Change is coming down the track for the nation’s railways. Whether that change gets us to where we want to go depends on whether the government can couple structural change with its plan to funnel cash into our railways through the National Land Transport Fund (NLTF), in a new New Zealand Rail plan launched last week. Emphasising that the rail network is a public good, while the delivery of rail freight services is a private one is key to the long-term success of our railways, and entire transport system.
Reaction to the plan’s announcement was predictable. When it comes to railways in New Zealand there’s usually two camps in opposition to one another. There’s one camp who want the whole thing shut down and sold for scrap. This camp is wedded to the idea that rail is outmoded, road is preferable for everything and represents the pinnacle of freedom and free enterprise. And at the other extreme there’s a camp who want to return to the bad old days of the government-owned and run railways, who believe every railway line on the map should be reopened, anything on rubber wheels is evil and in some cases that state ownership of railways is the first step in nationalising the means of production and distribution. Both camps are wrong but frustratingly get the most air time.
Very little focus goes on the fact that the structure of the rail industry in New Zealand, one of the underlying problems for the transport mode. Rail is unique for any transport mode in being almost entirely monolithic, dominated by a single profit-motivated (at least on paper) state-owned enterprise, KiwiRail. Rail services are competing against transport modes that are hybrids of public and private ownership. If we really want to revitalise rail, we must fix its structure first and reject nostalgia to return to the bad old days, or the privatise everything days of the early 1990s.
A lot of that nostalgia for rail is due to the fact that at one stage railways were one of the biggest employers in the country - 22,000 people worked for the old New Zealand Railways (NZR) in 1982. “The Railways” touched the lives of many New Zealanders. At corporatisation in 1982 NZR had its fingers in many pies - the railways themselves, the inter-island ferries of course, but also an airline across Cook Strait, a parcel service, a massive property portfolio, an advertising brach and New Zealand’s largest urban and long-distance bus and truck fleets. Almost everything was done internally, including heavy engineering, staff housing, vehicle towing, telephones, the whole lot.
Since the launch of the government’s draft plan for rail, the commentary has reiterated this nostalgia. There have been references to New Zealand’s railways prior to 1982 as some sort of transport utopia that was “world-class”. Let’s be honest: our railways include great feats of engineering of which we can be proud, but they were never world-class. While many people bitterly complain that that is because railways lost out on public transport investment to private cars and buses, they forget that for decades railways had a legal monopoly on the transport of freight. Railways were protected from road competition, and as with anything that is a monopoly, they became inefficient and lost focus on their core businesses of shifting freight. Service quality suffered.
Given the feelings towards NZR from its customers, the turnaround from 1982 onwards was remarkable. There was a clear focus on what rail is good at: freight and specifically bulk, heavy commodities. It's a little known fact that KiwiRail today carries 19 million tonnes annually; at its peak in 1977 the old NZR carried 13.6 million tonnes annually. Under government ownership rail freight volumes fell consistently from 1977, plateauing out in 1994, a year after the then New Zealand Rail was privatised. KiwiRail today carries more freight with a fifth of the staff NZR had, and focus on freight best kept off our roads. Most of this freight consists of New Zealand’s primary export earners. The three remaining long-distance passenger trains are solely (to the apparent surprise of some journalists) focussed on profitable tourist markets, where people are willing to pay more for a slower journey through glorious scenery, and suburban rail, which is rightly the focus of local governments in Auckland and Wellington to beat suburban congestion.
Despite this turnaround though, a fundamental issue remains. The sole rail freight operator, KiwiRail, is focussed on a narrow market with no other operators having a look in. There are a number of frustrated would-be users looking on with freight the monopoly won’t carry. As a result of its narrow focus, KiwiRail has lost customers and then closed parts of the network, or worse, scrapped rolling stock other operators might be able to use to turn a profit with - the most infamous examples being wagons built in the 1990s for car traffic or fertiliser wagons. While KiwiRail has done well with the 19 million tonnes of freight it carries every year, this figure has only grown marginally in the last 10 years; rail freight continues to only account for around 16% of all freight carried annually in New Zealand, a proportion that remains stagnant.
Compare this with the way we run our roading network: we don’t expect that to make a profit at all. In fact, if our roads were a business, you wouldn’t want to invest in them. In FY 2018, $1.7 billion was collected in road user charges (RUCs, and the figures make no distinction is made between commercial and non-commercial operators) and $2 billion in fuel excise, and a further $236 million were collected for motor vehicle registrations, a total of $3.9 billion. In the same year, we spent $4.9 billion through the NLTF for new roads, loans for new roads and maintenance of existing roads. In the same period, a total of $770 million was spent on rail. The “deficit” in the road transport numbers is made up of general taxes. This is without getting into funding for local roads, which is through your rates.
This is not to say that we should privatise the state highway network and hope that it would turn a profit. Only the most radical libertarians want to do that. And it may seem odd that many dyed-in-the-wool free marketeers have a blind spot for what is clearly a massive transfer of taxpayers’ money often to the benefit of private for-profit operators. That is because the overwhelming majority of the public see roads as a public good; and better roads mean more transport options, and we accept that private enterprises make money from the roading network do so to our benefit. You can’t run a railway line to every supermarket. And, of course, roads are vital as part of an integrated land transport network.
So why not treat the rail network the same way as we treat the road network? We have seen in the Tranz Rail era that running the rail network as a completely private entity up against a public-private hybrid leads to asset stripping (although, having a merchant bank as a major shareholder didn’t help on that count). We have also seen that an SOE with a profit motive ironically means it probably won’t ever be profitable and will only focus on a narrow band of freight, excluding others from having a go. If we want more freight to go by rail, and the government’s draft plan states that it does, the answer is to allow other freight operators with a profit motive to use the rail network as a public good and pay for the privilege on the same basis as RUCs.
We don’t have to look too far to see this model working. Across the ditch in the state of Queensland, the state government has split the rail network and public passenger services from the formerly state-owned freight operator, Aurizon. Pacific National, another Australian-wide rail freight operator, has entered the Queensland freight market as well. A third operator, Watco, has just started to freight services. All three freight operators pay track access charges to Queensland Rail, which focuses on improving its network and running passenger services. What’s interesting is that the new rail freight operators have mainly brought new freight onto the network, rather than undercut one another.
A similar arrangement wouldn’t be hard to implement in New Zealand. The old New Zealand Railways Corporation, currently an SOE, could be recast as the rail network owner. The government’s funding of the Railways Corporation through the NLTF could continue. Commuter rail operators would remain funded through regional councils, and long-distance passenger trains could also be supported through the NLTF. KiwiRail would then remain an SOE and focus on profitable freight operations, with the network open to other operators. The transport agency would provide regulatory and health and safety oversight.
This would put rail on the same level as road transport, and likely mean that both modes are best able to make use of their competitive advantages. Such a model means that investment in the rail network would be consistent and not result in the degradation we saw during the privatised years, while also ensuring a focus on customer needs isn’t lost. It would likely take a lot of pressure off our roads and enable greater integration between road and rail freight operators.
For taxpayers to see value in their greater investment in rail, we must get the structure right. Treating the rail network as a public good like we do with our road network will result in more freight on rail, and more integration between road and rail. That is the apparent goal of this government in its draft plans, and its plan to fund rail transport through the NLTF. With attention to the overall structure, we might just get onto the right track.