Michael Reddell is worried about the emphasis on rail projects in the new regional development strategies, defying reason and evidence in an effort to make us poorer, holding back national productivity prospects

By Michael Reddell*

Earlier this week, Kiwirail released its most recent half-yearly financial result.

Once again, the taxpayer was poorer for their operations.

They make great play of a modest “operating surplus” but I rather liked this summary table from their latest Annual Report.

kiwirail

In other words, no returns to shareholders at all; in fact losses in one year of a third of the (periodically replenished) shareholders’ funds

Last year, they had operating revenues of $595 million, and an overall loss of $197 million (much the same as the year before).  So roughly a quarter of their overall costs are not covered by income.   As an organisation –  and with all due respect to the energies of individual employees (including the five earning in excess of $500000 per annum) – it has all the appearance of being a sinkhole, absorbing more of the scarce resources of taxpayers each year.

And before people start objecting that roads don’t make a profit, it is worth remembering that airlines do and coastal shipping operations do –  and, if they don’t, they usually go out of business.

An organisation that operates such large losses (acquiesced in by successive shareholder governments) clearly isn’t one that applies the most demanding tests possible to the question of whether individual lines should be opened or closed.  Occasionally people attempt to justify government intervention in this or that activity on (questionable) grounds that the private sector is applying too high a cost of capital.  But in this case, the state operator’s average return on capital (ie over all its operations) is substantially negative, and it has no expectation of changing that.

A few years ago, Kiwirail closed the Gisborne to Napier line.  Rail volumes had been low and falling –  some trivial portion of the volume that Kiwirail estimated would have been required to make the line viable.  But ever since, there have been people hankering for the line to be reopened.

And yesterday, as part of the first wave of projects approved under the new Provincial Growth Fund, the Minister of Regional Development announced that

“We’re also providing $5 million to Kiwirail to reopen the Wairoa-Napier line for logging trains, taking more than 5700 trucks off the road each year.”

 In the more detailed material released with the announcement there is a suggestion that the Hawkes Bay Regional Council may also be putting in money.

There is no sign of any cost-benefit analysis of this proposal having been released at all. But we can assume that the proposal wouldn’t pass any standard (weak) Kiwirail commercial test since otherwise Kiwirail would have reopened the line without taxpayers’ having to chip in more money directly.

There used to be some logs/timber carried on the Gisborne-Napier line, but a reader pointed me to the numbers: in the final full three years of operation, a total of 327 tonnes of it.

There are, apparently, going to be a lot more logs to move in the coming years.  In the Minister’s words

“The wall of wood is expected to reach peak harvest by 2032 so reopening this line will get logging trucks off the road and give those exporting timber options that they currently do not have,” Mr Jones says.

“It makes sense to consolidate that timber in Wairoa and use rail to take it to the Port of Napier.

Except that apparently officials and Kiwrail had already looked at this option a few years ago.  In a report released only a few year ago it was noted that

“We note that Kiwirail was not convinced this would be finanically viable for users given the relatively short distance involved and the need to double-handle the logs.  Industry feedback has also indicated that transport of logs on rail across the study area was unlikely to be economic.”

Perhaps the economics has suddenly changed?  But, if so, where is evidence?  None was published yesterday.   We aren’t even told what assumptions are being made about how much of the logging business will be captured.

The Minister’s release also argued that there were climate change benefits from this move

“It will also mean 1,292 fewer tonnes of carbon dioxide released into the atmosphere each year.”

Even if this were relevant –  don’t we have an ETS supposed to deal directly with pricing emissions? –  and accurate (what assumptions are being made, including about the carbon costs of the double-handling?), it sound doesn’t terribly impressive.  A single 747 flying to London and back once apparently emits 1100 tonnes of carbon dioxide.

This is just one of the numerous projects the government is going to spend money on in the next few years.  I’ve only looked through the Gisborne/Hawke’s Bay list, and none of it fills me any confidence.   What, for example, is central government doing on this?

The Provincial Growth Fund will provide $2.3 million to redevelop the Gisborne Inner Harbour as part of a wider tourism investment programme.

If, as the Minister claims,

“Tairāwhiti is brimming with potential and untapped opportunities

you would have to wonder why the private sector, and the local authorities, don’t seem to think them worth spending money on.  (On my story, a materially lower real exchange rate would help quite a bit, but the government shows no sign of addressing that.)

A couple of weeks ago, I commented on the Minister of Finance’s underwhelming exposition of what the government was going to do to transform the productivity outlook in New Zealand.   The Minister noted

A major example of this is the Provincial Growth Fund developed as part of our coalition agreement with New Zealand First.  This will see significant investments in the regions of New Zealand to grow sustainable and productive job opportunities.

To which my response was

If it ends up less bad than a boondoggle we should probably be grateful.  It isn’t the sort of policy that has a great track record, and it is hard to be optimistic that one new minister –  with a vote base to maintain –  is going to transform the sort of flabby thinking around regional development presented at Treasury late last year.  

