dave June 12, 2018 No Comments

With its fleet of ageing ferries, age-expired locomotives and the need for replacement wagons, KiwiRail is building its case for a large taxpayer investment. David Williams reports.

It was in 2008, an election year, that Helen Clark’s Labour-led government bought back the country’s rail assets under the KiwiRail banner.

Finance Minister Michael Cullen said at the time that during negotiations with the previous owner, Toll, it become clear that buying the rail operating business, including the inter-island ferries, was the best way to increase investment in the industry. Running a commercially viable business would prove extremely difficult without government support, he said, adding: “In the months ahead, I will explore options for significant investments in new, modern rolling stock.”

Instead, Labour lost that election and the global financial crisis kicked in, leading to years of public sector belt-tightening under Prime Minister John Key. Yet, despite all the rhetoric about roads – especially those of national importance – the National government pumped billions into rail. According to The Listener, the previous government spent about $2.1 billion on network maintenance and upgrades, and $1.4 billion for commuter rail upgrades in Auckland and Wellington.

But it’s never been enough. While its freight and tourism businesses manage to make a small operating profit, the company traditionally needs more than $200 million a year to maintain its network. That network includes 3500 kilometres of track, 1322 bridges and 98 tunnels, as well as maintaining its “above-rail” assets.

KiwiRail’s latest half-year report said more than half of the company’s active locomotives in the South Island were bought before 1975. That reflects, KiwiRail chairman Trevor Janes wrote, “decades of underinvestment which has contributed to recent challenges” – including the 2016 Kaikoura earthquakes.

“A rail company cannot live from pay cheque to pay cheque, you need a longer-term focus.” – David Gordon

It’s in this context that KiwiRail started a review. In last year’s Budget, the National-led Government pledged $450 million over two years, on the proviso there was a probe into its operating structure and longer-term capital requirements. “The Government wants to put the rail network on a longer-term sustainable footing,” then Transport Minister Simon Bridges said, in the hope National could suddenly achieve what it had failed to do for years.

The focus of that review changed when Labour, New Zealand First and the Greens formed a Government. (Pre-election, Labour promised to build light rail from Auckland’s CBD to the airport and a passenger service between Auckland, Hamilton and Tauranga.)

KiwiRail’s group general manager of investment, planning and risk David Gordon tells Newsroom there’s now a greater focus on “What do you want rail to do?”, as opposed to simply how much will it cost. “A rail company cannot live from pay cheque to pay cheque, you need a longer-term focus. I think everyone understands that. The question is, what is the mechanism by which that’s done and then, obviously, what is the amount.”

One mechanism, announced in April, was a surprise petrol tax hike, something Newsroom Pro’s Bernard Hickey called the Government’s “politically riskiest move since its formation”.

In its policy statement on land transport, which sets transport priorities, the new Government sent a message by adding rail to the list of transport classes that can bid for money from a pot called the national land transport fund. (Auckland is set to get a $2.8 billion increase from the fund, to help pay for a $28 billion transport wishlist over the next decade.)

However, the policy statement said scope for rail funding is “very tight”, and limited to improving struggling urban rail services and contributing to new and existing “interregional” commuter services.

‘Rust never sleeps’

KiwiRail’s review is scheduled to run through the rest of this year. But Gordon says for the biggest-ticket items, which will cost the largest dollops of money, it wants to bring these to the Government’s attention earlier. Those include its locomotives and ferries, which are at “end of life”, and money spent in its freight business “just to remain relevant”. KiwiRail would also like to standardise its equipment and link its IT systems more closely to that of its customers.

The problem is, and always has been, how much money KiwiRail needs just to maintain its network. Two weekends ago, a big chunk of the Auckland network and almost all of Wellington’s network was closed for replacement works. In greater Wellington, five bridges are in various stages of replacement involving 70,000 railway sleepers.

“It goes on all the time,” Gordon says. “Rust never sleeps.”

KiwiRail has also become very good at sweating its big ticket items like locomotives and ferries. But you can only sweat them so much.

Off the back of a record summer season, KiwiRail’s general manager of strategic projects Walter Rushbrook says its existing ferries are at capacity at peak periods. It is considering whether it should buy or lease bigger ships to cope. That’s triggered wider conversations about transport links with the likes including port companies, regional councils and NZ Transport Agency, especially about the future of existing ferry terminals in Wellington and Picton. As Rushbrook says: “Bigger ships mean you need bigger wharves.”

