Kiwirail's asset revaluation - because Labour concealed the truth with accounting: UPDATED

Regular readers will remember that I’ve been long critical of the bizarre Treasury valuations of the social policy/heritage/commodity sector subsidy project called Kiwirail. So the latest report that this “asset” is to be revalued hardly surprises me. However, I am enormously dismayed at the unprofessional politically driven basis for valuation of this business which was instigated by the previous Labour government. It is one thing to throw taxpayers’ money at buying it back, another to hide what a real dud it is on the government accounts. Let’s bear in mind that neither Labour, nor the church of the Holy gRailway the Greens, have any interest in really showing what it’s worth.

So let’s start with the latest announcement. What does it mean?

The short version is “I told you so… again”. What was reported before has finally happened.

The land assets will remain under the NZRC, which has in fact been the case since 1 April 1982 when it was created. There was always a peppercorn rental of NZ$1 paid for use of the land under the rail corridor, which given that the Crown isn’t paid for the land under the road network, has always seemed an easy compromise in dealing with the thorny issue of valuing strips of land with little alternative use (especially roads, given land without access to roads has greatly diminished value). This should not be controversial, but let’s be honest about what the valuation of that asset should be – the market value of the land if sold. A study commissioned by the MoT valued it, in 2001, at NZ$462 million. This could be indexed to today’s values and priced, but I doubt it would top NZ$1 billion. Bear in mind this was never privatised in the first place, because every time TranzRail closed a rail line (which was rare), the corridor would, ultimately, be able to be sold by the Crown.  So the valuation was done professionally based on assumptions of the value of neighbouring land being applied, in most instances, to a narrow inaccessible corridor.

Yet the Annual Report 2011-2010 indicates land is valued at just over NZ$6 billion. This is quite absurd, so is the asset write down going to address this? Let’s continue.

The transfer of the other assets to a separate SOE is exactly what happened before the last privatisation, when NZ Rail Ltd was set up. The logic of this is clear, as the issues around rail land and its use are complex. Partly because of Treaty of Waitangi claims over Crown land, partly because the confiscation of past land under the Public Works Act means that if the land isn’t to be used for rail purposes, the previous owners or their successors must be offered the land back.

So the new SOE will be responsible for everything, other than the land, just like before. This is already raising the spectre of a new privatisation among those who treasure Kiwirail because they think it will be the saviour in the event oil prices and climate change suddenly decimate the viability of road transport.

Bill English states the total assets are being written down from NZ$13.4 billion to NZ$6.7 billion, this being both the land and the operations business. A simple halving of value, indicating a lot of in depth work was not done into this at all. The Kiwirail press release explains this further by saying that the non-land business will carry a valuation of up to NZ$1.3 billion “reflecting the revenue generated by it” rather than the current NZ$7.8 billion.  That's helpful in analysing this further.

The land component of the valuation seems to retain most of its book value, as it will be worth around NZ$5.4 billion, yet wont be expected to make a return on most of that asset (given the land under the roads isn’t expected to either). A small writedown of around NZ$600 million, but not nearly enough. Has the land under the rail network really shot up in value by a factor of 11 since 2001?  Kiwirail's Annual Report indicates that a professional valuation was done, no doubt in good faith. However, does that really reflect the market value of this land? If a railway line across a field, or behind some warehouses or houses is sold, are there really any other likely buyers beyond the neighbouring property owners? The discrepancy between valuations seems extraordinary, and I doubt whether valuations of railway corridors are done frequently enough in New Zealand to enable it to be equated to other such valuations.  

Setting that to one side, the valuation of NZ$1.3 billion for the operating business still seems wildly excessive. It was bought for NZ$665 million. How has it suddenly become worth double that since 2008? Is it revenue? Well no.

