Insight: Keeping NZ Rail on the Tracks

Rail has played a vital role in developing New Zealand's economy, with up to 18 million tonnes of freight moved via rail every year. But does it have a future?

The Minister of Transport estimates insurance will cover most of the $500 million cost KiwiRail faces to repair the earthquake damaged railway line from Picton to Christchurch.

The figures are enormous, but the government, KiwiRail and others believe repairing the entire rail and road corridor is vital to New Zealand's economy.

At present heavily laden trucks are wearing out the alternative route: the ill-prepared road through Lewis Pass.  

The quake damaged the railway line in about 750 places.  

Fixing that up will cost about $500m, around a quarter of the estimated $2bn cost of repairing the entire transport corridor, which is hoped to be done by the end of the year.

But, Transport Minister Simon Bridges said he thought insurance would pay for the majority of KiwiRail's cost.

"Ball park, you are talking about $300 to $400 million of cost," he said.  

"As with all these things, there will be provisions in there about exactly what is and isn't being funded. That is being worked through at the moment."

The November quake came at a bad time for KiwiRail, just as it was reporting a strong performance.

Its most recent annual report stated that it carried 18m tonnes of freight. That's 16 percent of New Zealand's total or 25 percent of exports.

But the huge earthquake in Kaikōura cost the company $12m in the six months up until the end of December. The company has since indicated the cost will likely be $25m in the 12 months up to the end of June this year. It's still not known how much insurance money might be payable for loss of trade.  

Almost no one argues against the importance of investing that money given the overall benefit to New Zealand and that includes Don Braid, managing director of the transport company Mainfreight.

He said if people had any questions about the worth of KiwiRail, they would reconsider them after looking at the amount of freight that is now on the road.  

But KiwiRail isn't just there to help keep road congestion down. It has the tough mandate of having to perform commercially. It has to be as cost efficient as possible as its shareholder, the government on behalf of the New Zealand state, demands that.  

KiwiRail's chief executive, Peter Reidy, said he accepted that.  

"Every shareholder of every business is always looking for improved returns - that's the name of the game, we are a state owned enterprise and we have a commercial mandate.

"The government expects that and we accept that and our board accepts that if you are going to invest capital, you are going to want to get improved returns.

"That's normal business, that is what it is like and if it is too tough, then get out of the kitchen."  

KiwiRail usually makes an operating profit, but by the time it has paid for the tracks beneath the trains, the land beneath the tracks and the tunnels and bridges along the way, it needs top ups: $210m and $190m from the government in two successive years.

Many critics say this is unfair - the tracks should be paid for out of the same land transport fund that pays for road building.

They say that would put rail on a level playing field with other modes of transport.  

Simon Bridges said that change would not happen.  

"We take the view that yes, government funding is required.  But we do want to see the government subsidy reduced.

"And so keeping the funding model that we have, where funding comes direct from the Crown as a budget appropriation, keeps a real discipline in place and creates a friendly tension between KiwiRail and the government so that we are neither under-investing but certainly not over-investing."

But Labour's State Owned Enterprises spokesman Stuart Nash argued the government money was not a subsidy.

He said it was unfair to complain about state payments made to rail compared with other modes of transport.  

"The cost of roads are enormous. Let's say a car weighs 500kgs and a truck weighs five tonnes, so the damage a truck does to a road is ten times that of a car.

"It's not like that at all - the wear and tear on a road from a truck is exponentially greater.

"So we need to value rail for its absolute contribution to the New Zealand economy. People look at rail and say look how much it is costing, that is terrible.  

"Yes, but a kilometre of road is horrendously expensive," said Mr Nash.

Tourism is also important for KiwiRail's profile but not for its bottom line.  

The company carried more than a million passengers on all its touring services between 2015-2016, and is proud of what this does for New Zealand tourism.  

Those passengers earned revenue of almost $28m in the year to June 2016, while the Cook Strait ferries earned revenue of $127.6m  

But by far the biggest earner off all is freight. It earned KiwiRail almost $390m - or 56 percent of its total operating revenue.  

Under pressure from the government, KiwiRail is still constantly seeking to drive down costs.

Last year it saved $18m and is on track to save a further $12 to $14m this year.  

It has been doing this through IT improvements and avoiding duplication, along with getting better prices and being able to pass those through to the market.  

But it knows it needs to do more - and knows the pressure for ever greater efficiency will not go away.  

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