Geoff Simmons calls for a 'rational comparison' of the costs of moving freight by rail or road. He suspects the way infrastructure costs are treated will be important factors

By Geoff Simmons*

On Thursday, Kiwirail finally spoke out against Treasury’s advice that they should be scrapped.

Until now, the public discussion has been limited to a bizarre joust between Steven Joyce, Bill English and Treasury on one side, with Mainfreight on the other fighting in Kiwirail’s corner.

Mainfreight’s directors and CEO have been calling for a more open-minded approach to funding rail, while Treasury and the Ministers (including Joyce who many believe is the champion of the road freight industry) have rebuked their calls as self-interested lobbying.

Who is right?

At the moment we can’t answer that question. The trouble is that we evaluate and fund road and rail in completely different ways, so we can’t compare apples with apples. We certainly shouldn’t write off rail as Treasury and the Ministers suggest until it is evaluated in the same way roads are.

The Arguments

The stoush kicked off when Treasury’s budget advice was released, calling for Kiwirail to be scrapped as there is no feasible way it will ever make money. The Government did little to argue with the advice – implying they agreed. However, Bill English conceded that because New Zealanders seem to like their rail so for political reasons the Government would choose to keep it and simply stem the flow of losses.

Mainfreight spoke out against the Treasury conclusion that rail is futile, claiming that they were taking a narrow view of the situation. They argue that we can’t build or widen roads indefinitely so rail needs to be part of the investment mix. Joyce’s retort was that as rail users, Mainfreight were simply angling for more subsidies from the public pocket. If they wanted more rail they should pay for it by signing longer term, higher volume contracts with Kiwirail.

Who is right? Mainfreight are a freight company, so you wouldn’t expect them to care too much whether they are using road or rail to shift stuff around. Presumably they use whatever mode is cheapest or most convenient. So on the surface, Steven Joyce’s comments that they should simply pay for their preferred mode seems sensible. Rail loses money, road doesn’t – end of story, right?

Wrong. The trouble is that government treats road and rail projects quite differently in New Zealand, so they can’t be compared so simply.

Road vs Rail

First up, Kiwirail actually makes a profit on its day to day operations – $91m last year. Where it loses money is on maintaining the track infrastructure. That is no different to spending money maintaining the road infrastructure.

In the ideal world, any investment in land transport (whether maintenance, upgrade or new build) should look at which of the alternatives gets best bang for buck. And alternatives shouldn’t just compare different roads as happens now, but also look at rail or a road/rail mix. Without that type of assessment it’s impossible to know whether a particular road or rail project offers the best return.

Currently in New Zealand the funding sources for each type of project differ – rail funding comes from the Consolidated Fund, and road comes from a mix of road user charges, local authority rates and petrol levies. That is the reason that rail ‘loses money’ but roading doesn’t – because they are funded differently.

The reality of different funding sources shouldn’t cloud doing a rational comparison of competing projects.

Put Road and Rail on a Level Playing Field

We need to compare road and rail projects on a level playing field. The New Zealand Transport Agency (NZTA) budget should be invested in either mode – whatever returns the best results to society for the money invested.

If this change were made, road users would probably complain that their petrol levies are subsidising rail, but that is a shallow argument. If investing in rail means that fewer trucks are on the road, and this means fewer roads need to be built, then the outcome could be better than building more roads.

But Roads Pay for Themselves!

As Richard Prebble points out it is not always possible to build new roads or make them bigger (e.g. in Auckland) and even if it is possible then the cost might be far higher than it has been in the past. So investing in rail as an alternative to road might well stack up in certain cases.

Roads pay for themselves only because the RUCS, rates and petrol levy used to pay for roads rise if the cost rises. We saw this with the proposals under Roads of National Significance scheme, some of which didn’t even pass the NZTA’s own cost benefit test. NZTA couldn’t afford these roads within their budget so Government simply upped the petrol levy by 9c per litre to pay for them. Logically, rail should have been looked at as an alternative to these investments.

