Opinion & Commentary
No light at end of tunnel for KiwiRail
When KiwiRail was renationalised in 2008, Australians correctly referred to it as ‘sale of the century.’
Since then, it has become clear that the previous government’s justifications for purchasing a hugely expensive, loss-making asset were driven more by ideology and political expediency than sound economic or social reasons. KiwiRail in its current form will never be more than a loss-making asset.
The taxpayer, as Bill English puts it, is the not-so-proud owner of a ‘worthless’ business. The sooner it is rationalised for sale and privatised, the better off New Zealand taxpayers will be.
NZ Rail was purchased last year, in a process led by Michael Cullen, for $690 million plus ongoing concessions to Toll (so much for supporting local competitors). Adding other costs and budgetary allowances, the renamed KiwiRail has already cost the taxpayers a billion dollars. According to the Crown valuation since the renationalisation, rail already has dropped in value to $369 million. This is a public asset valuation – the KiwiRail ‘business’ value is zero.
When Michael Cullen announced the buyback of KiwiRail, it was heralded as an example of ‘the failed policies of the past.’ The story was that selfish foreign interests had bought our rail system, stripped it off its assets, and run it down, leaving the government to pick up the pieces.
But this is misleading. In repeated advice to Dr Cullen, the Treasury advised against the purchase of the rail system and that changing ownership of rail would not cure the underlying problems, including the unfortunate fact that it isn’t commercially viable. It earns enough to cover operating costs, but the capital costs of rail are unmet and substantial.
Allowing the current network to ‘reach commercial equilibrium’ would require the length of track to be reduced from 4,000kms to 2,300kms. There is no obvious reason why government ownership will make any difference to this situation.
Nor is there any reason why social goals need to be delivered through state ownership of a rail company.
The social goals of rail were environmental and strategic. The problem, which will become more relevant for KiwiRail in the coming years, is that public businesses serving more than one goal regularly underperform.
There are two main problems with the environmental arguments for rail. The first is that an ‘average’ emissions profile is complex. Average emissions do not suddenly drop if the odd freighted good is transferred from road to railways. Rail is better at transporting certain goods (coal, for example) and roads do other things better (livestock, courier deliveries, and concrete, for example). Given that fuel is a substantial cost for both transport modes, the most efficient mode probably has already captured the business of what it can efficiently carry.
The second problem with greenhouse emissions arguments for state ownership of rail is that an emissions trading scheme (ETS) or other mechanism (such as a carbon tax) internalises carbon costs. Under an ETS, Rail might gain an input cost advantage and can pass that onto customers, but this would occur regardless of the ownership of Rail.
Another argument made for state ownership of rail is its strategic importance or that its ownership is in the supposed ‘national interest.’ This is a weak argument. There are no proven economic development benefits of rail in New Zealand; governments can only subsidise losses. Rail will not necessarily reduce car congestion.
The public response to the idea of losing a rail system seems to be a stronger factor than any particular strategic concerns. For whatever reason, railways have a romantic appeal. It seems that for much of New Zealand, the idea of losing certain rail services is more powerful than the reality would actually be.
The paradox of this perception is that public ownership structures tend to have difficulty efficiently delivering the services they mean to provide. Without competition and the disciplines imposed by the marketplace, businesses run by the state are often bureaucratic and inefficient. This prevents creation of any substantial profits for appropriation by the government.
In the OECD’s last economic report on New Zealand, it was noted that ‘there is no fundamental economic rationale for government ownership in these sectors [such as rail] beyond perhaps a transitory phase.’
The reform, rationalisation and resale should be high on the Key government’s agenda. The longer rail remains in state hands, the longer taxpayers are exposed to risk and ever-rising costs created by political expectation.
If the current government is serious about moving New Zealand into the future, it must be prepared to reform. It must close or mothball unprofitable tracks and break up the rest of the system into businesses that can specialise, such as Wellington Metro, Tranzalpine tourist route, and profitable freight lines. Then it must begin a privatisation process.
The substantial amount of freed land can be sold or converted to other public good uses, such as John Key’s national cycleway.
While the ‘sale of the century’ can only be lamented, this government has a fine opportunity to set rail on a positive and economically sustainable path for the future that is not reliant on the government involvement.
Luke Malpass is a Policy Analyst The Centre for Independent Studies. His new report: KiwiRail: Doomed to Fail? was released by CIS in September.
