Yet again, taxpayers are giving the railways a helping hand - $750 million over three years. Good money after bad, or the start of the rail revival? Nick Smith reports.
If KiwiRail is such a dog, why is Mainfreight spending $15 million on a new Wellington rail facility, asks its chief executive, Don Braid.
And why would the country's biggest exporter, adds Fonterra's Nigel Jones, spend more than $100 million integrating rail into its distribution network, including its Edendale factory in Southland, if it didn't believe rail was the best commercial solution?
Both men and the companies they represent are advocates for rail and believe a commercial future for the national rail network is viable. More importantly, Fonterra and Mainfreight are putting their money where their mouths are.
Mainfreight has boosted its operational spending on rail in the past 12 months by nearly 20 per cent to $26 million. "We'll have a crack at doubling it to $50 million," Braid says of the company's self-imposed 2012 target. The following year, Mainfreight aspires to be KiwiRail's biggest customer.
It faces stiff competition. Fonterra dramatically reversed its freight policy when it became clear the Government was committed to a rail infrastructure solution by buying back the track in 2004.
"Five years ago, about 30 per cent of volume moved on rail, the rest by road," says Jones, general manager of strategy for Fonterra trade and operations. "Now those ratios are reversed."
The company has signed long-term contracts with KiwiRail as a sign of Fonterra's commitment and "to give them security".
The move to rail at its Crawford St facility in Hamilton took the equivalent of 40,000 truck movements a year off the roads, Jones says. Since KiwiRail's formation in 2008, Fonterra has invested in rail capability to freight finished product from Taranaki to Auckland, Tauranga and Napier, and from Clandeboye in Canterbury to Lyttelton.
Edendale, the biggest milk processing facility in the world, capable of handling 15 million litres of milk a day, represents a game-changing prospect when its wares are shunted on to the KiwiRail network. It will be fully operational in the new season.
"Without rail, we would have all that volume back on the roads again," says Jones. "That is where the value to wider New Zealand is."
The interesting aspect of Fonterra's and Mainfreight's investments is not just the enthusiasm for a rail solution to New Zealand Inc's transport woes - although that is palpable - but that they wanted to make these investment decisions years ago.
"That's the first time in 10 years that that's been able to happen," says Braid of Mainfreight's integration of its operations with rail.
Jones adds: "We struggled to use it, to get deals in place, under the old structure.
"Freight companies really struggled with [former owner] Toll," he says. "What is needed now is for the transport industry to get behind [KiwiRail]. Once those companies start to do this and move volume on it, [it becomes a viable business]."
If New Zealand rail really is a dog, as many critics believe, Braid says, "it's only because it's had dog owners. At least now we've got a business that is seemingly structured correctly on its rail business, delivering good services to companies like ourselves, Coal Corp and Fonterra.
"It's got its best shot right now."
Sometimes you need a bit of crisis to galvanise support," muses KiwiRail chief executive Jim Quinn. "But I don't think that's been the case in this instance."
Oh, really? The company nearly went bust, many of its routes are unprofitable, its locomotives are 30 years old, its track is ailing and the bill to bring the whole thing up to scratch is, as Quinn admits, the "thick end of $4 billion; well north in fact".
If this isn't a crisis, it sure costs like one.
The previous Government spent $810 million buying back the rail business and improving the network. The present Government has committed $750 million for the three years to 2012 after endorsing an ambitious 10-year turnaround plan that involves KiwiRail spending at least $3.8 billion of its own money. If it can find it.
The scale of the challenge is illustrated by KiwiRail's latest half-year report, to the end of December, recording an after-tax loss of $69 million, before grants for capital spending.
While Braid and Jones argue rail is too important to New Zealand Inc to let it fail, Quinn says the company must stand or fall on its plan to return KiwiRail to profitability. Even so, he cannot rule out further calls for government assistance in the years ahead.
No commercial entity would commit to that level of expenditure, Quinn concedes, when prospects for a return on that investment are so distant.
"If we stick to the plan and go hard, we believe the business will be standing on its own feet from a cash perspective," says Quinn. "It will be dropping enough cash for reinvestment from about year seven." Year one is now - 2010.
To do this he must drive traffic on to the main trunk line between Auckland and Christchurch. The fact that Toll kept the trucking business when the Government bought back the railway helps immeasurably.
"Part of the reason rail got into trucks was to try and offer a one-stop shop logistics solution," Quinn explains.
"The corollary to that is you [antagonise] a large part of the market who are potentially your best customers - clearly there were issues with Toll about that."
Now that irritation has been removed, freight levels are increasing, as Mainfreight and Fonterra can attest. Quinn is about to sign a new deal with a small freight company, which he declines to name, and hopes to persuade other industry players to follow its lead.
The extra revenue and government cash will be used to fund the colossal capital requirements. First up is the rolling stock - new locomotives and 300 new wagons a year for the next three years.
Improvements to the Auckland-Wellington route involve track renewal, easing curves, upgrading bridges and removing speed restrictions. "Our average speed from Auckland to Wellington is about 42km/h," says Quinn. "The network is capable of around 100km/h."
It takes about 10 hours for a truck to make Auckland from Wellington; by train, it's 13.5 hours. Quinn expects the improvements to knock two hours off the trip, enough to make the route competitive.
"It's enough," says Mainfreight's Braid of the time-saving. "It will allow us to compete with a road operation."
