Tuesday, 21 April 2015

A new track for KiwiRail

Recent news has emphasised again to me the need to separate KiwiRail as an SOE and the provider of railway infrastructure in New Zealand. KiwiRail has a proposal that could lead to the removal of the electrification of the North Island Main Trunk. This is in the context of the Minister of Finance confirming KiwiRail was seeking further funding in this year's budget, on top of the $1 billion already spent since the renationalisation of rail and sea ferry operations in 2008 - not including how much was spent by Labour buying it back. The biggest mistake Labour made in this process, in my view, was combining the infrastructure with rail operations again.

The electrification itself was implemented as one of Rob Muldoon's "Think Big" energy projects during the 1980s (although proposals for electrification dated back to the 1950s), a project that was eventually completed under Labour in 1987. Its main purpose was to lower the cost of imported fuel, at a time (just after the 1979 oil shocks) when it was expected fuel prices would remain high. They didn't, and to top it off the railways lost their monopoly on freight transport when the sector was deregulated in 1981. The locomotives purchased as part of the project, the EF class, are now coming to the end of their economic lives and are in need of replacement. Apparently KiwiRail only has six of the original 22 available for use, when they need 17.

While it is only one of three options allegedly "on the table" (the other two being either refurbish the EFs or buy new electric locomotives) a proposal to shut down the electrification has attracted a predictable campaign against such a move. Under the current model though, it's understandable that KiwiRail is considering shutting down the electrification.

KiwiRail made a headline loss of $248 million in the past financial year 2013-2014. But, take out the cost of providing KiwiRail's infrastructure, and KiwiRail made a profit on its operations before tax of $77.5m. In the 2013-14 year KiwiRail moved 17.1 million tonnes of freight. If KiwiRail were instead charged for infrastructure the same way commercial road operators are - both through fuel taxes and by the weight of freight carried over the distance it was carried - the balance sheet would look different.

Under such a model, the infrastructure - which is treated as a public good by commuter rail users - would be a public good nationwide, much the same as the roading network is. You wouldn't have KiwiRail contemplating removing parts of the infrastructure to keep costs down, nor investing limited capital in its right of way.