A "investment" huh? Kiwirail is virtually worthless reports Bill English in the NZ Herald.
So what DID Labour and the Greens say about the renationalisation of the railway business? How did it come to this?
Well it started when it was privately owned and Tranzrail. Michael Beard was brought on board to be CEO because the share price of the railway had been in decline for several years. In essence, the railway had been run in the 1990s by railway enthusiasts who treated it as a network business, and expanded services. Beard found that it was not that much of a network business, but a business based on commodities. In essence about transporting:
- Containers long distances between ports, or between ports and major centres (Main trunk line Auckland-Invercargill, and Hamilton-Tauranga);
- Coal from the West Coast to Lyttelton, with minor coal business from Huntly to Glenbrook and Southland to South Canterbury;
- Logs and timber products in the Bay of Plenty to pulp and paper mills, and the Port of Tauranga;
- Milk from southern Hawke's Bay to Manawatu, and within Taranaki.
There is also a handful of other bulk commodity businesses, like LPG from Kapuni, and fertiliser to Gisborne, but that is basically it. Passenger services in the South Island are also profitable (urban passenger rail is subsidised like many bus services).
Michael Beard told the government that unless it subsidised the business, he would close unprofitable lines, and was seeking rail customers to invest in rolling stock to manage the capital risk. For example, log wagons gets damaged regularly in that traffic and have a long life. He was concerned that customers would seek short term contracts that could mean the wagons are useless to TranzRail if it loses the contract to road freight. On top of that, he also recognised that if TranzRail bought new wagons, its customers knew it had little option but to discount heavily to get business from them - because unlike trucks, which have more flexibility, if a major rail freight customers gives up rail for road, the wagons are useless. A big capital risk in a small country.
So what DID Labour and the Greens say about the renationalisation of the railway business? How did it come to this?
Well it started when it was privately owned and Tranzrail. Michael Beard was brought on board to be CEO because the share price of the railway had been in decline for several years. In essence, the railway had been run in the 1990s by railway enthusiasts who treated it as a network business, and expanded services. Beard found that it was not that much of a network business, but a business based on commodities. In essence about transporting:
- Containers long distances between ports, or between ports and major centres (Main trunk line Auckland-Invercargill, and Hamilton-Tauranga);
- Coal from the West Coast to Lyttelton, with minor coal business from Huntly to Glenbrook and Southland to South Canterbury;
- Logs and timber products in the Bay of Plenty to pulp and paper mills, and the Port of Tauranga;
- Milk from southern Hawke's Bay to Manawatu, and within Taranaki.
There is also a handful of other bulk commodity businesses, like LPG from Kapuni, and fertiliser to Gisborne, but that is basically it. Passenger services in the South Island are also profitable (urban passenger rail is subsidised like many bus services).
Michael Beard told the government that unless it subsidised the business, he would close unprofitable lines, and was seeking rail customers to invest in rolling stock to manage the capital risk. For example, log wagons gets damaged regularly in that traffic and have a long life. He was concerned that customers would seek short term contracts that could mean the wagons are useless to TranzRail if it loses the contract to road freight. On top of that, he also recognised that if TranzRail bought new wagons, its customers knew it had little option but to discount heavily to get business from them - because unlike trucks, which have more flexibility, if a major rail freight customers gives up rail for road, the wagons are useless. A big capital risk in a small country.
So Labour panicked and started on a path of rail policy. One of the first steps was to rescue Auckland ratepayers from Auckland councils' own insanity, and stop them buying the Auckland rail network from TranzRail. The Auckland councils were willing to spend over $120 million buying the network. Dr Cullen decided to override them and spend $81 million instead. The Treasury valuation at the time was that it was really worth no more than $20 million. From then we have the story of pouring money into Auckland's commuter rail network, but the bigger story was also bubbling along.
At the time TranzRail was seeking to bail out of the business, so after some extensive discussion, Toll Holdings was interested in buying the company. So a Heads of Agreement was signed with Toll that it would buy TranzRail (a private transaction), the government would buy the whole rail network for $1 and spend $200 million upgrading the track. Toll would have to pay track access charges to run trains on the line, and if it failed to keep up minimum levels of service, others could provide services. Toll promised to invest $100 million on new rolling stock.
The Greens fully supported this policy
In essence, Dr Cullen relieved Toll of the risk of the infrastructure, subsidised an upgrade of it, in exchange for Toll paying to use the network to cover ongoing maintenance. The only problem was that Toll didn't keep its end of the bargain.
Toll said it couldn't afford the track access charges required by OnTrack - the Crown company that took over the tracks. The Greens said the government should offer discounts (subsidies) on condition Toll carry more freight. So Toll kept paying less than the full amount, and ran trains, until ultimately it became clear it wanted out, and we all know what happened next.
