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


  1. Sad - I feel like you are pedalling old perceptions of "The Railways". Even in these early days of the SOE(KiwiRail) it can be said that the company runs at an operating profit. The business runs hamstrung by the interest on the purchase price - there is a purchase price for we stakeholders, because it was sold in the first instance!
    Okay - let's balance the equation properly - take the sale price back whenever, add in the CPI and the price paid even when the business was repurchased and it could be argued that the government got a real bargain. Moreover, KiwiRail is a far leaner and meaner machine than the "Railways" were, when sold.

    Your assertion "Private freight carriers like Mainfreight Ltd [MFT.NZX] carry the nations freight with far more efficiency than State rail ever will" is laughable. The reason - companies such as Mainfreight Ltd are using KiwiRail as much as they can - to the mutual benefit of both parties (This company to the point of building depots on KiwiRail land!). This is creating a lot of efficiencies and is increasing the profitability of these parties to the mutual benefit of both.
    Those that are missing out, are those that don't have the critical mass in their freight movements to take advantage of this leaner, meaner method of moving the nation's freight.

    The Just-in-time inventory is another fallacy that you seem to be trying to perpetuate. As the Managing Director of a company that carries a seven figure value inventory, I can tell you that yes we are always seeking to increase our stockturn and decrease holding costs, but it needs to be balanced. If we can save 3-5% on our freight cost by having to hold our stock for a fraction longer we will. Real just-in-time freight is really a fraction of the market, perhaps genuine when a broken part replacement is required. Most just-in-time freight that we require (or our customers) is in fact to make up for oversights on ours or their behalves or a market aberration. All general freight carried by KiwiRail is containerised these days and usually via a 3rd party like Mainfreight Ltd. It might be carried most of the distance by rail but we still get door-to-door service from the service provider.

    There's very few businesses that I like our government being involved in, perhaps major transport infrastructure is the one exception. An obvious restructuring of our Ports and possibly Airports is overdue. There are one or two good operators out there and an awful lot of average ones.

    I am surprised as a Mainfreight Ltd shareholder you purport to be (in a previous blog), that you don't seem to know that much about the company especially it's relationship with KiwiRail.

    I have read Mr. Oram's story and while I certainly don't agree with a lot he's written in the past, he certainly seems to be way ahead of you in the case of KiwiRail.

  2. This comment has been removed by the author.

  3. Hi Anon, Kiwirail and its predecessors have always made losses overall. The case for rail in New Zealand may have been good 100 years ago but for goodness sake this is 2010 not 1910.

    Now, it only works for bulk freight over longer distances. If it was better and more efficient more business would be using it. They don't.

    Interesting that you point out what Mainfreight are doing. They simply have no choice and are making the best of the situation they find themselves in. Unlike Kiwirail they adapt to business conditions without having its cap out to the taxpayer.

    On that point as well, Toll Holdings and its road transport division actually have taxpayer subsidies through the purchase agreement of Kiwrail back in 2008 when Toll sold to the taxpayer, so company's like Mainfreight are not advantaged as you say.

    Building Depots on "kiwirail" land. It happens in private business and MFT are paying leases for use of that land.

    On just in time inventory.

    Ask Ian Morrice from the WHS what he thinks of your claim. I have and it is a VITAL part of his business. I am a WHS shareholder too.

    BGR and a whole host of other retailers use JIT to maximise profit. Rail cannot do that for them.

    Please leave the Airports alone. AIA's value has more than halved because of Government intervention.

    Rod's view, while he is entitled to it, just plain lacks fact and his coloured by his lean to the left.

    I really cant take anyone seriously who buys Carbon Credits because he thinks carbon is a pollutant.

    Cheers, Darren

  4. What a load of BS.

    How much money did the State Highway make yesterday, last year, last decade??? Nothing, it looses money to the tune of $1.5 billion per year (as per NZTA website).

    Ratepayers and taxpayers subsidise the roading network for private operators to make huge profits from. Even worse, we NZ taxpayers subsidise the road network so foreign owned truck companies an siphon profits overseas ( Toll is the perfect example).

    Fortunately your blog is not mainstream, and based on what you have written, should not be.

    Now, run off and pay your membership fees to the trucking lobby.