Then again, the Secretary to the Treasury might quite like the idea of paying to reopen the Napier-Wairoa line.  I’ve told previously the story of Gabs Makhlouf, fresh off the plane from the UK, lamenting that the one thing New Zealand hadn’t sufficiently taken from the British Empire experience was to invest more heavily in rail (in response, assembled Treasury officials were not quite being sure where to look).

Sometimes economic policy in this country seems almost designed to defy reason and evidence in an effort to make us poorer, to hold back national productivity prospects.  Spraying around $5m here and $5m there –  $3 billion over three years, in some scheme reminscent of congressional earmarks in the United States – not backed, it seems, by any robust supporting analysis, seems just another  step along that path.


Michael Reddell is a macroeconomist who blogs at croakingcassandra.com and where this ariticle was first posted. It is here with permission.

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30 Comments

If trucks paid their true costs it might be a different story.

""by any robust supporting analysis"". It is certainly missing and NZ ends up with random spending rather like a kid buying toys on a whim. A case for railways can be made; it would have to point out strategic advantages - after the Kaikoura earthquake it was much easier and cheaper to get a railway working than new roads. Say fuel prices suddenly tripled (ref Gulf war) then railways might be economically viable again so there is an argument based on building a resilient economy.
Given the money involved we need robust analysis not random spending to satisfy a temporarily powerful politician's electorate. It is debatable whether even the USA can afford their congressional earmarks and this kind of spending is the way 3rd world countries wreck their economies.
If Shane Jones wants his party re-elected then he has to pay attention to making sound economic arguments, even if our finance minister overlooks bad expenditure it is unlikely voters will.

If our Railways had not been given away to the Merchant bankers in the 80s we could have kept them going and improved them.
Now our Railways need investment especially for the regions.
And our roads are getting increasingly dangerous with growing numbers of trucks.
The logging trucks between Gisborne & Napier are dangerous and could easily be replaced with rail.
The trucking industry is getting an effective subsidy from the nz motorist and Govt anyway.
Now we just need to add some passenger services once the mothballs are removed from the Railways tracks.
Imagine a Germany without trains!

1) The Government should have made the regional development fund contestable. One presumes some of the regional allocations came out of coalition talks. There should be a NZ law to avoid this.

2) Regions (main cities excluded) should have then had to make business case submissions to access the funding.

3) I agree with the comments above that trucking should pay their full costs (i.e. they are subsidized as well).

Golly Gosh

The Hawkes Bay Regional Council wrote off a "massive" $14 million in sunk costs over the uneconomic Ruataniwha irrigation scheme ...

Get in line for the National Government Irrigation Acceleration Fund lolly scramble - dont hear the lobbyists and pushers and urgers complaining about that do you = straight out subsidy
Crown Irrigation Fund == $450 million
Government Irrigation Acceleration Fund
http://www.crownirrigation.co.nz/

As a sop to the greens the Nationals tipped in the clean-up fund
Government Fresh Start for Fresh Water Clean Up Fund == $100 million
http://www.mfe.govt.nz/more/funding/freshwater-improvement-fund

NZ Irrigation Acceleration Fund
https://www.mpi.govt.nz/funding-and-programmes/farming/irrigation-accele...

But out come the lobbyists and pushers and urgers screaming about a measly $5 million that might get a few trucks off the road and save a few lives

Yes, Puketapu, for some reason National supporters are against national infrastructure that benefits all - businesses & consumers & citizens.

I think the issue is that occasionally the Government questions whether its investment is sensible. When it invests $1 million it effectively stops the private sector investing (through tax or impact on interest rates). Therefore the Government should be careful about its investment but never is.

My particular bug-bear is that local and central Government tie up land without any regard to the implications and then we have a housing shortage and on-going subsidy of rentals through the accommodation supplement. As I have pointed out before - Auckland Council subsidises golf more than it subsidies public transport

Hi Puketepapa

You're right, the Government should have made all these funds contestable and applicants should have to submit business cases to receive funding (funding would be on ranking of business cases).

Does a school submit a ‘business case’ to exist or receive operational funding? The local police force/station? All the many roads of NZ?
There are many areas where Govts spend for the public good. In most cases businesses benefit off the backend as well.
Business case narrow mindedness is what gave us the electricity multiple company debacle - instead of one decent system for all NZ citizens.

Hi Mortgagebelt, No.

The business cases should be based on socioeconomic assessment (i.e. economic benefits / disbenefits to NZ.Inc.), not a financial analysis.

However, your point about the electricity industry is interesting.

Could a zero profit (but still has to earn a return on capital) monopoly SOE electricity provider with a social corporate statement of intent be system optimized to produce a better outcome for NZ.Inc overall than a competitive electricity market?

Hi OEKiwi. It would be possible with the right parameters to have 1 main system.
If the fragmentation of power co.s had happened in the 40s, we probably wouldn’t have had the big hydro dams, geothermal etc, built at all, as the roi is so long term and because of the scale needed initially.

Ironic that it is Labour that is trying to get NZ Railways working again.

