Sunday, October 17, 2010

Kiwirail Destined for Big Losses

It is not hard to fathom the politics of most individuals, generally we where our politics on our sleeves and express it by what we say and do.

If you wanted to label me, I am more of a libertarian when it comes to life and focus on the freedom of individuals to be able to get on with their lives without the encumbrance of the State intervening which they just love to do. When it comes to business I know that private enterprise does just about everything better than the State.

Other people who come from the left of the political seesaw like to think that the State is all important and should play a big part in business.

This is the case with Rod Oram, a State lover with a green background and a penchant for promoting the State as a vehicle for the advancement of business and the economy as a whole.

We know of course that private business survives in spite of intervention by the State, rather than because of it and the economy would thrive if the State just simply buggered off and left us to build business and therefore the economy as a whole.

Rod's latest wrong headed opinion comes on the back of his push for taxpayer funded Kiwirail to become a player again in the transportation of freight around the country.

"Faster freight? More customers? A $4.6 billion, 10-year investment plan to make KiwiRail self-sustaining? Who would have thought rail had such a future here? Around the world, rail is enjoying a remarkable renaissance thanks to the economic and environmental benefits when services are well run.

The Swiss, for example, are completing a $12b, 57km rail tunnel under the Alps; the Chinese are building 50,000km of new tracks, much of it for 300km/h trains; and Warren Buffett, one of the world's most strategic investors, has bought the US's largest railroad". Rod Oram, Oct 2010

Like most commentators from the left they like to fudge facts and stretch the truth to misinform those who follow them (sustainable ignorance?) so I will set out to put the record straight.

Unlike Rod I have no political bias, my opinion comes from the point of view anchored in fact.

Rail in fact does not enjoy any major success anywhere in the world except for the investment by Warren Buffett who invested in freight carrier Burlington Northern in 2008. This rail company works because it carries bulk freight over long distances in the United States. When replicated in New Zealand this model, while not as successful, is nonetheless the only part of Kiwirail that works. There are certainly no big economic advantages and its environmental benefits, if there are any, are of little consequence to business.

In every part of the world that rail operates it is heavily subsidised in some way by taxpayers and this is no different in New Zealand.

The purchase of Kiwirail by Labour in 2008 and subsequent injections of capital into the company since then have so far cost the taxpayer close to 2 billion dollars and the drain on the taxpayer purse is only going to continue as the business remains State owned. The company is never going to be self sustainable and Mr Oram himself acknowledges it might take 10 years.

Private freight carriers like Mainfreight Ltd [MFT.NZX] carry the nations freight with far more efficiency than State rail ever will and the fact that the taxpayer is subsidising Kiwirail to try and compete on a level footing is an insult to freight carriers who pride themselves on good service and low costs. They are the backbone of our economy and that will never change unless a more left of centre government decides to try harder to put them out of business.

Kiwirail is highly inefficient. It takes substantially longer to get most goods from a to b and in this day and age of "just in time", inventory management they simply cannot cut it.

We need to be realistic about the status of Kiwirail and its position as a credible part of our economy now and in the future. It is a political wish to have it rather than a practical one and therefore its future will be subject to the machinations of politics, left and right.

The only place it really has in our economy is to move bulk goods like logs and coal to ports for export. Any other part of the network is simply a political wishlist that will waste billions of taxpayer dollars into the future as long as it is owned by the taxpayer.

You need to take this into account when reading Rod's wet dream over rail's future in New Zealand.

Disc I own MFT shares in the Share Investor Portfolio

Related Share Investor Reading

KiwiRail will cost Mainfreight
Commerce Commission needs to derail KiwiRail owner
Rod Oram: On the Prius to Obscurity
Another reason to ignore Rod Oram

New From Fishpond

A Perfect Gentleman: The Sir Wilson Whineray Story

c Share Investor 2010