Dr Cullen bought the lot - and bought it well above market price, when it really is worth very little. The claims that it was an "investment" are fatuous.
Kiwirail's locomotive fleet is aging and many will need replacing in the next few years if services are to continue. Much of the track is also facing renewal, as are some bridges. As rail is a long term investment (locomotives and wagons last a long time), it is only worth doing this if there is enough traffic to cover not only operating costs, but renewals and a return on capital. Otherwise, it is destroying wealth.
Indeed, when the railway was still state owned it used to run lines into the ground too. The Tapanui branch in Southland carried logs reasonably efficiently, but only barely covered operating costs. When a flood knocked out part of the track, it wasn't worth replacing it as there wouldn't be enough revenue to cover the cost - so it was closed.
The rail network is worthless if the view is taken that it all needs to be replaced in the next few years. I don't believe it would remain worthless if a business like approach were taken, like Michael Beard had suggested (although he wasn't entirely correct).
NEXT - What to do with rail?
4 comments:
* Overall, definitely one of your more objective posts on the rail issue.
* No - the "Railways" are not worthless at all, if it was to be closed down tomorrow and assets sold it's hard to there not being a very healthy surplus of funds. There are plenty of saleable assets and the goodwill surrounding profitable parts of it's current business.(For Mr English to come out with this is pure political - well something or rather.) Are you agreeing with him that it's worthless?
* Yes it's underperforming in terms of return to capital investment in the current environment - as are a lot of businesses.
* And another thing - the government has made or should have made plenty of money through the prime railway land that has been sold off over the years. Does this money show on the P & L? Probably not, because it is not technically owned by Kiwirail as I understand it. Other big businesses do this all the time, so perhaps real profits aren't being stated?
* Does rail have to be profitable? Historically it's been provided as a service. It offers a viable and usually a better alternative for serious volumes of freight. Does the dividend to government need to be of a fiscal nature?
* $195 million has to be spent to fix a 700m piece of motorway near Newmarket (Just how much money does the rail system require immediately?),
http://www.nzherald.co.nz/bernard-orsman/news/article.cfm?a_id=67&objectid=10559830
Can any comparison be made do you think Mr Scott?
1. It's saleable assets come down to land, ferries and scrap. Most of the rolling stock would struggle to be sold as it is narrow gauge and quite old. That's excluding that under a recession it would all be a lot harder. I doubt you could recover what was paid for it though. Most of the value is in the land, which was always the Crown's in any case. The land was never sold.
2. Underperforming is putting it mildly, it doesn't generate a return on capital as it can't pay its bills (track access charges).
3. Sale of land is a one off, and that appears on NZRC books. Hardly a sustainable business though.
4. If rail isn't profitable then it is not competing fairly with other modes (road, coastal shipping), and it is a subsidy as capital tied up in rail does not make a return. The state highway network generates sufficient surplus that it is reinvested in the network. If rail could do the same there would be little concern.
5. That piece of motorway is a new viaduct, which alone carries more people daily than the entire Auckland railway network. The money for that is easily generated by those using it through fuel tax and RUC (over 150,000 per day).
Michael Beard almost destroyed the company with his policies.
Napier-Gisborne had 20-30 trains a week during the height of each produce season during 1993-1995, under Ed Burkhardt's leadership. By 2001, under Michael Beard's leadership, it was down to 2 trains a week.
One management was achieving modal shift from road to rail, and one was not.
If the purpose of you and I owning rail is to shift tonnage from road to rail, then we need to replicate what Ed Burkhardt was doing. That means accepting freight that is marginal or low-profit.
Why is bulk road metal trucked long distance from Wellington to Gisborne today? Why is it not in rail wagons like it was in 1995? Because it's a low value commodity that will not make KiwiRail any money beyond break even.
But it will keep trucks off the road. And isn't that why we own it?
Geoff: The problem is Ed Burkhardt's accounting practices were um ingenius to put it nicely, capitalising maintenance expenditure, so that when money was spent on track it increased the book value of the firm, which is nonsense. Ed is a train enthusiast, and while what he did could be sustained for a short while, it didn't generate enough to replace wornout assets.
If Kiwirail can recover operating costs and long run costs to replace and maintain assets, then all well and good, though it should make a return on capital.
You see, keeping trucks off the road is NOT a public good in and of itself if to do so costs more than what you save from doing it.
As trucks pay RUC which recovers the marginal costs of their road use on the network, you are stuck with a very slender case.
Geoff - the reason "we" own it is because politicians spent our money, over the odds for it. In the process destroying hundreds of millions of dollars of wealth. Unless that can be recovered in monetised benefits, it will have negative for the country.
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