KiwiRail myths and realities🍋

KiwiRail has continually failed to meet even the goals it set for itself

My Asymmetric Information post We need to talk about KiwiRail in November stirred up a fair number of comments. I apologise for not responding personally to them all, as I was in Ottawa working on an infrastructure resilience project. Following a discussion with the editor, I though the best way to respond was with another post. Here goes …

Poor performance of rail in New Zealand is not a new phenomenon. Neither is wishful thinking that there is something magical about government ownership of rail that grants it some special place in a nation’s infrastructure hierarchy, and justifying continual taxpayer funding even when the numbers just don’t stack up.

Rail and nation building

Australian Prime Minister Kevin Rudd famously justified the $42 billion investment in the National Broadband Network (NBN) , the biggest infrastructure investment ever in that country, as a nation-building exercise of the kind delivered by the building of Australia’s railway network.¹ (Subsequent cost-benefit analyses found that the NBN, which at the outset forecast a return on investment of 7.1%,² will never recover its cost of capital.)

Indeed, railways have been hijacked by governments past and present as part of national mythmaking, as discussed by Yuval Noah Harari in his latest work Nexus. Harari proposes that myths condition humans to pursue some objectives (both rational and irrational) unquestioningly, because they play on feelings, not logic. Logical economic analysis, however, can be used to powerful myth-busting effect.

Fardowner Peak, Price Range, Westland. Dave Heatley

Myth#1 Asset stripped by private owners …

The first NZ rail myth to confront is that, in the good old days, public rail in New Zealand was extensive, well-maintained and profitable. When it was made into a profit-oriented SOE in 1986 and then fully privatised in 1993, the private owners asset-stripped it to satisfy profit maximisation motives, reducing services and allowing the network to deteriorate. Current government investment is a “catch-up.” Once the infrastructure is restored, then so too will competitiveness and profitability.

The reality is very different. The many works by the late New Zealand Institute for the Study of Competition and Regulation (ISCR) confirmed that rail had failed to make an economic return on capital invested since the end of World War 2 (notably here, here and here). This included periods when rail was under government and private ownership. Kiwirail itself notes:

“From the 1950s, rail's central role in the daily life of New Zealanders began to erode, as travellers opted to drive or fly rather than use passenger trains. Branch lines around the country were progressively closed and deregulation of the transport industry saw rail’s market share of freight transport drop significantly.”³

Poor economic performance led to decommissioning of uneconomic lines beginning in the 1960s, but subsequent capital investment was focused on rolling stock rather than the rail network infrastructure (electrification from Palmerston North to Te Rapa was the main exception to this pattern).

Operating surpluses improved from time to time – notably following various attempts at corporatisation, the most recent being in the 1980s. However, structural issues – notably the ownership of land being separate from rail operations – meant that funding for infrastructure improvements was still subject to political (not economic) considerations. When large amounts of railway land were sold in the 1980s (e.g. rail workers’ housing along the lines) the proceeds went to government coffers not rail improvements.

The network sold to private owners in 1993 was in poor condition both physically and economically, a situation that reflected rather than drove a long-term decline in usage by passengers and freight. Subsequent deterioration – including after the railway network returned to public ownership in 2008 – is a function of the inability for any owner to be able to generate an economic return on the capital employed.

Myth#2 Necessary for climate change goals …

The second myth is that rail infrastructure is needed to achieve climate change goals or address other externalities. Removing freight from road to rail, which is more carbon-efficient than road, will justify the investment – which can be switched out from commitments made to fund “roads of national significance”.

The problem is that rail is most efficient for only certain types of freight – specifically low-value-high-volume raw materials (e.g. coal, timber, milk) when taken direct from source (e.g. mine, forest, depot) to destination (e.g. port, factory). It is ill-suited to general freight where the destinations are widely-dispersed, not a single point. Containerised freight can be shipped on rail from hub to hub, but still must be transported by road from hub to its final destination. Take, for example, containerised freight from the Wiri inland port to the Mainfreight or Toll hubs in Wellington, destined for final use in the Kapiti Coast, such as at the burgeoning light industrial hub in Otaki. More of this sort of freight movement necessitates even more use of road transport – incidentally, along two new roads of national significance – Transmission Gully and the Kapiti Expressway.

