nationalisation, but wouldn't that look a bit Robert Mugabe or Hugo Chavez - and in election year too.

So, I'm expecting this to drag on. Toll Holdings knows though that its best deal is almost certainly under a Labour government rather than a National one, so it will want to strike a deal - Labour also knows it wants to be the government that "saved rail" for whatever reason. In addition, the Greens will demand it as one of their "faith based initiatives". So you might find another wad of taxpayers' money being thrown into the rail network to prop it up a bit more, otherwise I dare all those who want the government to force New Zealand taxpayers to save rail to do something...

save rail yourself. Get like minded people to come together and offer Toll Holdings a price. You might need to get the rail freight customers like Fonterra, Solid Energy and the like to join you, but make the effort. If you're not so inclined, then buy a train ticket on one of the few long distance passenger services left - at least you can say you've used it, since your taxes have paid for the lines!