KiwiRail Soon Self-Sufficient


Transport Minister Steven Joyce says that for the first time in 60 years, KiwiRail will soon become financially self-sufficient.
He told a Parliamentary Committee that that freight volumes are predicted to grow quickly.
In its half-yearly report to December 31 2010, KiwiRail is below its half-year targets for a number of financial performance measures.
But the Committee was told freight volumes are roughly 13% ahead of where they were this time last year.
The Minister said that investments from private freight forwarders are another encouraging sign. Fonterra is continuing to invest in rail-enabled land ports and yard areas, and Mainfreight is investing in Wellington’s rail yards as it increases rail-use between the capital and Auckland.
The Minister indicated that a challenge for KiwiRail will be modernising its systems fast enough to meet demand, and told the Committee that the company is working to obtain more rolling stock for this reason.
In its report to Parliament today, the Select Committee noted that during the appearance of the Minister in front of the Committee, he was asked whether State ownership was instrumental in encouraging private companies to invest.
The Committee was told that ensuring the company is reliably owned, and a long-term development plan is in place, are their main concerns.

The Committee asked the Minister what he thought about the future of regional and provincial lines and were told “that in reality no business can keep lines open that are empty.”
He explained that KiwiRail is working hard to develop customers— for example in Northland and Gisborne— and will hold lines open as long as possible while it attempts to do so.
“We suggested that in some cases, such as Gisborne, line degradation is deterring customers from using rail. The Minister disagreed, saying that while rail is a great means of large-scale,point-to-point distribution, it is less viable when moving small amounts of freight at different times, to diverse locations. This is why in places such as Northland, 97% of freight is transported on the road.”
And the Minister said the CBD Rail Link of National Significance is “instinctively a good idea but has some flaws.’
That’s part of his answer to a question as to whether the project has been completely shelved by the Government.
In the select committee report, it is noted that Greens’ transport spokesman Gareth Hughes asked the Transport Minister Steven Joyce directly whether the project had been ruled out entirely, as the member believed that the upper expenditure limit for public transport infrastructure has been lowered in the new Government Policy Statement.
The Committee’s report said:

“The Minister felt that strategically the project may make sense in the future, but noted that the benefit-cost ratio was 0.3 when applying the same basis for calculating the benefit-cost ratios for the RoNS. This is a low ratio in comparison to other projects.
“He said that to ensure the most economically viable and effective choices are made about Auckland’s public transport, a large range of factors must be taken into account, particularly careful consideration of a how the city will grow.
“Rather than pushing ahead with the Central Business District rail link, which is instinctively a good idea but has some flaws, all options must be adequately considered, and thoroughly tested before large amounts of funding are considered.”

The Committee’s report on the discussion with the Minister concerning the Roads of National Significance says:

“The Minister showed us NZTA’s recently released Final State Highway Classification, which provides a picture of road network usage, based on freight and daily traffic volumes,centres of population, ports and airports, and international tourism flows.

The high-volume roads—which amount to 6.5% of the State highway network and 1% of the total road network— carry 35% of total vehicle kilometres on highways and 17% of total kilometres travelled nationally.
The Minister showed us the significant correlation between these high-volume roads and the RoNS, which he said was no coincidence, emphasising that the development of RoNS will ensure reliable journey times, provide good links for export goods and people, and improve road safety.
We asked the Minister if he was confident that each RoNS project represented a good return on investment. He told us that the benefit-cost ratios for all the projects were positive, which he considered encouraging. The Green member believes these figures include calculation of wider economic benefits. The Minister noted that the calculations including wider economic benefits further increase the benefit-cost ratios.”




  1. tim says:

    Very premature methinks. Counting chickens before they are hatched.

    What will happen to these customers when the government subsidies are removed and rail freight prices increase? Answer - shift to cheaper unsubsidised providers, the most significant being coastal shipping.

  2. Matt says:

    Tim, there are no government subsidies. KR is expected to generate a commercial return - it’s getting $750m of government money over 10 years, and that’s as much life-support as Joyce is prepared to extend. The remainder of its $4b turnaround plan is to come from revenue.

