Four Options For NZ Rail Network’s Future

When the rail system was renationalised in 2008, the Labour Government appointed a Rail Development Group to come up with a plan for revitalising rail. Depending on your point of view this was either a desirable development to restore the rail network to a core transport option, or an unnecessary waste of taxpayers money to avoid the commercial realities of the operation of the rail system in NZ at the time.

It will be interesting with Labour’s new leadership to see whether they decide to adopt the proposals, or a variation of them, adapted to the new operating regime in NZ after being in opposition for however long it is before they are re-elected. The RDG proposals were in the main not adopted because Labour lost the 2008 election. National chose instead to develop the Turnaround Plan and have been implementing that, although they have also funded some urban passenger service improvements.

As of 2015 there are essentially four core proposals for the development / future of the rail and overall transport network:

• New Zealand First proposed in the 2014 election campaign a programme of “Railways of National Importance” (RONIs). This has been covered recently in a previous post to this blog. In essence the RONI programme is a throwback to the 1920s when it was rail first rather than today's focus on rail as part of an integrated transport network. "Rail First" was eventually abandoned by politicians as road transport became more developed and important.
• The Turnaround Plan for rail which is the policy developed by the incoming National Government in 2008 and which has continued to evolve since that time. It has been implemented alongside changes in the roading network including Roads of National Significance and the introduction of High Productivity Motor Vehicles of up to 62 tonnes. The Turnaround Plan has so far produced the closure of several hundred kilometres of the rail network and the loss of one of the rail ferries and could result in further line closures due to Kiwirail’s current poor financial performance being reviewed under the new CEO.
• The Rail Development Group of 2008 informed Labour’s policy development following the renationalisation of the rail network. Because the renationalisation occurred so close to the election which Labour lost, the policy was not implemented. It remains to be seen how this work will inform policy development of the Labour Party in future election campaigns.
• A fourth option which has gained some support in certain circles advocates that the rail network be owned by Ontrack and the rail operations be opened to full competition. There has not been any equivalent of this in NZ in the past.
• Essentially the rail lines will become another transport highway, owned and maintained in the public interest, with multiple operators for all services. This system is currently used around the world. This could be seen as a variation of the Turnaround Plan (National Government) policy.
• Between 2004 and 2008 there was open access to the network for passenger service operators only, as Toll Rail had an exclusive right to operate the freight services, except where they voluntarily chose to give up routes, whereby another operator could have stepped in to run them. In 2008, Toll proposed to drop a number of services; this was curtailed by the Government buying out Toll’s operations.
• There could be more desire for Open Access to be established on lines that Kiwirail does not operate if they choose to close significant chunks of the current network. So far the only proposal to date for alternative operation has been for the Napier-Gisborne line. This is not open access as Kiwirail does not have an open access function. The NGL proposal involves an exclusive lease to Hawkes Bay Regional Council with a consortium of private partners.

In order to inform this debate I have reproduced below the Rail Development Group’s proposals that were reported back to the Labour Government at the time of renationalisation in 2008. These are quoted from NZISCR (Victoria University) report “The history and future of rail in NZ” by Dave Heatley published in June 2009 where he has had an indepth look at the viability of rail in NZ since the system was first established in 1863. He proposed several options for the future of the NZ rail network. These were: maintaining the network at its present size, reducing the network to a commercially viable subset, or closing the network altogether. The first of these options is listed below. I have included with this the views of the author as to the value of this policy. Essentially the presently uneconomic lines that have been closed or proposed to close under the TAP would be kept open by running at least one service a week. It can be seen that the Dargaville and Napier-Gisborne lines, which have both closed since the TAP was implemented, were being maintained under this

The Rail Development Group (RDG) presented its reports containing recommendations for the operation of rail under public ownership in August 2008 (Rail Development Group, 2008a, 2008b, 2008d, 2008c). At the core of their reports is the choice between two different futures for rail:

• A pure commercial model operating on a 1500km network; and
• A non-commercial model with continuing government subsidies operating on the entire current 4000km network.