  5. Anon, at least have the courage of your argument to reveal who you are.

    This blog is not mainstream, it is quality rather than the mass media quantity. It is however currently been read by more than 12000 people pr month and read by those in influence and business.

    I have no membership to the trucking lobby.

    The State highway loses money? I doubt it. By what definition? It is paid for and has been many times over by private and especially commercial vehicles and without it this country would cease to function.

    Without foreign investment we would also grind to a halt and people like you with an interventionist left view would make that worse.

    Private Enterprise ALWAYS does better than public and we should be hoping and praying that Governments of all shades don't put us out of business because of pressure from evil collectivists such as yourself.

    Bugger off if you don't like reading my blog. I don't want you as a reader.

    You have that choice, you should be aware that people in business should be allowed that freedom and choice as well.

  6. Kiwirail is going to burden the taxpayer for years to come. Look at the folk who are at the head of it.

    What do they know about running a business let alone a 19th century railway set?

  7. Surely you are ignoring the environmental and emotional benefits of owning and running our railways?

    It will be successful if we are positive about it in the first place. The rest will just fall into place.

  8. I don't get it, why do you slam something just because it is run by the government?

    The company needs to be recapitalized and more money spent on upgrading it before you can make a judgment on it.

    My business uses its services on a semi regular basis and we are very happy with the service.

  9. 1. "Mainfreight has a commitment to rail that will benefit our customers and New Zealand"

    2. Roads get funding.

  10. Nice to get some facts right from the horses mouth Anon.

  11. Marcus, being positive about a pig still makes it a pig.

    Environmentally railways don't stack up. All that land underused by a few trains a day. Trucks are far more easier on the planet.

  12. WOW, this has turned into a shouting match. Neither side has ended up with a convincing argument.

    This last gem from Darren,

    "Environmentally railways don't stack up. All that land underused by a few trains a day. Trucks are far more easier on the planet. "

    makes me think that sentence should on the very top line, which would make it very easy to decide whether to read any of the rest.

  13. Yeah SB, trains heavily subsidised by the taxpayer are the answer to moving freight in the 21st century.

    In this country the bulk of freight is most efficiently and cost effectively moved by road transport.

    Geographically, rail cannot go everywhere in a long slim mass of land like ours (much the same reason why passenger rail in Auckland will never work) and you have to put your goods on a truck sometime down the line anyway. Why double handle and add cost/time and the possibility of damage to goods?

    Private business like the trucking industry must be allowed to compete on an even playing field, without having the disadvantage of a heavily taxpayer subsidised "competitor" trying to put them out of business.

    I am surprised by the ignorance by some on this matter but nonetheless welcome informed debate.

  14. I am amazed that this kind of subject (private VS public ownership) gets feedback when other pieces that I have written, like the Share Investor Q & As, get almost no feedback apart from offline stuff from the participants.

    I LOVE a good argument though.

    Looks like I won this one though ;)

  15. Darren, I'm with you. Most knockers of private business up against public forget the basic advantage that public "business" has over private when they are in so called competition. That is using limitless taxpayer money to subsidise them to compete against you!

    The latest nonsense from the National Party over disallowing owners of farms and other private property to sell to whomever they want to for the best price is another example of the same thing. The Labour push to take this further extends this outrage.

    That is, the freedom for us to exploit our private property rights to our full advantage.

    Private business should remain paramount in this country, for without it the Government would have the taxes to try and put us out of business in the first place.

    Let us prosper for a change and just bugger off and let us do business.

    I would like to disclose who I am but must tread lightly because of the politics involved.

    Excellent Blog by the way.

  16. In Canada and the USA rail is one off the best stocksto buy ( that means most rail companies )
    as fuel goes up so does there share prices. You need to make Kiwi Rail a private company with profit in mind and then watch. As your country is an island the nero gauge is no problem. Run into your comments trying to buy Kiwi shares because our local Companies CN and CPR are overpriced. Arguments on both sides are slanted to far in each direction. Rail has its place and so does trucking ( own a dozen of the stinkers myself). You need to built Geo-thermal
    powerplants ( no shortage of magma close to the surface) and electrify your trains, I would call that progress.

  17. Rail just doesn't work in the country this small Unknown. It loses alot of money, is inefficient, slow and expensive. We are having a part sale of some State electricity companies next year if you are interested..


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