  3. tim says:

    I beg to differ. Obviously once the government removes its “support”, rail freight prices will need to increase, especially if “revenue” is to fund further costs. Unfortunately, the KiwiRail monopoly will have to negotiate with Fonterra and the like, which are currently developing coastal shipping options and enjoying discounted rail freight in the interim. KiwiRail won’t be able to increase its prices to abuse the monopoly position, so it’s going to fail.

  4. Matt says:

    Rail freight prices need to increase regardless. They’ve been set low courtesy of contracts inherited from Toll, and are so low that they don’t even cover all of KR’s costs. That’s not KR’s fault, and remedying those pricing disparities is part of the reason their revenue is increasing.

    Coastal shipping can’t serve Te Rapa. Most of the dairy factories are closer to a rail line than a port. So you can believe that rail will lose to coastal shipping all that you want, but simple geography says that rail has to remain a significant part of the mix because trans-shipping by road all the way to a port will cost a lot more from many dairy factories than trans-shipping by road to the nearest rail loading facility.

  5. Cam says:

    Tim the $750 million is not an operating subsidy as I understand it. It’s capital to invest in infrastructure like rolling stock and track renewel which due to near zero investment over the last 20 years had ended up in a terrible state. Once this money is spent there will not be the same need for that level of ongoing investment. Well that’s the theory from Joyce anyway.

    Calling this a subsidy is like saying that fuel excise duty from private motorists to build and renew more state highways is subsidy for the trucking industry. Which clearly … wait, hang on a minute..

  6. Giel says:

    I don’t think KR is anywhere near being financially self sufficient in a sustainable way and wont be for many years - if ever. One has to be honest and say moving towards that is a admirable goal and good but you need to be realistic about how far they will get towards that nirvana. Lots depends on definitions of sustainability I guess.

    They are moving closer but there are many things against them - heavy trucks limits raised - improved roading infrastructure, changing dynamics in ports, high capital costs. Certain limited routes may be sustainable for a time with the new investment but what happens in 20 – 30 years time when it all needs to be re-invested in again. Rail has a history of capital bailouts and each time the “Minister” has said it will be financially self sustainable after the equity injection. If you don’t believe read it the following paper - one of the best summary’s I have seen on NZ’s Railfreight market.,17980/17980_ETC_2010_paper.pdf

    Cam “invest in infrastructure like rolling stock and track renewal which due to near zero investment over the last 20 years had ended up in a terrible state” That’s not quite right - between 1994 and 2001 - Tranz Rail invested $1 Billion in new capex - one reason they nearly went bankrupt and shareholder value collapsed so badly. The fact of the matter is that it wasn’t enough and to be sustainable Rail in NZ probably needs about $300 Million capital expenditure in perpetuity a year. The only way that could ever be “economic” is by taking into account Wider Economic Benefits (WEBs) of Rail investment which a more narrow commercial view simply doesn’t do. They need to be honest about that otherwise Railfreight is doomed in this country in all but a few bulk areas.

    Matt - Can’t apportion blame to Toll for low rates – Toll inherited them from Tranz Rail who incidentally inherited lots of low contract rates from NZ Rail - very hard to accurately apportion blame. In fact it wasn’t “anyone to blame” - it was a Railfreight Market failure as it simply doesn’t work in a normal commercial manner in NZ. Again read the article linked above for further insight. I have to say if the private sector can’t make it sustainable who for one minute thinks a bloated SOE with all its added overhead can?? Acknowledge that KiwiRail on paper may now have one of the strongest Board of Directors Rail has ever had - but it is so obvious the penny hasn’t dropped for them yet.

    Anyway time will tell and good progress is obviously being made and that should be good.

  7. Cam says:

    “Tranz Rail invested $1 Billion in new capex” - What was that billion spent on? The newest rolling stock KR has, as I understood it, was the EF’s which were commissioned in the early 80′s. There were ceratianly no new lines constructed and many existing ones were mothballed. Where did that billion go?