In 2011 it had gross revenue of NZ$667 million. It also got nearly NZ$345 million from taxpayers (yes you’ve spent more than a billion on this one and counting). However, its operating costs were NZ$567 million. Cool NZ$100 million profit before government right? No. Once you remove roughly NZ$60 million in subsidies for operating Auckland and Wellington passenger rail services, you’re down to about NZ$40 million. Not so good then.

Bearing in mind that the NZ$345 million from taxpayers is a capital grant to replace and renew some assets, you’ll also see it’s clear this isn’t a sustainable business able to renew its capital.  Otherwise it would take out debt that would be repaid over the depreciated life of those assets, which of course is not going to happen (but Treasury of course has taken out debt to pay for the nationalisation and all of the capital grants).  Bear in mind also that the market valuation when Toll Rail was nationalised was only NZ$435 million. Has the government really trebled the value of this business even though it has never paid a dividend yet? 

One guess as to why Opposition Finance spokespeople haven't asked that - because they fully supported this destruction of taxpayer wealth.

So the valuation continues to be generous in market terms. Kiwirail, if sold, would not go for the sort of money on its accounts, even if it continued to get hundreds of millions of dollars in subsidies and grants every year.

The use of replacement cost as an asset valuation gives a false impression of the value of an asset if it to be sold, simply because it does not generate sufficient revenue to justify ever replacing the asset on the scale (and in the same way) as it was originally acquired.

My previous post on this was right.

Kiwirail is not an “investment” in its current form, but rather an emotionally laden piece of heritage that mixes some commercial elements, some local public policy elements with a lot of hyperbole and wishful thinking.

Debates about pouring taxpayers money into it need to be based on some market based accounts, accounts that might actually show it can generate a reasonable rate of return based on what it could be sold for – but which wouldn’t ever justify the money poured into it so far.

For that reason, given both National and Labour have thrown over a billion into this taxpayer owned bonfire, and the Greens are just gagging to throw billions more at it, means that having debates based on reasoned balanced analysis are absent when most of those involved prefer conspiracy theories around corruption, hyperbolic evangelism about rail “saving the economy” and economic illiteracy.

Most of my past posts on this subject are summarised in this one, on what it would take to make the railway a viable business.

It includes the following ones:

-  The Greens posted a link to a great presentation on Kiwirail, which actually destroys most of their own self-generated myths about the business.  I link to it here.

-  Where is the rail network viable?

-  Bill English admits the rail network is virtually worthless

Another good read is this from Ross Clark which explains that the "failure" of rail privatisation is because there are some serious questions about the viability of rail at all.

UPDATE:  I know this article has been linked to by a couple of forums.  Please read the articles at the bottom and indeed the presentation I linked to here. You can romanticise as much as you like, and I have a stack of Rails magazines from the 1980s and 1990s, and the NZ Railway Observer as well, so I am a rail enthusiast at a personal, emotional level, but the hard economic facts are that rail is an expensive way to move goods given the high capital costs of the bespoke equipment and infrastructure.  Only when volumes are high, frequent and over long distances do the fuel and personnel advantages start to offset this.  It's about economics.  In the US, rail freight succeeds in spite of serious undercharging of trucks on untolled interstate highways, in NZ Road User Charges contribute to a very different picture.

Union and religious bullies tell you when your business can trade

Once again, union bosses and socialists - most of whom haven't created wealth from scratch in their entire lives - have found common cause with conservative Christians, in blocking legislation that would have allowed businesses to open the days they want to - this time in Timaru only.

For shame. 

I expect it of the nasty little busybodies in the Green and Labour parties, who can't even let an owner-operator business open the days he wants to, who embrace the religious (who they spurn most of the time), because they fear that some more people might feel like they have to work on a public holiday.

It is not about allowing people to shop.  It is about allowing property owners to decide when they can open their businesses to trade. THEIR businesses, not Maxine Gay's, not Peter Shearer's. 

It's none of your bloody business.

Same to the petty preachers who think because it is against THEIR religious belief to do business on certain days, think they should by force demand others obey their beliefs.