 
Kaitaki is the largest vessel on Cook Strait with a capacity of more than 1300 people. Photo: KiwiRail

KiwiRail’s Interislander ferries – Kaitaki and Aratere, which it owns, and the leased Kaiarahi – are not expected to have cataclysmic failures as they age, he says. But they might become more unreliable. “The team works really hard to keep it going but it’s like an old car – it’s going to need increased amounts of love as it gets into its twilight years.”

Meanwhile, Gordon says about half of KiwiRail’s 100 locomotives are “age-expired”. New locos cost about $5 million. “You could do the maths there.” Wagons also need replacing – he didn’t hint at how many – standard flat-top wagons cost about $150,000-a-pop.

“So, yes, it’s in the hundreds of millions, absolutely.”

Surely that number could reach $1 billion, over time? Gordon says that as a stand-alone commercial proposition, rail in New Zealand has never been in a position to fund its underlying capital, of about $200-odd-million a year.

“On an ongoing basis, rail will require capital. You do the years long enough it’ll get to be a very big number.”

Asked when big chunks of Crown investment might be needed in KiwiRail’s ageing infrastructure, Gordon and Rushbrook both arrive on a rough timeframe of five years.

Turnaround comes to a screeching halt

Labour would do well to focus on the non-financial benefits of rail – such as carbon emission savings and easing congestion – if National’s record is anything to go by.

In 2010, it enacted a $750 million “turnaround plan” in the hope of making KiwiRail self-sustaining by 2021. The plan was shelved in 2013. A Treasury review found KiwiRail had made substantial progress but the plan had been based on overly optimistic revenue assumptions, inadequate progress in some areas and unexpected factors, like the global recession.

Hundreds of millions of Crown dollars continued to flow into the rail company. A commercial review started in 2014 found that New Zealand’s freight business would never be big enough for KiwiRail to be self-sustaining. By 2016, six years after the turnaround plan started, freight volumes had increased 14 percent, and KiwiRail’s share of import and export volumes had leaped 69 percent. Another 48 locomotives and 1300 wagons were bought.

So much was achieved. And then the Kaikoura quakes hit in November 2016.

In latest KiwiRail accounts, for the half-year, the company notes its insurance only covers loss and damage up to $350 million. The previous Government promised to meet any shortfall, including, in that last six-month period, a $40 million injection, while the company’s accounts took a charge of $134.1 million on its assets “for the capital cost of reinstatement incurred”.

Gordon says if Crown money is invested properly it can deliver on Government policy objectives. He points to Government investment in Auckland’s commuter rail network. In 2003, when Britomart station opened, patronage was about two-and-a-half million trips a year. Last August, the rail network celebrated recording 20 million trips in a single year.

Gordon: “I can’t see any reason to suspect that, post the City Rail Link and other things, that could be up in the 50s.”

Peters versus English

A question which seems more relevant in the last 24 hours is, what are the Government’s objectives? Yesterday Labour’s Justice Minister Andrew Little announced he was backing off repealing the controversial Three Strikes law because New Zealand First wouldn’t support it.

In terms of KiwiRail’s future, it’s worth repeating an exchange in Parliament in February 2015.

Bill English, the Finance Minister at the time, found himself defending his Government’s investment in KiwiRail – more than $1 billion over four or five years – under questioning from Finance and Expenditure Committee member Winston Peters.

Plugging capital investment gaps of between $150 million to $350 million a year was a concern, English agreed.

Peters asked English if he’d had any discussions about privatising the ferry service or putting in foreign ships or crews. No, English replied, adding: “This is a business where it’s a real challenge to get it to a sustainable basis, and we are now, I think, on about our third round of having a harder, deeper look at what drives KiwiRail costs and revenue.”

Peters, unsatisfied, pressed further, asking if any Treasury boffins had ever asked about the financial “disaster” happening at KiwiRail, the “almost daily stoppages” and whether it needed to go through the business with a fine-tooth comb. “Surely somebody said: ‘Look, alarm bells should be ringing here. What are we going to do about it?’”

Newsroom asked Peters, the Minister of State Owned Enterprises and soon to be acting prime minister, for his current view of KiwiRail’s operations and the likelihood of further Crown investment. His office didn’t respond.

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