Should we really ditch Kiwirail?

Geoff SimmonsEconomics

Yesterday, Kiwirail finally spoke out against Treasury’s advice that they should be scrapped. Until now, the public discussion has been limited to a bizarre joust between Steven Joyce, Bill English and Treasury on one side, with Mainfreight on the other fighting in Kiwirail’s corner. Mainfreight’s directors and CEO have been calling for a more open-minded approach to funding rail, while Treasury and the Ministers (including Joyce who many believe is the champion of the road freight industry) have rebuked their calls as self-interested lobbying. Who is right?

At the moment we can’t answer that question. The trouble is that we evaluate and fund road and rail in completely different ways, so we can’t compare apples with apples. We certainly shouldn’t write off rail as Treasury and the Ministers suggest until it is evaluated in the same way roads are.

The Arguments

The stoush kicked off when Treasury’s budget advice was released, calling for Kiwirail to be scrapped as there is no feasible way it will ever make money. The Government did little to argue with the advice – implying they agreed. However, Bill English conceded that because New Zealanders seem to like their rail so for political reasons the Government would choose to keep it and simply stem the flow of losses.

Mainfreight spoke out against the Treasury conclusion that rail is futile, claiming that they were taking a narrow view of the situation. They argue that we can’t build or widen roads indefinitely so rail needs to be part of the investment mix. Joyce’s retort was that as rail users, Mainfreight were simply angling for more subsidies from the public pocket. If they wanted more rail they should pay for it by signing longer term, higher volume contracts with Kiwirail.

Who is right? Mainfreight are a freight company, so you wouldn’t expect them to care too much whether they are using road or rail to shift stuff around. Presumably they use whatever mode is cheapest or most convenient. So on the surface, Steven Joyce’s comments that they should simply pay for their preferred mode seems sensible. Rail loses money, road doesn’t – end of story, right?

Wrong. The trouble is that government treats road and rail projects quite differently in New Zealand, so they can’t be compared so simply.

Road vs Rail

First up, Kiwirail actually makes a profit on its day to day operations – $91m last year. Where it loses money is on maintaining the track infrastructure. That is no different to spending money maintaining the road infrastructure.

In the ideal world, any investment in land transport (whether maintenance, upgrade or new build) should look at which of the alternatives gets best bang for buck. And alternatives shouldn’t just compare different roads as happens now, but also look at rail or a road/rail mix. Without that type of assessment it’s impossible to know whether a particular road or rail project offers the best return.

Currently in New Zealand the funding sources for each type of project differ – rail funding comes from the Consolidated Fund, and road comes from a mix of road user charges, local authority rates and petrol levies. That is the reason that rail ‘loses money’ but roading doesn’t – because they are funded differently.

The reality of different funding sources shouldn’t cloud doing a rational comparison of competing projects.

Put Road and Rail on a Level Playing Field

We need to compare road and rail projects on a level playing field. The New Zealand Transport Agency (NZTA) budget should be invested in either mode – whatever returns the best results to society for the money invested.

If this change were made, road users would probably complain that their petrol levies are subsidising rail, but that is a shallow argument. If investing in rail means that fewer trucks are on the road, and this means fewer roads need to be built, then the outcome could be better than building more roads.

But Roads Pay for Themselves!

As Richard Prebble points out it is not always possible to build new roads or make them bigger (e.g. in Auckland) and even if it is possible then the cost might be far higher than it has been in the past. So investing in rail as an alternative to road might well stack up in certain cases.

Roads pay for themselves only because the RUCS, rates and petrol levy used to pay for roads rise if the cost rises. We saw this with the proposals under Roads of National Significance scheme, some of which didn’t even pass the NZTA’s own cost benefit test. NZTA couldn’t afford these roads within their budget so Government simply upped the petrol levy by 9c per litre to pay for them. Logically, rail should have been looked at as an alternative to these investments.

Before we scrap Kiwirail, we need to evaluate the impact

The same applies the other way around. Before shutting down Kiwirail, Treasury and NZTA need to consider what this would do to the pressure on our roads. What extra roads would be needed to shift the passengers & freight currently shifted by Kiwirail, and would that extra cost lift the rates, petrol levy and RUC charges? The extra cost might well be more than the $167m loss made by Kiwirail this last year – which means it would make sense for road users to pay to keep Kiwirail afloat. And maybe it makes sense to pay Kiwirail even more so it can do more.

We won’t know the answer until NZTA does the work. By comparing rail and road on a like for like basis we will know in no uncertain terms if investing in rail really is a folly (as Treasury suggests) or whether it actually makes sense.

Rail has other advantages too

Rail has a host of other advantages, which may or may not feature in the current Government’s analysis but should ideally be factored in. First up, rail is far more energy efficient (especially where it is electrified), so better from an environmental perspective (carbon emissions at least). There’s also safety – crashes have a human and economic toll. Trucks are over-represented in crashes and the bigger the vehicle, the bigger the mess. Rail by comparison is extremely safe.

Without proper information and analysis, it is difficult to know who is right: Mr Joyce or Mainfreight. The only way to know for sure is by NZTA evaluation road and rail on an equal basis.

Then we can see clear as day which is truly the bigger folly: KiwiRail or the Roads of National Significance.

Should we really ditch Kiwirail? was last modified: December 15th, 2015 by Geoff Simmons
About the Author

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.