Monday, May 5, 2008

KiwiRail will cost Mainfreight

Micheal Cullen is not Warren Buffett, another individual who has been buying large train sets, like Burlington Northern in the United States. Buffett has bought good assets at rock bottom prices and they are lean and mean operators. This is not likely to happen with the new State run rail company that will no doubt be called KiwiRail.

So ignoring that, and on behalf of the long suffering taxpayer, the Micheal Cullen and Helen Clark twins have just plunked down almost NZ$700 million taxpayer dollars to buy a new train set, with billions more to come to prop up its day to day running, on a business that has never made money.

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Apart from the stupidity of the transaction,and over inflated purchase price and the immediate increase of about 2000 in state employees in a new government department, one of Labour's main aims is to "get all those trucks off the road".

Just like Air New Zealand [AIR] before them and government departments like KiwiBank, taxpayer funds will be used to subsidise an inefficient and loss making business to compete with private enterprise, the very people who are paying the tax in the first place!

Like myself, you would have to be concerned if you were a shareholder of a company like Mainfreight[MFT] or the owner of a smaller trucking company, already struggling with high diesel prices and government imposed regulation and cost.

Long haul operators like Mainfreight are going to face intense competition from the new State run rail company. Subsidies to business who need goods hauled will give an unfair advantage to the rail operator when competing for business.

Further government "protection" of a State rail system, in the form of "climate change" regulations and/or taxes can't be discounted with the current administration, who have shown that they are prepared to retrospectively pass laws to fit their socialist agenda, regardless of sensible business practices and outcomes.

While Mainfreight have both long and short haul divisions and operate trucks from seaports, airports and rail hubs and therefore may be able to transform their long haul business and capital expenditure to focus on a possible busier short haul business-Labour have a goal of doubling current freight volumes, the cost to do this is clear. It will be large.

"In summary, we do not have a large enough or vibrant enough business sector in New Zealand. Economically, New Zealand has been on a long slow decline relative to other OECD countries for close to forty years, and this decline has accelerated in recent years. Surely with the benefit of hindsight, New Zealand governments can recognise that our productive sector is not performing to the level necessary to ensure this nation’s future health and prosperity.

Right now we need bold new initiatives and inspirational leadership. Other countries have found ways to reverse economic decline, and that has involved low company tax rates as in Singapore and Ireland and a reduction in the weight of compliance costs.

Whatever the outcome, Mainfreight has a determination to remain a New Zealand owned and operated business while continuing to pursue global aspirations".

More and more the New Zealand economy slides down the OECD economic rankings as we milk our productive sector in the hope of remaining a first world country with taxpayer funded hospitals, education and social welfare.

There needs to be a clear understanding that the productive sector is the only means by which a country can prosper – interesting, challenging enterprises earning profits are the mechanism which creates opportunities for people to do well for themselves, the enterprise, and for mankind".
Bruce Plested, Executive Chairmain, Mainfreight annual report 2007

Now Bruce and his mates at Mainfreight are canny operators in logistics and business in general and will probably manage the increased government interference in their business well, but why should they have to?

The uncertainty that today's decision makes for Mainfreight and other logistics operators is only compounded by a lack of any detailed planning before the purchase of the rail assets from its former Australian owner, Toll New Zealand.

There was no business case done before the purchase by the government, as there was no detail over just how much capital expenditure was to be made to justify such a high purchase price for largely obsolete rolling stock.

Operators of long-haul trucking businesses would do well to lobby their local MPs and hassle them about the cost their decision today will impose on their businesses. Short haul logistics company's, while clearly advantaged, would do well to similarly put their MPs against the wall.

Some forget the reason this turkey was sold in the first place, it was losing $NZ1 million 1994 dollars a day and was costing its clients through slow service, strikes, theft and high prices. Toll have done much better running the business and there is no reason to feel complacent about bureaucrats running the company again.

Regardless of the political implications though, the uncertainty to the logistics industry will cost them millions.

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c Share Investor 2008