The recommended approach is the non-commercial model where the government purchases non-commercial services from KiwiRail. The services purchased are commonly called a “community service obligation” (CSO). CSOs in railways are an old concept: railways in Victoria were receiving payments for non-commercial services as long go as 1896 (Wills-Johnson, 2006a). The State-Owned Enterprises Act provides for CSOs, and ONTRACK has been the recipient of CSO payments of around $4m p.a. for non-commercial activities over the past few years. The proposed subsidy levels for the KiwiRail Group were expected to reach $235 million annually by 2013. These proposals are in addition to operational subsidies and planned capital works programme for urban commuter services.

These subsidies are to allow the KiwiRail Group to deliver the outcomes listed below.

Desired non-commercial outcomes.
a) Freight:
i) Baseline
(1) A national network: all lines open with regular rail ferry services, most of the time;
(2) Services on all lines, at least weekly
(3) Achieve modal shift to rail from road (as opposed to rail to and from coastal ship, other than at the margin), prioritised according to the value of taking incremental traffic off roads in various corridors (for example shifting NTKs to rail in Auckland-Tauranga are likely to be more valuable than NTKs in Southland in terms of avoided roading costs).
b) Passenger Metro:
i) Substantial increase in Auckland as per the Rail Development Plan from the ARC and ARTA, resulting in a reducing per head contribution from taxpayers;
ii) Moderate increase in Wellington as per the GWRC rail upgrade plan;
iii) Other commuter services as commercially justified or as supported by NZTA;
c) Long distance passenger:
i) Domestic and international tourist services on Christchurch – Greymouth, Christchurch – Picton and Wellington – Auckland;
ii) Other services as commercially justified;
iii) Non-scheduled heritage train services at a similar level to today at minimum cost;
d) Passenger, car and commercial vehicle movement across Cook Strait to continue to be purely commercial; and
e) State sector level of compliance – assets, processes and systems in proper state.
The RDG used three main arguments in favour of the non-commercial model:

• The government’s policy outcomes will not be achieved without subsidies;
• Avoided roading costs (due to modal shift); and
• Network economics dictates that closing lines will shed revenue faster than it sheds cost.

This subsidised non-commercial model and the arguments used to support it have significant flaws. Firstly, there is nothing special about the current extant network. It is nothing more than the result at one point in time of the historical interplay of political and economic forces. The assumption that the public is best served by paying to freeze the network at its 2008 size is not backed up by any hard analysis. A subsidised line carrying one train per week cannot be providing much in the way of a community service. It is highly unlikely to avoid any roading costs.

Nor is it likely to contribute meaningfully to any modal shift. The environmental costs of maintaining and renewing the line are likely to significantly outweigh any environmental benefits due to its operation. And persisting with operating the line has an opportunity cost, e.g. the railway corridor land is unavailable for other productive purposes. Secondly, their analysis of network economics is self-contradictory. If, as claimed, closing lines will shed revenue faster than it shed s costs (Rail Development Group, 2008b), then it logically follows that every network size smaller than the extant network will be less profitable than the current size. This is not consistent with the assertion elsewhere in the reports that a smaller network (of around 1500km) is commercially viable. The authors may have confused economies of size with economies of density.

As discussed in Section 3.1.1 , while rail exhibits strong economies of density, there is a lack of empirical evidence for economies of network size. Subsidies with the aim of protecting network size will act to reduce network density and therefore reduce potential returns due to economies of density.

Thirdly, the RDG are cherry-picking with regard to government policy. They state “rail can operate in a commercial model, though in doing so it will not meet the needs of the New Zealand transport Strategy” (Rail Development Group, 2008d, p. 4). But the recommended non-commercial model for rail is also at odds with the NZTS. Modal shift towards coastal shipping, also a part of the NZTS, is seen as a competitive threat to be neutralised. Increased energy efficiency and removing trucks from the roads is presented as a positive, but only in so far as it benefits their arguments in favour of retaining rail. The RDG and KiwiRail Group (2008) view the current trials of 50-tonne trucks as a competitive threat and suggest those trials be curtailed. However, 50-tonne trucks would improve energy efficiency and reduce the number of trucks on the road – outcomes consistent with the NZTS.

The proposals by the RDG are an echo of the situation that applied from the 1930s to the 1980s, where rail was protected from competition in order to meet goals that did not necessarily align with the national interest in social and economic performance.

The RDG’s recommendations elevate the running of one train service a week on all lines in the extant network to a national goal, to be achieved regardless of the nation’s productivity, economic costs or environmental goals. These recommendations are not in New Zealand society’s interests.