Subscribe to RSSGovt: Rail Helps Oil Shock
The government, in announcing today’s KiwiRail turnaround plan, answered questions about how it expects to work and what will be achieved.The government, in announcing today’s KiwiRail turnaround plan, answered questions about how it expects to work and what will be achieved.It defended its investment in rail.
It said that the existence of rail would reduce the transport cost shock from future spikes in oil prices.
How much government money is being invested in rail through Budget 2010?
The government has, in principle, agreed to invest $750 million in the KiwiRail Turnaround Plan. This includes an appropriation of $250 million in Budget 2010 which comprises: $20 million for 2009/10 $230 million for 2010/11. Final approval of funding for the KiwiRail projects is dependent on joint Ministerial approval of specific KiwiRail business cases for investment.
The lion’s share of the funding for the Turnaround Plan will come from operating revenue from within the KiwiRail business itself. Budget 2010 also appropriates $7 million for renewal expenditure and some operational support of metropolitan rail for 2009/10.
What is the KiwiRail Turnaround Plan?
The KiwiRail Turnaround Plan is designed to preserve and enhance New Zealand’s national rail freight network and move KiwiRail towards full financial self-sufficiency within 10 years, meaning that it will be able to fund its ongoing operating and capital costs from customer revenue.
The Turnaround Plan envisages investing $4.6 billion in the business over 10 years and has requested a Crown contribution towards this. KiwiRail is required to provide the lion’s share of this through increased customer revenue.
Rail is a business with high fixed costs.
Once initial steps are taken to improve services and increase revenues, it is planned that these revenues will be re-invested in the further development of the business.
Why is there a need for a Turnaround Plan and the government’s investment in it?
The overall freight task has doubled in the last 15 years.
Typically the freight task tracks GDP and is therefore forecast to grow at a rate of around 2.2 percent per annum over the next 25 years. Predictions for freight growth in the National Freight Demands Study are of the same order of magnitude and together both forecasts indicate an approximate doubling of the current freight task by 2040.
All transport modes are going to need to operate more efficiently in order to meet this growing demand. The rail freight business as it stands is not able to fund all of its capital needs.
While there has been some recent investment in rail, large parts of the network have been neglected. Decades of limited investment has led to reduced customer service performance and rolling stock and infrastructure failures.
The government has decided to make the best of what is currently a poor investment by providing KiwiRail the opportunity to make the business commercially viable. This means getting the business to a point where it can fund all of its own operating costs and capital expenses through customer revenue.
Being able to do this will depend on improving service delivery standards, without which the increase in both the volume and prices required to cover costs would not be possible. Expansion of the business beyond the current niche markets will also be required to realise the increase in revenue needed
How will KiwiRail turn its business around?
KiwiRail is planning to focus on improving reliability and timeliness performance in order to establish itself as a viable alternative for freight movers.
Areas of its freight business where it can grow revenues, improve its return from customers and carry more include bulk and long distance freight, and transport between major ports and production areas.
KiwiRail intends to grow revenues through targeting investments to achieve ‘quick wins’, so that early investment decisions result in tangible returns by way of increased revenue.
Keeping the main freight line of Auckland to Christchurch fully operational and providing important routes into all of our major ports will help contribute to New Zealand’s economic growth by ensuring that network access is available to as broad a customer base as possible.
Will this Turnaround Plan work?
The government is supportive of the KiwiRail turnaround plan’s objectives but implementing it will take strong commitment from the KiwiRail board, management and staff.
It will also require support from key stakeholders including freight customers and the Auckland and Wellington regional councils KiwiRail will need to satisfy the government on an ongoing basis that conditions for investment are being met in order to secure each tranche of capital.
What sort of scrutiny has the KiwiRail Turnaround Plan been put under?
KiwiRail’s Turnaround Plan has been subject to engineering and financial due diligence scrutiny led by the Treasury.
Major freight customers have been consulted in order to better understand what they expect from the service and their likely response to improved rail service performance.
This work has found that, although the current freight business is not currently sustainable, a well managed national rail network will generate additional revenue and preserve a freight transport solution that might otherwise be lost.
Key customers have indicated that improvements in reliability, timeliness performance, and in the quality and availability of rolling stock, would be factors to motivate them to increase the proportion of freight they choose to move via rail.
How will the money be used?
The money will be used to fund specific and costed business cases that are consistent with the objectives of the Turnaround Plan (capital investment: rolling stock, renewals and upgrades around the network).
What is likely to be invested in first?
The Turnaround Plan places a high priority on improving reliability and timeliness on the Auckland to Christchurch main line. Customers supported this, and placed particular emphasis on the Auckland to Wellington segment, and on better rolling stock.
While it will be up to KiwiRail to decide on specific investments, we expect investment proposals from KiwiRail to reflect these customer preferences.
Will this mean the creation of new services?
The investment is firstly about improving current service performance, particularly better reliability and shorter transit times on the main trunk line to increase service uptake.
What are the benefits of this investment?
Rail forms a major part of New Zealand’s transport network and improving the efficiency of the supply chain will benefit all users.
The overall freight task has doubled in the last 15 years.
Typically the freight task tracks GDP and is therefore forecast to grow at a rate of around 2.2 percent per annum over the next 25 years. Predictions for freight growth in the National Freight Demands Study are of the same order of magnitude and together both forecasts indicate an approximate doubling of the current freight task by 2040.
