CIS on Kiwirail

Luke Malpass from the CIS writes in the Dom Post:

Consider the following facts: KiwiRail was bought for $665 million. That figure then turned out to be $690m, plus other spending commitments, and ongoing preferential treatment for Toll’s trucking business at the expense of New Zealand- owned competitors (so much for supporting local business). This failed policy has already cost the taxpayer about a billion dollars.

KiwiRail has been subsequently valued at $369m. This was an upfront loss to the taxpayer of $321m – a loss of almost a million dollars a day for a year after the purchase. Put another way, $320m 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 (to break even), the network has to shrink from 4000 kilometres to 2300km. The government was repeatedly advised of this by the Treasury before the purchase.

The rail system required a subsidy under private ownership to operate a network of the present size. This policy will continue under public ownership – except the subsidy will get larger.

In Australia the sale to Michael Cullen was referred to as the Sale of the Century, as they got such a hugely inflated price for a failing business.

With such a commercial and political mess on its hands, the present Government has only one policy option – the reform, rationalisation and resale of KiwiRail.

I’m not sure anyone would buy it, even with rationalisation.

The full CIS report is here. There are many good parts to it:

Because rail is a static, long-lived asset, it is not well placed to respond to population changes and industrial freight flows. Nor is it well placed to respond to the greater flexibility offered by cars and trucks. Once a track has been laid, trains must travel there regardless of market forces—it is a totally sunk cost. New Zealand’s population is too small and not concentrated enough to make our currently large rail network viable. This is nineteenthcentury technology developed well before other forms of transportation became widely available; and while it still is good at transporting some freight, rail has severe limitations and is only economical in some areas.

It would be interesting to compare how many other countries with our small population have an extensive rail network, excluding Europe where the rail system is basically continental wide.

The greenhouse gas argument is also explored:

The second problem with greenhouse gas 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. This would occur regardless of the ownership of Rail.

It is highly likely one could do far more for the environment if one used the money sunk into Kiwirail, to plant trees.

shipping is more than twice as efficient as rail (in greenhouse terms), and competes along similar routes to rail. This ratio suggests that in order to get the same amount of carbon savings, the government has to compel a far greater share of freight to Rail to reach the same targets. Further, if an overall strategy of reducing congestion and greenhouse gases was so
important, then why did the previous government not look at ways to actually support that by investigating deregulation and providing incentives for other transport modes? While Rail certainly is ‘cleaner’ than road transport, it is not as clean as shipping and the substantial environmental benefits claimed for it are dubious.

The Kiwirail purchase in Labour’s dying months was a classic poison pill.