Before we scrap Kiwirail, we need to evaluate the impact

The same applies the other way around. Before shutting down Kiwirail, Treasury and NZTA need to consider what this would do to the pressure on our roads. What extraroads would be needed to shift the passengers & freight currently shifted by Kiwirail, and would that extra cost lift the rates, petrol levy and RUC charges? The extra cost might well be more than the $167m loss made by Kiwirail this last year – which means it would make sense for road users to pay to keep Kiwirail afloat. And maybe it makes sense to pay Kiwirail even more so it can do more.

We won’t know the answer until NZTA does the work. By comparing rail and road on a like for like basis we will know in no uncertain terms if investing in rail really is a folly (as Treasury suggests) or whether it actually makes sense.

Rail has other advantages too

Rail has a host of other advantages, which may or may not feature in the current Government’s analysis but should ideally be factored in. First up, rail is far more energy efficient (especially where it is electrified), so better from an environmental perspective (carbon emissions at least). There’s also safety – crashes have a human and economic toll. Trucks are over-represented in crashes and the bigger the vehicle, the bigger the mess. Rail by comparison is extremely safe.

Without proper information and analysis, it is difficult to know who is right: Mr Joyce or Mainfreight. The only way to know for sure is by NZTA evaluation road and rail on an equal basis.

Then we can see clear as day which is truly the bigger folly: KiwiRail or the Roads of National Significance.


Geoff Simmons is a senior economist at the Morgan Foundation. This article was first published on the blog garethsworld.com and is re-published here with permission.

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26 Comments

"There’s also safety – crashes have a human and economic toll. Trucks are over-represented in crashes and the bigger the vehicle, the bigger the mess. Rail by comparison is extremely safe."

Safety should be a major factor in any analysis. Of course, ministers go on the road in hi-tech BMWs with professional drivers, so don't care about that.

There is a possibility that all rail will become electricity driven if oil becomes too rare, thus too expensive and especially if it continues to seriously damage our planet. The Bluff smelter may close and most homes can use some solar power. Also electricity produced by clean nuclear fusion will eventually become possible.

Not a possibility but a certainty Even the most optimistic future date for oil depletion is 2050, a mere 35years away and before that loss of production sets in about now The problem is there is no replacement for transport fuel for trucks
but for rail there is electrification

And not to forget the possibilities of Helium 3.
http://www.explainingthefuture.com/helium3.html

I think the smelter will go myself it's just a q of when not so sure on fusion but thorium looks very possible and safe

they should never have rolled ontrack back into kiwirail. that way they could have allowed competition on the rails. as it is now Port of Tauranga or Fonterra or mainfreight have to get kiwirail to contract for services, let them have the ability to run their own trains.
I liken it to only having one trucking company allowed to use the motorway and having to pay for it

Typical short term financial outlook by treasury every time I see their rubbish I wonder why they are kept

Ingrained neocon ideologues...and we pay for them, absurd.

Just read a quote defining trickle down economics----a golden shower where the wealthy p*** on everyone else.

The Future - Strategically Thinking - where is the forward thinking on the part of treasury

Just picture electric trucks with specific infrastructure requirements - like battery exchange stations every 5 kilometres along all the motorways and no straying more than 10 kms from the nearest truck battery exchange station - cant you just see it?

yeah bound to work well.

not...........

They are neo-cons whos idea of long term thinking is 6 months and their political masters are the same, except their time frame is to buying the next election.

However the Green's / eco-brigade are just the same, ie they assume that we will heroically keep the cars running by us all driving EVs.

The problem is fundamentally there will be huge changes and there is no easy street to it. just decades of hard graft and no one will say it because no one else will vote for it, so its can kicked.

I wonder myself if it gets really ugly how forgiving/tolerant the public will be when this future becomes self-evident.

"I wonder myself if it gets really ugly how forgiving/tolerant the public will be when this future becomes self-evident." In NZ, expect a few grumbles only and that's what the pollies count on.

There are strategic issues here beyond the immediate apparent economics. What future possibilities do we exclude if we scrap rail?

1 We are a country that relies on our natural resources. Currently the pendulum has swung against mining, what if it were to swing back? Rail is extremely efficient at transporting minerals. Without it most mining projects are stuffed.