This investment in rail will be a major factor in increasing New Zealand’s ability to reduce transport costs and the overall cost of producing and delivering goods to market. Rail is estimated to be six times more fuel efficient than road for hauling bulk freight.
A well managed national rail network between Auckland and Christchurch offers another freight option for businesses. There is also the potential to reduce road congestion by moving a greater proportion of freight by rail.
When can results expect to be seen?
This is the best opportunity for many years for rail to demonstrate its relevance to New Zealand’s transport infrastructure.
It should be evident within two to three years whether KiwiRail can achieve this.
How does rail add to New Zealand’s export competitiveness?
Rail can contribute to New Zealand’s export competitiveness by supporting opportunities to reduce domestic freight transport and international shipping costs. Rail has a comparative advantage in the carriage of bulk freight and containerised export/imports from point to point (such as from an inland port to a port, or from a production facility to a port – eg Wiri inland port to Ports of Auckland or metro port to Port of Tauranga).
In this way, it complements road and sea freight.
When does the Crown expect to start receiving dividends from the KiwiRail business?
Any dividends to the taxpayer shareholders are expected to be a long way off. KiwiRail is in a major turnaround situation, and it is expected that all revenue obtained over the next ten years will be re-invested into developing the business. This is a challenging long-term strategy.
Who is responsible for overseeing the investment?
The KiwiRail board will be accountable to the government for the successful implementation of the Turnaround Plan. Shareholding Ministers (Finance, Transport, and State Owned Enterprises) will report to Cabinet on a quarterly basis. Performance monitoring and investment advice to Ministers will be undertaken by the Ministry of Transport and Treasury.
How will KiwiRail be held accountable for the capital they are being given?
Funding comes with very stringent conditions and the implementation of the turnaround plan will be subject to continual review and monitoring to ensure the investment in the rail network and rolling stock is being fully optimised. A detailed three year CAPEX investment plan from KiwiRail will be required, along with enhanced performance reporting, and regular progress reports to Ministers.
What is the option value that rail provides for the New Zealand economy?
The option value that rail provides is: the insurance value provided for future events with uncertain probabilities and timing such as changes in fuel prices and the nature of shipping services to New Zealand. Rail is estimated to be six times more fuel efficient than road for hauling bulk freight.
The existence of rail would reduce the transport cost shock from future spikes in oil prices by providing alternative freight corridors with potential capacity. Rail contributes to system resilience in the case of disruption to parts of the roading system value it generates over time by providing freight shippers with cost-effective alternatives in managing their supply chains and location decisions. If closed down and removed completely it would become extremely difficult and costly to re-open a rail network at some point in the future.
As modes of transport, rail and road should be set on a level playing field for the companies that move freight.
Is this support for KiwiRail distorting the competition?
No. The government is making a capital investment in KiwiRail on behalf of its shareholders – taxpaying New Zealanders. At the same time, it is discontinuing any operational subsidy of the company to remove any short-term price distortions. The Crown also funds investment in roads, and recovers this investment from road users.
We are developing the business to get to a position where the investment in rail is similarly paid for by rail customers.
What is the value of having multiple freight modes?
The different transport modes largely service different parts of the freight task. New Zealand needs all modes operating efficiently and effectively, especially as forecasts indicate an approximate doubling of the current freight task by 2040.
There are different freight segments including: Time dependent, door-to-door Non-time dependant, depot-to-depot Less than truck size, truck size and greater than truck size (ie bulk freight) Aggregated container loads etc For each segment there are advantages and disadvantages for each of the various freight mode options. Some are more suited to rail, others are more suited to coastal shipping and road.
At the end of the day the real advantage to the New Zealand economy lies in the delivery of the preferred option and required service levels at the best possible price, regardless of the mode.
KIWIRAIL PLAN COVERAGE
Union says rail privatisation has been discounted
KiwiRail CEO on what the plan means
Governments $4.6b KiwiRail turnaround plan
Labour calls plan miserly
Mike Lee calls for more rail investment
Government confirms MetroRail fare increase
3 Comments
Hmmm, some hypocracy, like the RoNS being infrastructure “lead growth” and therefore not needing to meet the same scrutiny as evidenced by the statement, “subject to continual review and monitoring to ensure the investment in the rail network and rolling stock is being fully optimised.”
It is also great to hear some reference to peak oil… Maybe Joyce has read a few energy briefing papers..?
So, do the statements “As modes of transport, rail and road should be set on a level playing field for the companies that move freight” and “The Crown also funds investment in roads, and recovers this investment from road users” mean that we can expect to see the *full* costs of their road network usage recovered from the trucking industry to avoid market distortions that affect decisions by potential customers.
Despite the strong subsidy it has enjoyed for many decades, this re-balancing might be phased in over say 5 years to get the industry “to a point where it can fund all of its own operating costs and capital expenses through customer revenue”.
It would also require “strong commitment” from all parties including wealthy private investors, shareholders and other financiers. Quarterly performance monitoring would satisfy the government that its huge subsidy to trucking is being spent prudently over the period while it reduces to zero. Major customers might also be consulted and the trucking industry directed to focus their efforts on what those customers say they need most – including more services on the important Auckland-Wellsford route, no doubt.
Did I miss anything?