Get out of the way.   The fact that National MPs opposed this shows that the shadow of Rob Muldoon hangs over this party with such gutless "pragmatic" despisers of choice and free enterprise.

Jacqui Dean's attempt to let her constituents decide for themselves if they wanted to open on Good Friday and/or Easter Sunday, has been thwarted by 70 MPs who think they know best.

Yes it was only Timaru, but so what?  It is one step towards freedom.  If only more constituency MPs would do the same, then the country could see tiny roll backs across the land, and eventually they might get it that there is no point having such laws at all.

It wouldn't be compulsory to open on those days.  Where is there a law making that compulsory?  Who even suggests that, except those with the warped post-modernist belief in floating strawmen that distract from the real argument - property rights.

I haven't seen the breakdown of who voted on this Bill, but all those who opposed it have shown themselves up for what they are - petty minded little busybodies who think they know best how ordinary men and women, shopkeepers, run THEIR businesses.  Forgetting of course, that these business owners are those who pay the wages of the MPs and indeed the edifice of the state these MPs so love to harness to do their bidding.

Is fuel tax in the UK becoming impossible to increase?

I hope so.

Yesterday, Chancellor of the Exchequer George Osborne did his latest U-turn on his budget – he deferred a 3p/l increase in fuel duty that was planned for August. The increase had actually been planned under the Gordon Brown administration, which was always keen to increase taxes on fuel faster than inflation. The coalition government simply sought to maintain it, but was under pressure from Labour (hypocritically) and others to not proceed with it, so it has been delayed.

Now this move is welcome. Unlike the US (and New Zealand now), increases in fuel tax in the UK are not dedicated to spending on transport, but general revenue (and indeed four times as much is collected in fuel tax than is spent on roads). The statist media (indeed state media in the form of the BBC and Channel 4) talk about how it is a “cost” of £500 million (£1.5 billion if the increase is permanently suspended), but this is of course only the nonsense accounting view of Treasury.

It is £500 million that remains in the economy to be spent, invested or saved by individuals and businesses, rather than be spent by government. On top of that the official view (ineptly put by junior minister Chloe Smith) is that it is “funded” by savings in spending from various government agencies. All good stuff, but it does raise two issues.

The first is whether it is permanent. It’s unclear how it will be easier to raise fuel duty in January compared to August. The same politics will arise then and rightfully so.

The second is whether the UK is finally getting to the point where atlas (in the form of motorists) will shrug and say “no more”, at least in relation to fuel tax. That stage has already been reached in the US where the federal government has been unable to raise fuel tax since 1994 and neither have 20 states. It’s causing concern because, unlike the UK, fuel tax in the US is dedicated to expenditure on transport, mostly roads and so it is becoming difficult to fund improvements and maintenance. As a result, more and more states are looking at new ways to pay for roads, with tolls for new links and capacity being popular, along with letting private companies build improvements and toll for them, others are considering how to replace fuel tax completely with direct user charges.

In short, the politics of increasing fuel tax are promoting a shift to user pays, away from taxing proxies, in the United States.

Opposition to fuel tax increases is understandable. People don’t want to pay more when they see government poorly spending the money it does get, with money misdirected to politically motivated new works whilst maintenance falls by the wayside. Tolls are grudgingly supported because they get linked to what you use.

In the UK, opposition is twofold. For a start, motorists feel unfairly singled out, with tax at around 59p a litre BEFORE VAT, tax is the majority of the price of fuel.

Most grudgingly accept VAT on most goods and services, because it isn’t targeted. There is also tolerance of taxes on alcohol and tobacco because of the links between their consumption and health impacts. However, why fuel?

Since none of the money is dedicated to roads (and it is many times higher than the road budget) and roads are crumbling, it seems it has nothing to do with that.

Since there is a discounted rate of VAT on electricity and gas, the environmental argument seems fatuous and inconsistent.