2 Rail technology is advancing rapidly, there will be new technologies that transform the economics of rail.

There will also be climate change thinking that will transform the economics of trucks!

There is also the small problem of not having oil and hence diesel for many decades longer. Sure you can make bio-diesel but that is an energy disaster (EROEI) so making the huge quantities to keep trucks running long distance when electrification via hydro would avoid that loss would be stupid.

I agree, except I dont think its will be the transformation/improvement of rail but that the "cheap" economc model of diesel driven vehicles will rise past the point of being economic, making rial our only long distance option. So really ripping up the tracks would be an economic disaster for us 20~30 years from now.

Not to mention the deadly fumes that diesel engines put out. These will now be allowed to come out politically following the VW scandal. Air pollution from vehicles (and from what I can tell the ultra fine particles from diesel are particularly deadly) is a real killer worldwide. I think the introduction of electric cars will be a revolution like banning smoking in pubs, the real benefit will be in the dramatic improvement in air quality.

unfortunately we down a path of low productivity and inefficiency, worksafe has a lot to do with it. In the case of Kiwi rail, they are spending a fortune on safety whilst infrastructure (tracks and bridges) are not being maintained properly.
Look at the case of the collapsing road bridge in upper hutt. There are old bridges in our area like that not to mention the rough roads we have to drive on. An yet you only have to drive past road works in this country to see the public money being wasted on worksafe.

Well safety is paramount. Given NZ's history of a no8 bailing wire mentality and the fatalities that have occurred a serious improvement in safety is essential. I certainly have not seen anything like you when I have driven past road works.

I hear what you are saying Steven but who in this country who is a civil servant or works for council and is trying to save us money?? That's what pisses me off! Has anyone actually done a study of what all this worksafe stuff is costing us and if there's been any benefit? I guess I know a lot of people in farming , trucking, kiwi rail, they all tell me worksafe is adding significant cost and slowing down work in jobs that no one can remember any ever getting hurt doing. I'm not saying get rid of it completely but they are over doing it. Why make every workplace in this country inefficient because a few a have a bad safety record? Answer? There is a lot of money in it.

Incredible. New Zealand has a terrible workplace fatality rate compared to other OECD countries and the recent government changes were a joke. Safety is paramount Mr McDuck.

http://hstaskforce.govt.nz/documents/comparison-of-ilo-published-occupat...

Disagree, It's an entire new industry with huge costs and for what benefit? Show me the num bers of all the savings Worksafe is achieving through less injuries, 60% of this stuff is nonsense and everyone who works in the field knows it.

What he doesn't say is that both National and Labour Governments have admitted in the past that trucking companies do not pay their fair share of road costs. Trucks do 99% of the damage to the roads, and let's not forget that the Government has recently legislated to increase the size of trucks, while the cost of the roads is spread across all users. So while his comment "road users would probably complain that their petrol levies are subsidising rail" is probably legitimate, we are already heavily subsidising trucks.

This article and the opinion of treasury only have legs because of decades and generations of under-investment in rail. Had investment kept pace with the population and the needs of the country, this conversation wouldn't happen

The fact that it is happening tells you the lever-pullers got it wrong

A useful article on the current debate. I was very shocked at the bluntness and lack of depth in the current debate. That its between political dogma on the one hand and some self interest on the other is shocking. That the NZTA has not done some proper work on this, is slack.
Personally I am very responsive to clear thinking uncluttered by ideology. Any work would need to look at likely future direction of transport, and whether electrifying is highly likely or not.
Come on NZTA !

So roads pay for themselves? I look forward to the trucking lobby paying $1billion to the government to cover the cost of the new motorway they want along the onehunga foreshore to get into their warehouses a bit quicker, they wouldn't possibly expect the taxpayer or ordinary motorist to pay for their motorway would they?

You have one inaccuracy in this article, you say that the road network is not funded by the consolidated fund. Even though the government has increased petrol tax to pay for some of the RoNS programme, this is still no where near enough to pay for their current roading programme, and so funding for NZTA has been getting topped up from the consolidated fund. http://www.nzta.govt.nz/planning-and-investment/2015-18-national-land-tr...