  8. Giel says:

    Cam - a very long list but heres a few:
    New rail ferry Aratere (about $90 Million), New Middleton Railfreight yards terminal (about $30 million), new wagons - constructed several 100 at Hillside (coal, container, box conversion), elimination of all 4 wheel wagons (except Northland) and replacement by bogie wagons, DF locomotive conversions from DF to DFT - turbocharged about $1.5 million each x30, conversion of many DX locomotives to DXC / later DXB - over million each, new milk wagons for new milk traffic, signficant upgrade of Milk Route for new milk trains(Taranaki line)- new sleepers to take Milk trains, signficant upgrade of Coal Route - to take heavier wagons and heavier locos (DX) for coal, conversion Otira tunnel to Diesel from electric, normal track renewals (about $30 Million a year - new sleepers, rails, ballast etc) plus normal capital overhauls in mechanical equipment (Locos etc)

  9. Matt says:

    Giel, rail also has to compete with the subsidisation of road freight. The playing field is horribly tilted, and $750m over four years (my earlier 10 was a mis-thought) doesn’t come close to balancing things out. You’ve cited heavier trucks, and that’s a further subsidisation when the significant extra damage wrought by those trucks is only partially captured directly while the rest is supposed to be collected from the increased taxation revenue that will flow from such behemoths - heavier than standard truck weights in the entire OECD, from what I’ve been able to find - being allowed on our roads.

  10. Giel says:

    The NZLTF road funding allocation is hypothecated from Road users funds and that is the problem for Rail. The Rail investment by the Government is NOT hypothecated from Rail users but the general taxation pool (and for commuter Rail from Road Users partly as a Road decongestion benefit). Not arguing that there aren’t good reasons for that - such as Wider Economic benefits for Rail but we need to be careful with our assertions. Occasionally the Government tops up the NZLTF from other sources for roading but not normally. The RoNS are to be mostly funded by users by higher fuel taxes, higher RUCs and potentially Tolls (although initially at least General taxes help out).

    Even out of the RUCS that truckers pay much goes back to local bodies to supplement local rates funding that is applied to local roading infrastructure via the NZLTF. Forget the old MoT paper (2002) which said Rail paid 80 plus percent of costs and Road users only 57% odd percent - that was based on the way things were in 2002 and it has completely changed to a more Rail bias since then. So that study is now largely irrelevant to the way things are today and shouldn’t be referenced any more.

    Help me out on that one as I am not sure the assertion you make is true any more that the level playing field is tilted in Roads favour now. It was in 2002 but not now as far as I can see - even if WEBs, which aren’t that large anyway, are taken into account. The John Bolland report helping to justify Rail investment by the Crown put a estimate on WEBs that Rail brings to the table and whilst significant it wasn’t enormous but did help justify the Crowns position to part fund the Turnaround Plan to a certain point.

  11. Matt says:

    Road-related taxes haven’t fully paid for roads ever, and Joyce’s RODS are just making the situation worse - billions more building new roads at a time when NZTA identifies that road tax income is decreasing.
    RUC doesn’t capture all the damage trucks do, never has, but the gap between capture and cost is greater with the ultra-large trucks that are now allowed than for lighter-weight vehicles.

  12. Giel says:

    Matt - not sure the evidence supports what you say - it certainly is the case for Rail however. RUCs use the weight on the axle for charging purposes which is based on a the fourth-power rule – that is, if the weight at the axle is doubled, then the amount of road damage caused increases sixteenfold (2 to power of 4 = 16), for a given pavement strength - this is reflected in a truckers RUC costs. The new heavy trucks therefore have much higher RUC’s allowing for that extra damage. And by the way we are one of the few countries to charge truckers more correctly in that way and so our environment is more favoured to railfreight than nearly any other country in the world!! Thats why in most areas of the world general freight by Rail (such as Europe, Britain, Japan, Australia) other than heavy bulk or consolidated freight has simply died.

