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Ensuring The Future Of Rail In NZ - Report

January 2003
Ensuring The Future Of Rail In New Zealand

You will be aware of recent media publicity about problems with New Zealand’s rail system, including welded rails buckling in the heat, derailments, stranded passengers in Wellington, major concerns about overall track maintenance, and current discussions between Government and Tranz Rail on a range of options including subsidies and a Government buy back of the rail network.

Major freight users concerned

Major rail freight users are very concerned at the developing situation if no action is taken. The future of the country’s rail services, a vital part of the Land Transport Strategy, is at risk.

The national benefits of a viable rail freight service are well accepted and include more competitive pricing by exporters, a beneficial impact on road congestion and better environmental outcomes and energy use.

Yet in the 10 years since rail was privatised, rail freight’s share of total freight has shrunk to about 10% and monopoly operator Tranz Rail continues to lose market share to other transport modes. This is at a time when NZ’s economic growth rates have been amongst the highest in the OECD, with the last quarter’s GDP growth being particularly strong. Rail freight revenues should at least keep pace with this growth rate.

Significant spending needed on tracks

While roads are continually improved and travel times reduced, little is done to improve the ability of the rail network to compete through enhancements to the system. As the recent Halliburton Report reveals, the monopoly network operator continues to have serious problems adequately maintaining the existing network. Significant portions of the network have weight and speed restrictions, and tunnels which restrict load size. This is not a sound basis for running a competitive freight service.

Should the Government buy back the network it needs to factor into the purchase price the substantial liability for deferred maintenance (possibly in excess of $200 million). The new owner of the network needs to acknowledge this liability and take responsibility for ensuring that the track is not only “fit for purpose” but that there is a plan to improve it to meet the country’s future needs.

Freight is key to maintaining network

More than 70% of Tranz Rail’s revenues come from freight. Freight revenues are therefore the major source of funding for the maintenance of the network, regardless of who owns it.

As freight volumes shift from rail to road and coastal shipping, the ability to fund the maintenance and operation of the rail network reduces. Once freight users have made investments/entered contracts to use other transport modes, reviving rail through restructuring and a new, competitive approach to freight contracts will be even more difficult. Conversely a strong network operation that actively seeks to attract freight to rail has the potential to spread fixed costs over growing freight volumes and provide a win/win situation for all stakeholders.

New structure needed

The Rail Freight Action Group encourages Government in its negotiations to buy back the rail network at a realistic value, but cautions that buying back the tracks will not, of itself, solve the problems of freight users unless a new management and operating system is adopted. We advocate a Government body to manage and maintain the network of behalf of all New Zealanders, managing safety and timetabling issues for passenger and freight services alike. There needs to be contestable access for competitive freight service providers, paying affordable fees for access to the network. Tranz Rail could still be in a strong position as the incumbent freight service provider, and owner of much of the country’s rolling stock, with current contracts with freight users.

Subsidies the alternative way of the future?

If urgent moves are not made to develop a financially sustainable model for the rail network, and major freight users encouraged to maintain or increase their cargo volumes on rail, subsidies are likely to be increasingly sought to preserve the rail network. Tranz Rail and Government are reported to be discussing subsidies as one option to make rail more competitive with roads.

Transfund is already receiving applications for subsidies under the Alternatives to Roading system to preserve certain provincial lines which Tranz Rail otherwise wants to close. It has no plans to build a link to the new export port at Marsden Point. If there is no change to the present ownership, increasing subsidies from the taxpayer are likely to be needed to maintain the existing privately owned rail network. This will benefit the shareholders of Tranz Rail, not the users, yet it’s freight which underpins the success and future of rail in this country. The Rail Freight Action Group opposes subsidies as distortionary, and believes rail can prosper if it is restructured along the lines suggested.

End to monopoly sought

We are not asking Government to nationalise rail, or to revert to being a provider of rail freight services. We are urging Government to take the opportunity to restructure a monopoly model that clearly is not succeeding, and to enable competitive freight services on the rails, the same as we already have on roads and at sea.

If New Zealand wants to preserve a viable national rail freight and passenger service, these steps are urgent. If rail fails under the current model, it will be very difficult to revive it. The time for a bold restructuring of rail services is now.

Please contact us if you would like more in depth information.


Email: cedric@porternovelli.co.nz

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