What remains is a Nanny State finger pointing view, aligned to the Green Party, that people “shouldn’t” drive and so fuel tax is a way of encouraging them to use public transport, cycle or walk. The fact that the freight hauled on most trucks has no realistic alternative mode is blanked out. The fact that so many reject other modes, even though they are subsidised (with taxpayer subsidies for rail almost as much as total spending on roads), indicates that it doesn’t meet their needs.

So the overwhelming impression is that fuel duty in the UK is about fleecing people who have few options to avoid it.

It is about time motorists stood up and said enough.

There is a reasonable argument that, in the absence of tolls and privatisation of roads, a tax on fuel used on the roads is a rough proxy for user pays. So if the rate of fuel duty was to match that (taking into account tax taken from annual vehicle excise duty) it would drop from 59p to around 9p a litre (in fact given the massive backlog of capital work needed to renew the network I’d say 10p). If that was transparent, then it would show it up for what it is – a tax grab. Any reasonable view of it being environmental would mean increasing VAT on electricity and gas, which is also unpalatable.

It SHOULD become political unpalatable to continually increase fuel duty – a tactic that Chancellors of the Exchequer have been using since John Major, with Gordon Brown particularly keen on milking money from motorists.

Of course the UK can’t cut fuel tax more than half, for EU law prevents reducing tax on unleaded fuel below what is around 29p/l. Yes, the EU actually sets FLOORS for taxes with Directive 2003/96/EC.

Meanwhile, it ought to be time that UK motorists generally said no – and were louder and more militant against persistent tax increases. This fuel duty increase postponement should be permanent, and fuel duty ought to be in decline.

Shock news - Socialists hate constraining local government

Some months ago Nick Smith raised himself in my estimation (to be fair, the only way was up) by declaring that the “power of general competence” granted local authorities around a decade ago by the then Labour-Alliance coalition government, with warm support from the Green Party, would be overturned.  Rodney Hide, whose beliefs should have meant he was at the forefront of this, failed, and Nick Smith, who is typically considered to be one of the more centrist of the Nat Cabinet Ministers, embraced an agenda of local government sticking to “core services”.

Now setting aside what they are (and I think it could be very few), this has the promise to help keep local government out of private property rights, out of the way of businesses, individuals and keep rates bills from rising faster than inflation.   It essentially would stop councils thinking they can grow functions as long as they can force ratepayers to pay for them.

When Labour, the Alliance and the Greens embraced “empowered” local government, it was part of a wider belief that the role of the state, including local government, should not be constrained by legislation if elected councillors wanted local government to do things.  It was saying that when councillors are elected, they should have the widest mandate to “do as they wish” collectively,  because accountability would lie at the next local election.  All very well if you think of government and society as being a conglomeration of groups with interests that are all competing, which are gloriously tempered by democracy.  Not very well if you think government is the body with the monopoly of legitimised force against individuals, which typically takes from the many to give to the few, and which regulates some for the satisfaction of others.

You see, those on the left of the political spectrum have a benign, almost warm fuzzy view of government because it can do things that they can’t do themselves – for them it is about forcing people to do things or banning them, or engaging in commercial or non-commercial activities that none of them could ever imagine being able to do so by choice.   For me, it is about using the coercive power of the state to use other people’s money to pursue pet projects and to take rights or property from some less favoured individuals for the benefit of more favoured ones.

It is hardly surprising then to read the news that Wellington’s Green Party Mayor is upset about the proposed changes, and spouts the typical propaganda line used by anyone who thinks local government is representative.  She talks about it constraining the “self-determination of communities”.  Really? For a start, a community does not have a collective brain, it is comprised of individuals with their own views.  As a result, a community is not a “self” so cannot have “self-determination”, because it is comprised of hundreds or thousands of “selves”.  If thousands of people want to act in a particular way, they do not need local government if they are not intending to use force.  They can fund raise, they can spend their own money, they can open up a business, or a charity or they can boycott one.   Indeed, self-determination of the individuals in a community is very empowering.

