Kiwirail’s construction contract

Todd Sissons, my sister-in-law’s brother-in-law (Todd is married to Sarah, sister of Susie married to my brother Matt) has done a rare blog post on the decision by Kiwirail to have their new trains made in China, instead of Dunedin:

I have always found it remarkably easy not to get all het’ up about other people’s problems. However, over the past couple of years I have been doing a lot of thinking about ‘the economy’ and I have slowly come to realise that individual and group woes have a tendency to compound over time into big globs of ‘economic ugly’ that inevitably effect almost all of us working class shlubs, particularly in a country as small as NZ.

 KiwiRail’s recently announced decision to outsource the purchase of 300 container wagons to Chinese manufacturing concern CNR has not just het’ me up – it’s got me positively incendiary.

 This decision is bollocks – there is no other way to put it. Actually there are several better ways to put it – but hey, this is a family friendly blog…..

 The Southland Daily Times reports KiwiRail’s CEO, Jim Quinn, as saying that this decision does not imperil jobs at it’s own Hillside and Hutt Valley workshops. He proceeds to reinforce this carved-in-wet-sand assurance by further stating that he cannot guarantee that there will always be enough work for them…..[unless, of course, he did something like, lets see…award them Kiwi-Rail’s own contracts].

 I have had personal dealings with Hillside. Back in 2005/06 Sarah & I photographed the ‘Men & Women of Hillside’ for the Toll NZ calendar – that’s where the photo comes from. I gained a great deal of respect for the operation – and it’s workers during these photo shoots.

 Hillside is not inhabited by a bunch of over-entitled, Teamster style union shirkers tossing handfuls of bolts in the general direction of a locomotive. The carpark is not chocka with $60,000 SUVs and I never spotted a lunch room filled with workers taking 2 hour seniority breaks.

 They are a highly skilled, workforce building remarkable products on a scale that I have not seen previously in NZ. Quite simply, they are bloody good at building big heavy stuff and they do it all – from foundry to paint shop to high tech electrical controls – in about the most Dickensian agglomeration of buildings still standing in the Southern Hemisphere.

 The bottom line is this – Hillside Engineering is about as competive and lean as a manufacturer can be in New Zealand. In 10 years time when China is no longer cheap we will need these skills again in NZ, so we had better not lose them in the interim.

 The reason for Hillside’s failed bid on this project was surprise, surprise – cost. To my knowledge, CNR have not promised to deliver a 40% lighter, self-loading, web-savvy super-wagon that comes complete with it’s own facebook and twitter accounts. Nope, CNR are 25% cheaper than Hillside on this $29 million contract and that’s it. By my calculations that equates to about $7.25 million – so for expediency I’ll call it an even $7M between friends which, admittedly, seems like a lot of money – but is it in the scheme of things?

 Now, I don’t fully understand the operating rationale behind SOE’s – I would naively assume that it would be to utilise and safeguard state owned assets for the betterment of the broader New Zealand economy. What I do understand is that the previous Labour Government stumped up at least $665 million to purchase what is quite possibly the least successful monopoly in commercial history. If we had three privately owned railroad competitors in NZ, I could understand that the imperative to cut costs would exist – but we don’t** and we as the taxpayer are stuck with Kiwi-Rail (at least until after the next election) whether we like it or not – I for one do like it.

 So if we own a monopoly why don’t we just do what all good monopolies do best – pass the extra costs on to the end user in order to deliver a more holistic package of benefits to the NZ economy?

 If we are already at least $665 million plus in the hole, what the hell is another $7m to keep New Zealanders working at a time like this? Bernard Hickey summed it up beautifully when he said that we need to be much more nationalistic about these issues – damned right we do.

 Like most of the developed world, manufacturing is more expensive here because we live in a country where we expect a living wage, social safety nets and a safe working environment. Inevitably we operate under A LOT of Government penned legislation that safeguards these expectations and adds A LOT of costs in the process. If an SOE cannot afford to pay the true cost of manufacturing in NZ using it’s own workers, who else can? We might as well just shut up shop tomorrow.

 Let’s face it. Hillside will never be able to beat the Chinese on price. Everything is cheaper in China – in fact Kiwi Rail might like to consider outsourcing it’s CEO role to China, I am sure they could easily exceed a 25% saving on that.

 So the question has to be what do we stand to lose from this deal? Are we really saving $7 million?

 I would argue that from the get-go the New Zealand loses at least 12 million dollars by sending this deal to China. (apples for apples – The Hillside deal has a $7 million ‘buy NZ’ premium and I am assuming $10m imported materials which is a capital outflow from NZ – meaning an additional $12 million leaves NZ under the CNR deal). I am a macro-economics gumby*, but as far as I can see, The CNR deal ensures that this additional $12m is off to China, and unless someone in the CNR Mansion*** is in the market for a few thousand tonne of kiwifruit or a nice package deal holiday to NZ it ain’t coming back except as part of Bill English’s weekly $300 million loan package.

 Which segues rather neatly to my next point – let’s look at that $7 million in context – as we have previously established $7 million is a shed load of money to most of us (though up until last week $7 million was probably Mark Hotchin’s monthly living costs). But $7 million is a mere 2.3% of the aforementioned weekly rogering that we are already taking as a country – I can’t be bothered looking it up, but I suspect that $7 million pays for about 6 hours of dole and DPB payments at present.

 Continuation of this accounting-centric purchasing at Kiwi Rail could well ensure that the dole, DPB, or worse, Australia, is where a large portion the 180 skilled workers of Hillside could soon be headed. What is the downstream cost of that? Is it worth the risk for a measly $7 million? I for one don’t think so and I would be happy to foot my portion of that bill as a taxpayer.

 But do we really have to foot the bill?

 I always like to chunk business problems down to the smallest denominator – it brings perspective and big problems often look a lot more resolvable.

 Firstly, lets spread the $7m extra cost over the 300 carriages. That’s about $23,000 extra per carriage – significant yes, but wagons don’t curl up and die after a year – though it is entirely possible that they could be tagged to death in South Auckland within their first week of service.

 I am no train spotter, but looking at Kiwi Rail’s current rolling stock it would appear that a wagon can ride the rails for at least 97 years and survive two world wars – but I’ll adopt a more economically palatable 10 year timeframe. That’s a paltry $2,300 per annum across their life span – we’ll apply some snazzy time value of money guess-timation and make that $2500 per annum to give the bean-counters a return on investment. That’s less than $7 a day – or the equivalent of a Big Mac combo a day we have to recover to keep 180 Kiwis in work.

 I have no idea how rail container freight is charged out (volume, time, or weight) but trucking 2.5 cubic metres from Alexandra to Auckland return cost us $750 return last month so I am guessing a container would cost thousands for the same trip. Will Fonterra**** really balk at the equivalent of $7 or even $25 dollars a day in charges? I doubt it.

 So what to do? It’s simple really – CANCEL THE CONTRACT maybe pay some penalties to keep the diplomatic corp from squirming at embassy dinners and bring the jobs home. We all know that the Chinese Government would have few qualms reciprocating if their manufacturing sector looked like ours.

 Do the right thing, CANCEL THE CONTRACT.

 I’ll leave it to economists to do battle with Todd over the economics, but will just make one point in response. If we put up barriers to overseas firms being able to win NZ contracts, then inevitably NZ firms will face barriers to being able to win contracts overseas.