With a decline in rail freight-kilometres travelled since 2009, despite a large increase in total freight carried overall in New Zealand, there has so far been no meaningful payback to climate change commitments arising from the billions of government dollars already spent on rail. And as the third ISCR report shows, there is little evidence that additional rail freight investment offsets other externalities such as road safety or other road congestion significantly. The issue of road user charges not covering the entire cost of road use, leading to an effective government subsidy, is irrelevant: road users pay at least something to government for their use of roads. Rail pays nothing.

Myth#3 Governments can succeed where private enterprise has failed …

The third myth is that somehow “this time is different” because the (government) shareholders have objectives other than profit maximisation.

Indeed, there are differences – namely that the estimates of future demand no longer need to be realistic in order to convince the “shareholders” to part with their money. The figure below shows KiwiRail’s performance targets for its freight task (i.e. rail freight carried) between 2010 and the present (dotted lines), as detailed in successive Statements of Corporate Intent (SCIs).⁴

SCIs are the primary accountability mechanism specified in the State-Owned Enterprises Act 1986, laying out the “the performance targets and other measures by which the performance of the [SOE] may be judged in relation to its objectives.”

Every one of KiwiRail’s SCIs indicated an upward trajectory for this performance target.⁵ Not one of these targets was met. KiwiRails freight task has declined, and is now 12% below the level it in 2008/09, the first year of KiwiRail’s operation.⁶ Moreover, it is below the average freight task for 1999/2000 to 2007/08, when the New Zealand rail network was in private ownership.

On one level KiwiRail’s freight task targets show unbridled optimism by its management and board. On another, its ongoing failure to meet those targets indicate a comprehensive lack of effective accountability by the responsible Ministers. In both cases, there is no evidence of learning from experience.

Despite $11.67bn (in 2024$) of government contributions, the amount of freight carried by KiwiRail has fallen since 2009.

Myth#4 A long-distance passenger rail nirvana …

That rail has a crucial role to play in urban commuter transport, leading to faster journeys and reduced urban road congestion, is beyond dispute. However, long-distance passenger rail is ineffective in New Zealand because most long-distance journeys are undertaken are between network “ends” (e.g. Auckland to Christchurch; Queenstown to Wellington), for which air travel is more frequent and efficient, not between interior points (e.g. Taumarunui to Taihape; Blenheim to Kaikoura). This differs significantly to long-distance trains in (say) England, where a train travelling from London to Birmingham can cater to significant demands for travel between large population centres such as Coventry and Oxford, or Luton and Leicester, in addition to the end points.

In New Zealand, smaller passenger numbers and the spread-out nature of the country mean bus travel is both more convenient (more trips to choose from) and more efficient (lower capital investment) for interior point trips. Plus, buses can go places trains can’t to pick up and drop off passengers.

For longer journeys, air travel is faster, cheaper, and can offer more frequent services than rail.

Reality#1 Rail was highly profitable New Zealand — in the past

Contrary to “nation-building” myths, private-sector owners commissioned many of the successful railways, aiming to meet commercial objectives. Inevitably, of those came into government ownership via compulsory nationalisation (such as in Britain, New Zealand and Australia).

By contrast, government-commissioned railways often failed financially, causing fiscal crises. For example, New Zealand’s economic crisis of the 1880s and 1890s was in part triggered by an inability to service loans for building railways entered into by provincial and subsequently the national government (under Sir Julius Vogel).

New Zealand’s private-sector railway success story was the Wellington and Manawatu Railway Company (WMR). Farmers in the region needed certainty of getting their produce to market in Wellington in a timely manner, and merchants in Wellington needed the freshest and best produce to sell to their urban customers. So farming and merchant interests formed a company in 1880 and capitalised and commissioned the railway in 1881, in accordance with the Railway Construction and Land Act of the same year, which permitted private railways so long as they were built to the same specification as government railways and interconnected with them. The government made some grants of land in exchange for a contractual undertaking that the owners could sell to the government either on completion or at any time up to 21 years after completion. For farming interests (including many members of my extended family living in the area), participation in railway ownership and patronage of it was as important to them as ownership and membership of firms providing inputs into and processing of their outputs – such as the local dairy processing, seed, fertilizer and general farm and household supply co-operatives. The merchants were well accustomed to vertical integration upward and downward in their supply chains (including local delivery of both passengers and cargo from the trains). The final spike was driven in 1886.

