Luke Malpass: KiwiRail - a costly indulgence?

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Policy analyst Luke Malpass writes on the railway firm and which users are paying the most for it.

What does a billion dollars mean to you? It is a huge amount of money, an amount so vast that most us cannot quite comprehend how much it is. This is how much KiwiRail has cost the taxpayer - so far.

Recently, Transport Minister Steven Joyce announced that Auckland and Wellington commuters and councils may have to pay the running costs of their local rail systems, owned by KiwiRail. If so, it will likely mean higher ratepayer contribution and higher ticket prices over time.

If this sounds terribly expensive, it is because it is.

KiwiRail operates by government subsidy, and like all subsidies it is dispersed across all of society thinly enough not to be noticed too much. Some of it comes from Auckland and Wellington ratepayers, most of it from the entire country's taxpayers.

A billion dollars may seem reasonable for most people who do not ever come into direct contact with the rail system and are unable to judge for themselves. And here is where the upside to this situation, in Auckland and Wellington at least, might be found.

Mr Joyce's announcement indicates that presumably in Auckland and Wellington, ticket prices and rates will be raised (or some sort of levy imposed, especially in Auckland).

Maybe when people realise how much extra hard-earned cash they have to part with to sustain rail, they will appreciate what an expensive indulgence KiwiRail is and thus scrutinise it more critically.

It will also give KiwiRail and the Government a far clearer idea of how much commuters are actually prepared to pay to take the train. In some circles, there seems to be a Field of Dreams' "Build it and they will come" mentality. Unfortunately for KiwiRail, that's not how commuters make transport decisions.

People measure price against convenience and timeliness. Most commuter rail systems around the world are subsidised to some extent and integrated with urban planning to make it affordable and convenient for users - and this is valid public policy.

However, given the affordability and widespread access to cars in New Zealand, expensive fares for few services will see commuters voting with their feet and pressing down on the accelerator rather than stepping on to the carriage.

Auckland Regional Council chief executive Mike Lee has been reported saying that shovelling more of the costs on to Auckland ratepayers is a sign of the Government making the books look better to make KiwiRail more attractive for privatisation. If only.

Would it be better for KiwiRail to run at a loss forever and at enormous cost to taxpayers so it never "risks" being privatised? Apart from the deficiency of logic here, the fact is that KiwiRail is still a worthless business and the Government has little choice but to try to restructure it before even considering doing anything else.

On a national level, Mr Joyce has signalled the Government's intention to work with KiwiRail in taking some hard-headed decisions on the future of other rail lines.

Some lines - such as the Napier to Gisborne line - may be mothballed and the main freight lines would focus on freight rates and profit.

It is encouraging that the minister sees potential areas where KiwiRail can generate profits.

It is not just that some parts of the network are unused and unprofitable but also that some of the services, because of contractual arrangements made before the renationalisation, are being offered at what the minister calls "virtually marginal cost".

Given that the vast majority of costs of rail are fixed costs, and that these fixed costs are very high (the very reason rail is expensive), the minister is euphemistically saying that these contracts are basically providing some services for free.

KiwiRail is now trying to rectify that situation. These first steps towards the rationalisation of rail should put the system on a more fiscally sustainable path.

However, there is always the risk that as long as rail is in public hands (or private ownership with the wrong regulatory framework and incentives), political imperatives can override sensible decision making or prevent commercially sensible decisions.

Short-termism and vague, woolly social goals could ride roughshod over the only aim rail should have: providing the best service to its customers at the lowest price.

The approaching Budget will reveal the extent of government support, especially capital injections for KiwiRail over the next few years.

The $1 billion already spent on KiwiRail was a lot of money, so the question is whether consumers and taxpayers are prepared to pay a bigger price in the future.

Luke Malpass is a policy analyst with the Centre for Independent Studies. He is the author of KiwiRail: Doomed to Fail? www.cis.org.

- NZ Herald

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