Quinn comments: "We're actively encouraging customers who want to use rail to get connected. As they look to expand, we'll invest with them. We'll allow them to build on rail land if that's the right thing to do."
Refurbishment of the inter-island ferries is also imperative if the main line is to function properly. The Kaitaki, for instance, is not rail capable and when it is in operation it disrupts continuous rail service between the islands.
But first up is a 29m extension to the Aratere. "You chop it in half and then you put a new segment in and then you put it back together again with a massive amount of glue," Quinn says of the alteration. "And it still floats." In 2012, they'll either add a rail deck to the Kaitaki or replace her.
You'd have to say it's a fairly heroic plan," says Dave Heatley, KiwiRail critic and research fellow at the Institute for the Study of Competition and Regulation.
Heatley says the numbers touted by KiwiRail don't add up. In order to fund that planned $3.8 billion in capital expenditure it would have to grow its income from freight by 8 per cent a year, year-on-year, for 10 years without increasing its costs, he says.
Debt is an unlikely avenue, as Quinn admits when asked about investment from other market sources: "I don't think any fund would logically invest in us because nobody has succeeded with this, so why would they trust you? We've got to get the track record."
More disturbing to Heatley's mind is the brevity of KiwiRail's 10-year plan, which runs to a scant two pages. Further, he says Government support seems muted, a point touched on by Quinn.
"As Steven [Joyce, Transport Minister] put it," Quinn recalls, "it's not the best plan that he's read but it's probably the best plan for rail from a commercial perspective." A ringing endorsement, then.
Continuing government support beyond the $750 million already committed is contingent on achieving unspecified performance targets, which, Quinn says, are still being hammered out. "If we deliver the revenue growth then our shareholder support will continue," is his summation of negotiations.
KiwiRail's best evidence that it can grow the business enough to support the planned level of spending comes from two transport studies forecasting a stratospheric increase in freight volumes in the next 20 years.
The amount of stuff carried by rail will increase by 70 per cent by 2031, says the Ministry of Transport. Road Transport Forum research predicts similar growth, but by 2020. KiwiRail has demonstrated it can grow its share of domestic transport. The question is whether enough freight can be won from road to meet its master's requirements.
The assumptions, counters Heatley, are too optimistic. "Rail in its present structure is not a viable business - that's the reality."
History favours his analysis, notwithstanding Braid and Jones' criticism of the standard of private rail ownership.
In Quinn's favour is the year-long inquisition the present Government put KiwiRail through before approving spending. Treasury and the Ministry of Transport led the inquiry: "They put us through seven shades of hell challenging our plan," he remembers. The Government signed the plan.
A number of stakeholders cite the Air New Zealand crisis and subsequent renaissance as a resounding example of what can be achieved with government support and smart management. Heatley is not convinced. "Perhaps it falls back into the category of Think Big," he says of the notoriously wasteful schemes instituted by the Muldoon Government in the late 1970s. "That didn't get the proper level of pre-analysis that was required, and history has judged it harshly."
The thing with rail," suggests Fonterra's Jones, "is you either have it or you don't."
Given the choice, answers Heatley, "shutting it down completely is the better option".
Heatley wants KiwiRail to cut its unprofitable lines, including the main trunk, and stick to its knitting: domestic freight in the Auckland-Hamilton-Tauranga triangle, the West Coast coal route and perhaps the milk route out of Taranaki. For him, everything else is superfluous.
The man in charge of those decisions has already mothballed the Stratford-Okahukura line. And Napier-to-Gisborne is up in the air, says Quinn. "We'd like to keep it viable but it's got revenue just north of $600,000 and it's got a $23 million capital bill in front of it over the next 10 years."
Other lines under a cloud are Northland and the North Wairarapa line connecting Masterton to the Napier line.
"We're telling people, here's the problem and we'll try and work with them to unleash the most opportunities we can," Quinn says. "But if we're unable to close the gap, we'll move to a mothball phase."
Cutting rail back to a few profitable lines, he says, would leave him "with a business that's no more viable than I've got now but with a much reduced growth prospect".
Further, closing lines costs "a massive amount of money" to clean up, and the lines and rolling stock could only be sold as scrap. "On some valuations, there's $13 billion worth of stuff, but $5 billion of that is land."
It is doubtful whether a sale could realise anything like its market value as the land is only of use to adjacent owners. "It would be the longest, skinniest milk farm in the country," quips Quinn.
His preference is to retain the entire network, which he argues is needed for the coming growth in freight. "I despair of the whole debate," Quinn admits. "This is about creating a multi-modal capability set to enable New Zealand to be competitive."
The reality is, adds Jones, port change is coming and the country needs a national rail network around which trucks and shipping combine to efficiently carry New Zealand's exports and imports.
Braid points to the railyard vista visible from Mainfreight's Auckland boardroom window: "For 12 hours of the day that fixed asset isn't being used. If we had port reform we could see this railway working during the day."
Larger ships carrying up to 8000 containers will soon be a reality in New Zealand waters, says Quinn, "and we're going to need that rail capability to get it away from the port".
"Environmentally it's more efficient," Jones says of rail. "But it's not just the green impact, it's also the impact of trucks on the road. It's a question of using the right and optimal solutions for the task at hand."
Kiwirail spending starts in October. "This is New Zealand's money," Quinn notes, "and if we're going to spend it, let's find out if this plan has got a shot."