The WMR was continuously financially successful, paying a 6% or 7% annual dividend, a return averaging 13.5% per year on capital employed. The government’s poor financial position in 1886 meant it had no interest in acquiring the railway on completion. However, when completion of the rest of the government’s Main Trunk Line approached in 1908, the government announced its intention to use the terms of the 1881 contract to compulsorily acquire the railway. This occurred on Monday December 7 1908, when the WMR was integrated into New Zealand Railways Department. The staff, 123 in 1886–87, grew to 382 by 1908, of whom 324 transferred to the NZR. The NZR also took over 20 locomotives, 56 bogie passenger cars, 14 brake vans, 343 wagons and two 10-ton hand cranes. When the company was taken over shareholders got 55 to 60 shillings a share. Of the 633 shareholders on the Wellington register, 307 were "originals" None were happy with the price paid, but they were unable to refuse.

Reality#2 Rail could be profitable again, if done right

The lessons of history help to show how parts of KiwiRail could be restructured for better performance, as well as what not to do. “Nation-building” and other myths should be avoided.

Looking forward, rail does have some part to play in New Zealand’s transport system, but only when tightly tied to actual demand, and with ownership aligned with its principal customers. For example, it could be restructured as follows.

The South Island’s West Coast line carrying coal to Lyttleton could be owned by coal-mining companies, the Port of Lyttleton, or a combination.

Lines taking cargo from factories to ports, and from ports to inland ports could be owned by either the ports, or a consortium of ports, factory owners, and transport companies. The lines taking timber to ports may be best owned by the ports.

Rail lines in Auckland and Wellington might best be owned the relevant regional councils. These councils already own the stations and rolling stock, and contract out the operation of passenger train services.

Interconnection agreements (regulated as necessary to resolve disputes) could address any issues of travel over competing company lines. In this way, ownership is tied to customers, and incentives to use and maintain rail infrastructure are aligned. Such an arrangement also provides incentives for the government to adjust road user charges so that they reflect actual costs.⁷

If we are genuinely committed to the goal of having a rail network that generates a financial return on investment, let’s get the conversation going based on facts and logic, not myths and emotion. If, on the other hand, we are committed to having a rail network for symbolic or emotional reasons, despite it representing a net cost to taxpayers and having minimal impact on climate or other goals, let’s be honest about that and make the cost-benefit decision with our eyes open.

By Bronwyn Howell

On one level KiwiRail’s freight task projections show unbridled optimism by its management and board. On another, its ongoing failure to meet those targets indicate a comprehensive lack of effective accountability by the responsible Ministers. In both cases, there is no evidence of learning from experience.

KoheKohe (Didymocheton spectabilis) flowers. Dave Heatley

1. See, for example, Prime Minister Realising our broadband future University of New South Wales Sydney 10 December 2009.

2. NBNCo Corporate Plan 2012–15.

3. Rail history (KiwiRail website).

4. Freight carried is measured in net tonne kilometres (NTKs). One NTK is one tonne of customer freight carried for one kilometre. NTKs is a key measure for comparing between freight modes (e.g. road, rail and shipping). All else equal, a fall in rail NTKs means a reduction in KiwiRail’s revenue, and a reduction in any positive externalities (e.g. road congestion, carbon emissions).

5. KiwiRail has not produced an SCI every year, and not all of its SCIs included targets for NTKs.

6. The “actual” figures in this graph are a composite from three sources, as there are discrepancies between the sources and time gaps in each. I used actuals from KiwiRail SCIs, where available. Where not, I used actuals from KiwiRail annual reports. And where those were missing, I summed the monthly totals from the Ministry of Transport’s FIGS rail system. That said, these discrepancies are minor in the context of the wider discussion.

7. Something that has not been occurring in recent years, as, for example, government incentives to electrify the vehicle fleet have led to pricing distortions.