    If we are to use the argument you put forward we need the evidence. I can’t find any and have been looking for a very long time for any to support assertions like yours. All I have ever found is some peoples stated intuition that it is the case which I am afraid isn’t good enough to cut the mustard with any decsision makers - and rightly so.

    With Railfreigth the arguments are more about WEB’s than direct cost benefits in my view.

  13. Robincole says:

    Joyce seems to have it in for the NAL, I cant see how four usualy good sized freight trains per day (2 returns) between Auckland and Whangarei plus local Northland freights can only account for 3% of Northland freight.This amount of trains is similar to what you would find on other secondary lines such as Hawkes Bay or Taranaki.Giel mentioned a MOT study in 2002, I’m sure it was around 2005 or maybe that was another study that came to the same conclusion.Either way other than the govt puting money into rail recently not alot has changed.There was couple of RUC increases, the first increase for large trucks in 18 years.By the way railfreight in the UK has increased by 60% in the last decade or so.

  14. geoff_184 says:

    The trains probably do only carry about 3% of Northland freight, but that figure will be arrived at by counting every truck in every part of Northland, including logging trucks from forest to mill in the far north.

    The relevant figure would be the percentage of freight between Auckland and Whangarei. I would say rails share is around 15%.

    Not that that’s the case right now. Last night saw 1 wagon head north on 128, and tonight saw 2.

  15. Matt L says:

    For the issue of Kiwirails low freight charges to some companies. I remember seeing something on here from a year or so ago when the Turn Around Plan was first being discussed that Kiwirail was going to be addressing those under-priced contracts to bring them up to the appropriate market level. I also remember seeing comments from some of the companies that they understood the need for the increases and that they would work with Kiwirail to do that.

    Since that time we have development and investment like that of Mainfreight who would be paying commercial rates, I think they even made the comment that the only reason they held off using rail was that Toll was a competitor. I also believe that there are other freight companies that are looking to do a similar setup to what Mainfreight has.

  16. richard says:

    As far as petrol tax and user charges, don’t they go mostly towards State Highways with the bulk of funds for arterial and feeder roads coming from rates?

    A large portion of our roads are not State Highways and some principally rural councils have problems keeping their roads up to scratch when they have a small rates base.

  17. Matt says:

    Giel, Joyce acknowledged at the time of bringing in the permits for larger trucks that the additional pricing was insufficient to capture the extra damage, and that most of the extra costs to road-operating authorities would be captured through taxation on the increased economic activity such trucks will supposedly bring about.
    And I’ve seen nobody other than you suggest that RUC captures all the damage done by heavy vehicles.

  18. Giel says:

    Matt - No offence and good debate but evidence please - “No one other than you” - Please do me a favour - I haven’t seen one shred off real evidence to suggest that Road users pay a smaller share of their infrastructure costs than Rail users. Yes I think Rail should be supported so we surely both agree there but I beieve for reason of WEB’s that Rail brings but not because Road users don’t pay for roads - which clearly by and large they do. Local roads / streets etc are a bit different as local rates contribute but with heavy trucks a portion of RUC’s revenue goes to local councils to pay for their share of wear and tear on local roads not paid for by rates.

    All I ever hear from people on this is anectodal evdience that trucks don’t pay their way. Believe me I used to be in the camp until I looked into the facts of the situation. As for the heavy trucks it is acknowledged that heavy trucks will costs more on roads and that is why there are and continue to be lots of work going on on road pricing changes. So yes you are right to some degree that extra costs will be incurred resulting from heavy trucks but it is clear work is going on to ensure that the cost of this will utimately be paid for by road users - in this case heavy trucks.

  19. Giel says:

    Approximate Current Mix of Income and Expenditure for road related costs

    Direct Expenditure related to road use $1,900 Million
    Residual costs - Not use related $600 Million
    Public Passenger transport $400 Million
    Other $300 Million
    Sub Total Other Non Road Costs $1,300 Million
    Total Road Costs (icl not Use Related) $3,200 Million
    Income from:
    Rates $700 Million
    Motor Vehicle Registration $200 Million
    Other incl NLTA (-ve) $200 Million
    Road User Charges (RUC) $1,000 Million
    Fuel Excise Duty income (FED) $1,100 Million
    Total Funding $3,200 Million
    Net $0 Million

    So as can be seen road users pay way more than the direct infrastructure costs through road charging and also contribute to PT and other residual costs - in fact RUC and FED alone pay more than the direct costs of road provision - that certaintly is not the case for Rail.