Around here we are getting a lot of damage from logging trucks. Most of the forestry is foreign owned and the costs are going to be passed onto ratepayers. A couple of weeks ago a motorcyclist was killed and the local fire chief slated the poor state of the roads due to the huge increase in logging trucks. I asked a local highway patrol officer and he told me many of the trucks are now 57-58 tonnes and some up over 60.
G
A friend up the East coast has just had a note form the local council his rates are going up %140.

http://gisborneherald.co.nz/localnews/3121977-135/forestry-needs-to-cove...

The next problem is forestry trash ruining our beaches and taking out bridges in a flood.

http://www.stuff.co.nz/national/8147750/West-Coast-bridge-to-reopen-on-T...

In the North what I have observed is that all roads lead to Port Whangarei, and are getting a similar hammering. North Kaipara Head gets a lot of truck movement, which is crazy given the development of the area was through trees leaving these shores via the harbour for a hundred years.

This is the problem with minister's pet projects. Not much different that the so-called Roads of National Significance or a host of other projects that a very poor return on investment. We need to have robust cost-benefit-analysis and include all factors which is a important criticism of many roading projects. But that wouldn't win votes.

If the government decided to halve the GVM for heavy vehicles, it would alter the parameters of any cost benefit analysis, just as it would if the government decided to double the maximum GVM. You know you're reading a lobbyist article when a logical faux pas like that is ignored in the underlying argument.

This sentence;"and before people start objecting that roads don't make a profit,it is worth remembering that airlines and coastal shipping do and if they don't,they go out of business" is as stupid as it sounds.

Put differently,of course roads don't make a profit and NOBODY expects them to as they are an integral part of the transport infrastructure,but acknowledging that would ruin my argument,so I'll introduce some irrelevant stuff,in the hope of pulling the wool over your eyes.
Right wingers just seem to hate railways and love roads. sensible folk know that we need both,but as we let the rail system wither,we are now playing catch up.

Playing catch up with a myriad of things.

Thank you linklater. As I read further, I was hoping that Reddell would present some argument about why you shouldn't treat rail the same as roads in a cost-benefit analysis, as that seems to be the missing argument in every column I read on this issue. He didn't touch on that at all. I am further convinced that this is a lobby-controlled argument.

The most significant cost in moving logs is handling. You have to put logs on a truck to get them out of the forest. Once they are on the truck, the cost of moving them an extra 100kms directly to a port is insignificant compared to the cost of off loading and reloading on to a train (and waiting for the train to accumulate an economic load). If you halve the GVM of logging trucks, you simple double the number of trucks on the road, and increase the cost of moving the logs to wherever they are going. So the effect of some of the suggestions made by some commentators is to increase the cost of our forest products for local and export markets.

Care to discuss the cost benefit ratios for the multi billions of dollars that National spend and proposed to continue spending on their "Roads of National Significance"?

The issue, peculiar to rail, is its exquisite vulnerability to NZ's notoriously shaky/slippery geography. One metre of one rail missing or out of alignment anywhere spells Line Closed.

Road, assuming alternate routes availability (this isn't everywhere, e.g. Karamea, so don't try arguing it's always present) generally does not suffer: traffic simply switches to the alternate and carries on.

Poster child: the Kaikoura earthquake, which saw the SI rail network rendered useless for a year. Road freight switched overnight to the longer, hairier but available alternate routes and just trucked on.

Road, for the public transport lobby-minded, is a prerequisite for bus, taxi and shuttle, emergency services (fire, police, ambulance), so railing (sorry) against Renegade Roads is simply ludicrous (and not in the Tesla sense....).

PS: Glad to see Interest using Reddell - an ex-RBNZ policy guru with a suitably sardonic take on Gubmint policies, conditioned by years of exposure to pollies and their ill-thought-through whims....

They could have diverted the Ferries to Ch Ch

Lack of instantly available handling infrastructure at the Lyttelton end for ro-ro....was never feasible.

It used to be there?

New Zealand has many types of geography, so needs many types of transport infrustructure. Energy should always be the number one cost in consideration (for the long term) as most other costs are a human construct. Small coastal shipping, canals, rail, and road all have a part to play.

Waymad -not to deny your point. But to add -KiwiRail were insured and had their rail corridor up and running before the Kaikoura road was opened. Roads are not insured -the poor old taxpayer covers that risk......

We are truely a banana republic.
Cant repair an old city
Cant build a new city.
Cant fund enough new roads or maintain those we have.
Cant afford a railway system.
What is next?...the grid.

After Bannockburn Scotland had almost 400 years of 'independence' until the economy sank compared to the big neigbour and with barely a whimper it was absorbed by the Act of Union into a Britain that was all English. Similarly if NZ's economy sinks far enough below a bigger neighbour then it will lose its last vestige of independence and just become a state of ? (Australia or China). At the rate of failure of NZ's comparative economic performance we don't have 400 years. [70 years to go from 1st to 47th on the CIA list, so maybe another 70 years to be between Botswana and Belarus?]

Well done Lapun.
If we are sliding it will be imperceptible but I agree the final act is merger with a big brother.
Its the last straw that breaks the camels back and in retrospect the past decade may mark a turning point, gross mismanagement by a goverment followed by lack of confidence.