Yet what Celia Wade-Brown means is the power to force people to pay for something they don’t want, or the power to ban people from doing or make people do things they don’t like.

The idea that people in a city are somehow “empowered” because a minority of them bother to vote for a cabal of councillors who are off the leash and able to do whatever a majority of them deem as being a “good idea”, is a nonsense akin to the absurd theory of the “vanguard party” of the people which represents the “general will”. (Remember your will if contrary to that, is at best meaningless, at worst dangerous).

For the leftwing gutter rag the Standard to support this view is unsurprising.  Besides generating a headline that is sheer nonsense (if only it were true), it talks in glowing terms of local democracy, largely because statists like themselves think of government as doing “good”.  It makes the false claim that New Zealand local government “has the lowest gathering of funds at a regional level in the entire OECD”, when the UK easily outstrips that (there being very low contributions from council tax).  It raises the red herring that “attempts to change this with regional fuel tax and congestion charges” have been vetoed by National, when there is no evidence that any local authorities in New Zealand have wanted to do either (nor did Labour push for either outside Auckland).  Nothing gets statists excited more than wanting new taxes and new ways they can interfere in the lives of businesses, property owners and individuals in the guise of “local democracy”.

It cites an article by Christine Cheyne of Massey University.  The same Christine Cheyne who was an advisor to Prime Minister Helen Clark on local government and transport policy.  Not surprisingly she will take the view that the status quo is just wonderful.

Local government should be constrained.  Regional Councils were once just regional water catchment boards, they should return to this role.  Territorial authorities were once simply land use planning agencies that also looked after local roads, parks and refuse collection, they should return to the planning function alone with the rest of the activities privatised by both sale and transfer to ratepayer shareholding owned entities.  The monstrosity that is Auckland Council should be curtailed back in the same way.  If local government is to have any function it can be as a local arbitrator and record keeper of property rights in land (and waterways and airspace).  Nick Smith’s bill should turn the clock back to the situation pre 2002 in many senses (although it doesn’t have a clear vision for its role in transport, which is another issue).  It isn’t enough but it is a good start, the next big step ought to be to deal with the RMA – but I’m not holding my breath for that one.

Meanwhile, you have until 26 July to make a submission on the Bill.  Go on, encourage Nick, you know the other lot will be moaning and groaning for councillors to keep and strengthen their powers to tax, spend, borrow and regulate.   The Labour Party, which treats local government as a training ground for its new generation of finger-pointing, do gooding, control freaks, is already prepared with an automatic submission website (which I wouldn't waste your time editing, because they wont forward submissions that disagree with their "we know best" point of view).

Egypt's new dawn or a new dark age

For many years, there has been much concern expressed in the Western world about the consequences of letting the Muslim Brotherhood take over in Egypt.  After all, it was the justification for providing oodles of financial support for Hosni Mubarak’s regime, after he succeeded Anwar Sadat (who dared to make peace with Israel and was assassinated as a result), who himself succeeded the warmongering personality cult figure of Nasser.   Egyptians have been under the jackboot of dictatorship for decades, and as much as US Administrations have appeased Mubarak and Sadat (given both have maintained peace with Israel and kept the Suez Canal open), their opponents have long deified Nasser.  Egyptians who dared cross with any of the regimes would face a police, secret police and military ably dishing out summary justice, engaging in imprisonment, torture and summary executions.  

There were two comforts casually taken by Western supporters of the Mubarak regime.  One was that he wouldn’t wage war against Israel, back Islamists in Iran, Israel or elsewhere.  The value of having an ally who is peaceful in an area that has been volatile, is considerable, especially when it can have its hands on the throat of one of the great shipping routes between Europe, the Persian Gulf and Asia.   The second was that Egypt appeared to modernise.  It could be seen in the malls and shopping centres in Cairo, where young Egyptian women would walk around in jeans, hair uncovered and look little different from those in Europe.  It could be seen in the relative vitality of a country that welcomes tourists, has many fluent in English and had a semblance of a civil society.   However, underneath that entire facade were multiple pressures.