  20. Giel says:

    Oh and by the way as measured by tonne kilometres Rail carries about 15% of NZ freight, road about 70% so by simple math extrapolation if trucks pay about $1 Billion in RUC’s for road use then Rail for its relative tonnage use should pay $214 Million track access per year - which I can assure you they don’t - not even $100 Million a year (the rest is capital subsidy by the Crown currently) so by any account on a per tonne kilometre basis heavy trucks pay well over double what Rail pays for the same equivalent freight unit for transport infrastructure use ( actually currently it is more than 3X’s)

  21. Robincole says:

    Giel- if I’m reading this right, road wear n tear costs $1.9 billion a year, with trucks paying $1 billion.However trucks cause the bulk of the damage to roads, so they may still be paying a couple of hundred million less than they should.Evan Joyce admits they are being undercharged.Why do you think trains should pay the same user charges as trucks?Per tonne-kilometre trucks probably do alot more damage to flimsy tarseal than trains do to tracks.KiwiRail’s problem has been Tranzrail’s defered track maintainance.

  22. tim says:

    The fact is that KiwiRail must do much, much much more than just spend taxpayers money with a dream. It’s been tried before with millions of losses to show for it.

    An entire cultural change at the top level is needed and that needs the right leadership - leaders, not politicians, industry experts, not “generalists”, entrepreneurs investing their own money, not bureaucrats spending taxpayer dollars.

    KiwiRail needs a new management team with years of rail experience and a track record of leadership to really turnaround this business IMHO. Quite simply, spending more taxpayer money by itself is just not enough.

  23. Giel says:

    Robin - Agree with you that Rail infrastructure costs per tonne kilometre should normally be cheaper than Road but not sure that in many cases in NZ it actually is with our modest tonnage levels. Quite frankly with a few exceptions our traffic density is too low. I mean we celebrate 3 Million tonnes a year of coal as being large when in Queensland it is approaching 100 Million tonnes a year. Go figure. Also coupled with that we have very expensive operating conditions with grades of 2 to 3% not being uncommon, restrictive loading gauges, low axle loads (18 tonne and often lower), sharp curves, weak formation with mud spots common which all makes our Railway one of the most expensive in the world per freight tonne kilometre for both above and below rail. That is not an easy fix. Yes the Turnaround Plan will mitigate some of those problems but unlikely will be enough to make the railway financially self sufficient. I really think that Kiwi Rail management don’t fully appreciate that and how expensive it is to run a railway in those sort of conditions. High rail wear on curves and grades, mechanical equipment wear, high fuel burn rates per tonne kilometre, low net to tare ratios, short trains due to draw gear constraints, difficult terrain etc etc. All those factors significantly erode Rails comparative advantage to Road in this country and make for the probably the most tough operating conditions for a freight railway anywhere in the world to be economically self sufficient. And all with only 14 million tonnes per year on a 4000km network! Couple that with a very expensive Interisland rail operation and the dye is cast I think. Economically self sufficient - I don’t think so. However it is not all bad and WEBs if taken into account may just make the railway viable in the broader sense. But let’s not delude ourselves.

    Sad reality is the Freight Network Infrastructure operating costs are now close to $100 M per year and the long term capital costs for a 4000km freight network costs about $150 Million a year - so $250 Million a year is probably in the ballpark for infrastructure. Problem is the Freight payers will struggle to pay for that hence the WEB argument is critical to Railfreights survival in this country. Anything else in my view is a fantasy.

  24. Robincole says:

    Possibly the most tough operating conditions in the developed world, eccept probably Tasmania.I think KiwiRail can be self sustaining but perhaps only with all proffits going back into the business.Though with oil prices likely to rise that could change.

