Preliminary Comments on KiwiRail Gisborne-Napier Report
8 October 2012 The preliminary findings of the Rail Action Group economic analysis team on reviewing the Kiwirail financial analysis are as follows.

The cutting off of projections at 10 years: i.e. implying that the reinstated line has no value beyond year 10, is fundamentally a flawed and inaccurate economic approach.

Even at Kiwirail's 8.9% discount rate (which seems very high for what is public infrastructure - e.g. at what discount rate are roading and other government investments assessed?), and on all of Kiwirail's cost projections simply as presented per page 38 of the Kiwirail report, then on the freight tonnages predicted in the GDC Report of May 2012 (replacing the incorrect woodchip for the massive volume of logs/timber coming out south of Gisborne and unaccounted for in the GDC report), an appropriate beyond-10-years analysis results in a positive net present value i.e. a recommendation to reinvest. At what we would consider a more appropriate discount rate of less than 8.9% then the decision to retain becomes even more compelling.

This is before an independent engineers vetting of Kiwirail's capex estimates. So if an independent engineer (we plan to ask Interfleet to peer review in conjunction with BERL's economic work) agreed that these costs are dramatically more than necessary, then the positive decision to reinvest would be even more compelling.

This analysis that even on Kiwirail's own numbers, but with the projected volumes from the community as per the GDC May report, shows a positive economic case to retain the line is before one even takes into account possible upsides of further volume in the future which we understand could include amongst others: Ovation, Hatuma, JML Aggregates and Genetic Technologies, and possibly Heinz Watties. Logically, we would suggest factoring in these possible volumes but reducing by an assumed probability of them happening as the best practice approach. However we have to date entirely excluded these and still get a positive net present value on Kiwirail's own numbers (not to mention also entirely excluding negative impacts on the costs of maintaining Gisborne and Hawkes Bay's roads).

The report also clouds the costs because of the issue with the Ahuriri Bridge, a second-opinion on the structural integrity and lifespan of this bridge and a review of cost estimates seems in order.

The report ignores other non-KiwiRail benefits but as an State Owned Enterprise Kiwirail has legislative obligations to be “an organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates”. To this end, the report writes off the economic contribution of tourism, not only to the line viability but the thousands of passengers that tourist trains have and will bring to Tutira, Wairoa, Mahia and Gisborne. It also pays no consideration to products from the region becoming less competitive if rail is not available for freight in and out of the Wairoa and Gisborne districts.

GISBORNE RAIL ACTION GROUP | www.rail.org.nz

Kiwirail_NapierGisborne_Model_7_October_2012.pdf

ENDS

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