The first was the tired nature of living under a tired corrupt regime that had last more than 30 years with one president.  A regime where wealth and success could come to the well connected, the relatives, the friends and those willing to share with those in power the booty of contracts, trade and business.  A regime where the victims of such corruption, victims of the extra-legal use of authority by the regime would be ignored, at best.  A seething resentment that a country that was becoming wealthier, more connected, with an increasingly younger population, was sitting atop something rotten.  

The second came from those who resisted the modernisation, who saw the wealth and success of fellow Arab regimes to east and west, and would spread resentment at the dependency of Egypt on the succour of the United States (Egypt being, until recently, the second biggest recipient of US taxpayer funded aid after Israel).  They would prey upon the fact that most Egyptians are Muslims and see the hope in dealing with corruption, crime and what they perceived as moral decay, in dumping the quasi-secularism of the Mubarak regime, in favour of Islamism.  They did not think of the 10% Christian minority, or the tiny Jewish minority, nor did they think women should be anything but “equal, yet not bearing duties against their nature and role in the family”.  They would also prey upon the strong anti-Israeli sentiment, which harks back to the families whose sons were victims of the wars Egypt had waged against Israel in the past, and the strong fraternal sense of injustice many Egyptians felt with Palestinian Arabs.

So when Egyptians threw off the Mubarak regime and held elections, the inevitable binary result was that the top two candidates would represent the old regime, and the organisation best organised and longest protesting about it – the Muslim Brotherhood.

With Mr. Morsi becoming President, in a land that no longer has a working Constitution, the stage is set for a new battle.  Given the Parliamentary elections have been ruled null and void, these will presumably be held again, but he faces the army first and the smaller mass of Egyptians who support modernity.  The women who deep down fear new laws about what they wear, who they marry, their rights to divorce, their treatment if abused, their employment and their work.  The Christians who fear new laws about worship, about free speech, about education and about equal treatment under the law.  The Egyptians more generally who want a society where the state protects everyone’s rights, as individuals, including the right to apostasy (which has, at best, been controversial and difficult in Egypt).

For now, it is likely that Egypt will not become the new Iran.  It is still receiving US government largesse, which is largely benefiting the military.  Any shift in policy that results in this ending will risk a military coup, given the sheer size of the Egyptian military.  However, it is difficult to envisage how a man who belongs to an Islamist organisation, which espouses Sharia law as definitive, which seeks to restrict the role of women, which supports the abolition of the state of Israel and considers jihad and martyrdom as glorious, is going to ever represent a step forward.

If his colleagues get elected in the Parliamentary elections (along with Salafists who are more extremist), then one can envisage a new constitution.  Not one that separates religion and state, nor one that prioritises individual rights.

The intellectual bankruptcy of supporting democracy as the measure of freedom will then be revealed. Egyptians will be deemed to have “supported” an Islamic state, and it will be “better” than the Mubarak regime.

Those who would protest in the streets for civil liberties, for the rights of women and the rights of minorities would appear to be willing to surrender those, for the victory of a man who represents rejection of Mubarak, and implicitly, the United States which backed him.

It may be that fears of an Iranian style Islamist revolution are wrong, it may be that Mr. Morsi is in fact willing to support a secular Egypt, that respects religious and individual freedoms, that fights the scourge of corruption that has long infested that land and takes only token steps towards embracing the long held agenda of an Islamist state.  

However, it is clear that being allowed to vote for a President is not freedom.  Individual rights are not protected when people who do not belong to the dominant religion, live and worship in fear, and when laws are enforced to prohibit people abandoning the dominant religion with the death penalty.

State religion, deep cultural misogyny, suppression of “blasphemous words and deed” and death worship are not compatible with individual freedom (including the rights and equality under the law for women), freedom of religion, freedom of speech and embracing of life.  

Like a train that has escaped one tunnel, had a brief smattering of daylight and may now be about to enter another…