  25. tim says:

    If the operating conditions are so tough, why bother maintaining the network? According to Giel, the network is far too large to properly support itself, and with weak and ineffective leadership, throwing more taxpayers money at kiwirail would be a fools errand.

    Giel, which parts of the network need to go (either mothballed, “sold” to others sich as councils or main users in your opinion to make KiwiRail a proper commercial self sustaining company that actually pays its own way?

  26. Robincole says:

    Who says KiwiRail has weak and ineffective leadership? Jim Quinn hasnt been there that long, and theyve had some encouraging results. Going to take more than five minutes to turn KR around.

  27. tim says:

    Don’t like being devil’s advocate, but KiwiRail certainly don’t have strong effective leadership, and unsurprisingly results so far have been far from amazing. I can’t think of 10 real leadership achievements over the past two years since KiwiRail took over from Toll.

    Spending taxpayers money with very little results to show for it, increasing costs, more operational failures despite large amounts of money spent, unhappy employees, increased customer use using discounting without proper customer commitment, employee layoffs and more management bloat is a real concern IMHO.

  28. Giel says:

    Tim Gisborne line could be sold to franchise or Council as could Northland.  But these lines are really a sideshow and closing them will save little. The main problem is the Auckland to Christchurch corridor with expensive Interisland rail ferry link. This is the difference between a nationally connected high cost ‘Network’ and main users lines only. Hundreds of millions being spent on a route that really can’t be commercially viable at competitive freight rates. Fonterra for example now making plans on back of that investment to ship milk powder up  NIMT rather than using more nationally rational port call choices. Living of free Government investment. This puts pressure on the Marton to Taranaki line which is perhaps one of the most expensive lines to operate in the country (since the much easier graded and more direct to Auckland SOL line mothballed) as it has very steep grades (3%) sharp curves and poor track geometry. This limits effective train size one of the most important comparative advantages rail has over road. It also means high mechanical and infrastructure wear. For years (since the 1930′s in fact) the Marton New Plymouth line was avoided like the plague in operating terms due to it’s high operating costs in railway terms, much like the old Rotorua line which in the end was impossible to make viable due to it’s steep grades profile and resulting short train capacity.It buggered wagons by shortening their life.  For example it destroyed all the roadrailer wagons in the 1990′s.
    Wider economic benefits may mean we should keep the Auckland Christchurch corridor rail link with linking Interislander rail ferry connections but I don’t think KR appreciate the enormity of the costs attached to that operation. Volume alone will not solve that problem. In fact past a certain point you may get the perverse outcome that the more you carry the more you loose. Freight payers probably pay less than half the costs of it’s operation which potentially undermines the viability of other areas. There are simply too many bottlenecks.
    This is a national economic question and the Government need to be honest and say this will always need financial support to be sustained. Yes the Turnaround plan helps but self sustainable - please. Quite frankly I am flabbergasted this fundamental issue is not understood and people think it can be commercially viable in a micro economic sense. Now with WEBs added it may just work but that’s another question.

  29. Robincole says:

    I will concede that Interislander adds to costs, but road transport has the same problem.More grade and curve easements will help, but this will require an ongoing funding comitment.An ongoing program to eliminate as many bottlenecks as practicle.It wont be cheap.

  30. tim says:

    I disagree with Robin - Giel is definitely right here. It’s pretty clear that the Minister needs to step back and commission some independent advice. KiwiRail management needs to also look at what’s really being accomplished here. Maybe they can’t see the wood for the trees.

    With NZ’s geography, especially most NZ cities being serviced by ports, it’s pretty much inevitable that the amount and distance of goods carried by rail will always be insufficient to carry costs for the whole network without the discounting and subsidisation unless a completely different approach is taken.

    As I’ve said before, spending more money is not enough to make kiwirail into a sustainable success. Things have taken a dive IMHO since the commercially driven Toll management were replaced with public sector managers despite more money being thrown at the problem. The real question needs to be - what 10 things can KiwiRail do to make things work for real?


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