Infrastructure: KiwiRail's infrastructure problem

Photo / Supplied

Trains need tracks to run on — and hence bridges, tunnels and signalling. If there are large numbers of trains, as on many lines overseas, the infrastructure costs can be shared amongst them. But if there are only a few trains a day, the infrastructure cost per train is high.

This is the basic reason New Zealand railways have been losing money in most years over half a century. Government subsidies, or periodic bailouts, have been needed to keep the business afloat.

The main competing form of infrastructure, roads, do not have this problem as there are many cars, light vehicles and heavy vehicles to share the costs. Overall, road users pay their way, through fuel taxes and road user charges.

New Zealand's railways developed from the 1870s in the days of Sir Julius Vogel. Trucks did not exist and most roads were little more than tracks. The competition was mainly from coastal shipping, which railways gradually outcompeted. From about the 1920s, truck designs and roads improved, and rail freight has been in relative decline. Planes have supplanted express passenger trains.

There is one line that appears to be financially viable, Tauranga-Hamilton-Auckland. It is busy, mainly carrying containers to and from the port of Tauranga. The Auckland and Wellington urban rail lines are also viable in the sense that the costs are covered by contracts with the regional authorities. All the other lines struggle to cover costs of operation and maintenance.

The Government is now subsidising KiwiRail — $1.3 billion in this year's Budget and over $1b in each of the two previous Budgets — to help keep it running and to replace worn out parts of the infrastructure and rolling stock. Road and sea transport do not need such support. The Government plans to continue rail subsidies, partly because it sees railways as a vital service and partly because it wants to encourage use of rail rather than road. Both these reasons are debatable.

First, only a few lines are essential. Without urban passenger railways Auckland and Wellington's congestion problems would be much worse. Highways to Tauranga would not cope if all the rail freight was diverted to road (KiwiRail carries about half the total). Arthur's Pass and Lewis Pass are not suited to carrying large numbers of coal trucks from the West Coast to Lyttleton.

But the rest of the network is nice-to-have rather than essential. If the rail freight traffic and the limited amount of remaining rail passenger traffic switched to trucks and buses, there would be increased revenue from road user charges, which could be used to increase road capacity, and the roads would cope.

Secondly, even with rail subsidies there will still be many trucks on the road.

David Greig. Photo / Supplied

Customers often prefer road freight, even if more expensive, because of its flexibility and convenience. Rail is a good mode for large movements of containers, minerals and logs, but does not suit urban delivery, low-volume regional freight, farm pickups, or urgent freight. Rail is also good on emissions grounds, but that will change as new engine technologies (e.g. hydrogen) come in. Further cost reductions would be difficult: Staff levels are around one fifth of what they were in the 1950s;

KiwiRail's infrastructure expenditure does not involve "gold plating". Even the much-hyped restoration of the marginal Northland line is only up to a fairly basic level.

Infrastructure spending generally focuses on what is most important. Some helps make better use of existing assets — for example improved junctions and European-type train control (replacing traditional signals) in Auckland and Wellington.

It may seem closing a few lines would do the trick. But most of NZ's branch lines were closed decades ago. Closing the few that remain would not save much as relatively little is being spent on them anyway. And closing the main trunk line (Hamilton to Invercargill) or parts of it would harm rail freight revenue as many of the freight movements are of a network type — for example some of the freight on the viable Tauranga/Hamilton line gets there from the less viable main trunk line. The choice is either large subsidies or running down parts of the rail system.

The urban and Tauranga lines are sustainable, but without subsidies the rest would revert to "managed decline". The current work programme will get the rail infrastructure into reasonably good shape, so a running down process could be dragged out for a long time if there was judicious basic maintenance and gradually increasing resort to speed restrictions.

The alternative is very expensive. A subsidy over $1b a year, compared with annual KiwiRail revenue of under $700 million, is a huge amount to divert from other government programmes or to add to our debt.

Even then, we would still have a lot of trucks and KiwiRail would still need longer term support. There is no easy answer.

David Greig

David Greig is a policy economist who has worked in the NZ Treasury and Ministry of Transport, the Victorian Treasury, the OECD, the Australian Productivity Commission and economic consulting firm ACIL Allen.