Opinion & Commentary
KiwiRail mired in Labour ideology
On election night, Helen Clark expressed hope that all her government’s gains would not go up in a ‘bonfire of right-wing ideology.’ Curiously, few have dared question the Clark government’s ideological inclination toward state ownership of assets – especially the flawed decision led by Michael Cullen to nationalise the rail network.
When the government bought back NZ Rail in 2008 and renamed it KiwiRail, it was supposed to herald a new era in integrated and sustainable transport strategies. Modern locomotives would wind their way across beautiful New Zealand vistas, carrying not only freight and people but also the aspirations of a country boldly facing the future. Private sector ownership was out; public ownership of what the government called an important ‘strategic asset’ was in.
The government publicly presented the buyback as the only obvious result of the ‘failed policies of the past’ and as a fait accompli to the New Zealand taxpayer, who should be grateful to such a visionary government for having the guts to make this bold move.
In the year since the purchase, we can properly appraise the decision and it appears that the rhetoric was little more than just that: rhetoric. The purchase is not grounded in economic reality, strategic thinking, or environmental concerns. Instead, it is an ideological Trojan horse and an expensive vote winner.
It is best to examine KiwiRail in the light of an outgoing government that needed something to fit into its narrative about ‘the failed policies of the past’ and the supposed evils of privatisation. Little else demonstrated that better than Rail, a system that had lurched along because the Labour government could not bear to see it shrink to an economically sustainable size without subsidies.
Consider the following facts:
KiwiRail was bought for $665 million. That figure then turned out to be $690 million plus other spending commitments and ongoing preferential treatment for Toll’s trucking business at the expense of NZ-owned competitors (so much for for supporting local business). This failed policy has already cost the taxpayer around a billion dollars.
KiwiRail has been subsequently valued at $369 million. This was an upfront loss to the taxpayer of $321 million – a loss of almost a million dollars a day for a year after the purchase. Put another way, $320 million of taxpayers’ money was spent for value that never existed.
Further, this valuation is an optimised depreciation valuation, a public service entity costing. In other words, KiwiRail is worthless as a business.
In order for rail to come close to commercial equilibrium (break even), the network has to shrink from 4,000kms to 2,300kms. The government was repeatedly advised of this prior to the purchase by the Treasury.
The rail system required a subsidy under private ownership to operate a network of this size. This policy will continue under public ownership – except the subsidy will get larger.
In purchasing an asset this bad, the Labour government demonstrated its allegience to an ideology: that government ownership and operation of rail is inherently more desirable than private ownership and operation.
The government bought the asset hurriedly and went into the last election with the campaign slogan of ‘Kiwibank, Kiwisaver, KiwiRail – keep it Kiwi, Vote Labour,’ leveraging off the idea of positive public ownership of assets.
The difficulty with this jingoistic approach, however, is that organisations such as the World Bank say ‘privatisation is now so widespread that it is hard to find countries not using this approach: North Korea, Cuba and perhaps Myanmar make up the shrunken universe of the resistant.’ Paradoxically, the buyback was, to use the words of Michael Cullen, ‘an ideological burp.’
The OECD considers that in New Zealand, ‘there is no fundamental economic rationale for government ownership in these sectors [such as rail] beyond perhaps a transitory phase.’
With such a commercial and political mess on its hands, the current government has only one policy option: reform, rationalisation and resale of KiwiRail. The difficult reality is that many of the unprofitable lines must be closed while the government prepares to sell off separate parts of rail to interested parties in the private sector. The rail system needs to shrink substantially to become viable in the long term. Only then will taxpayers be insulated from further political expediency and foolishness.
Without such bold action, rail is going to continue to be a drag on the economy and a constant cost for taxpayers, who have already spent a billion dollars on it the business in the past year.
One cannot help but wonder whether Michael Cullen spends some evenings smiling and warming his hands over the bonfire of right-wing ideology. The nightmarish political and financial situation he has created for his successor demands privatisation. Such a move is fiscally responsible but is politically fraught.
It will take time and courage to introduce the reforms needed, and while privatisation is off the agenda for now, hopefully the Mr Key and Mr English are preparing for their second term of government.
Luke Malpass is a Policy Analyst at the Centre for Independent Studies. His new report KiwiRail: Doomed to Fail? was released by CIS in September (www.cis.org.nz).
