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

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c Share Investor 2010

KiwiRail value derailed

I had to get this billboard photo from Whaleoil because I couldn't find it on any Labour Party affiliated website.

Perhaps they are embarrassed. 

They should be.

The accounts reveal the value of KiwiRail has been slashed $242 million, more than a third, since the Government bought the business from Australian firm Toll in July for $690 million.

The "fair value" of KiwiRail is now $448 million, a loss of about $56 for every New Zealander.

KiwiRail is a key plank in Labour's election billboards, which include Kiwibank and KiwiSaver. "Keep it Kiwi, vote Labour" the billboards say. More

Today we find out that the Crown accounts show the "value" of KiwiRail have dropped by almost a quarter of a billion dollars since Cullen bought it just a few month ago.

This brings KiwiRails value down to just $448 million. Not bad going in just two months.

Of course Treasury puts the value of KiwiRail at alot less than that. 

$125 million is their true value of Mikey's wee train set.

c Political Animal 2008

Cullen pays 6 fold more than KiwiRail worth

It is no surprise that the purchase of Toll Holdings rail assets earlier this year were overpaid for but Kiwis can now officially know just how much.

In a report sneaked out by Treasury and written about at the NBR on September 16:

Documents posted on the Treasury website reveal that in late 2006 officials valued the New Zealand’s rail system at $120 million, some $570 million less than the price the government paid for the business in July this year.

The paper trail clearly shows that throughout the lengthy sale process, Toll had the upper hand in the negotiations because it knew the government was not buying for commercial reasons. Toll also knew that the crown was under time pressure because it had to continue adequate funding to secure the financial viability of the rail business.

We are supposed to trust this individual to manage the New Zealand economy over the current recession given he spends taxpayer money like a drunken socialist?

Related Reading

KiwiRail rolls out Cutting edge technology

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Commerce Commission needs to derail KiwiRail owner

KiwiRail will cost Mainfreight

c Political Animal 2008

KiwiRail rolls out cutting edge technology

For two decades it sat rusting in a museum, a memory of days gone by just after WW2.

The train was built in 1949 and is the centrepiece of KiwiRail's commuter service in Wellington.

In a few weeks, the ancient electric train will return to the rails for the first time in 23 years to "ease pressure" on the Hutt Valley line.

There is talk of resurrecting steam trains from the Museum of Transport and Technology in Auckland to allow the 3 people who currently use the train in West Auckland to "travel like they used to in the old days".

The three commuters in question, all over 85 years old, were asked by KiwiRail management, what would it be like to "travel like they used to", Mildred Clarke replied, "it would be lovely, but when you used the term like they used to dear, we had no idea they were the same trains we were going to school in over 70 years ago son".

The age of steam has surely arrived and Kiwis can now be proud that the Government has provided this cutting edge technology for the working-class proletariat.

It makes one hanker for the 7 series BMW limos that Helen lady uses, said Gertrude Floss, Mildred's younger more hip friend.

c Political Animal 2008

KiwiRail's first main trunk service begins

PHIL REID/The Dominion Post

KiwiRail's first Wellington to Auckland train service begins. The three day trip will be accompanied by sausage rolls, cold Bell tea, 2 day old club sandwiches and frequent stops to take on board more coal.

c Political Animal 2008

Cost of Labour's 2008 Election bribes

I thought it would be very interesting to see the cost of Labour's election bribes so far.

A good concise list of what it is they are spending the money on, and how much it will cost the working taxpayer.

Some of it might be legitimate, some of it bordering on legit but most will be out and out handouts to prospective Labour voters.

Lets take a look.

1. KiwiRail purchase - cost NZ $665 million, plus hundreds of millions to "upgrade it" and keep it running. Altogether, including missed economic growth from keeping the money in taxpayers hands, $2 billion plus. Election bribe.

2. $10 billion in "tax cuts" mostly focused on those on welfare-working for families -and at an average of $16 per person hardly worth legislating for. Election bribe.

3. Increase in working for families-$200 million plus per year, 600 million over a 3 year term. Election bribe.

4. 1.7 Billion in lost capital value for Auckland International Airport shareholders because Labour stopped the sale of this private asset to buy votes. Election bribe.

5. Corporate welfare for research and development, cost $700 million. Election bribe.

6.Universal student allowances. Cost $728 million. Mooted but it will go ahead. Election bribe.

7. South Auckland "University". Cost, $25 million to purchase land and hundreds of millions more to develop. Not needed as Auckland already has 4 universities. Election Bribe.

8. Mt Eden Prison, Cost, well north of $250 million and unnecessary. Bunk beds will do. Election bribe.

Other costs with some merit but nonetheless some of the better ones could have been done earlier in Labour's term.


* $750 million in new health spending (includes first year of $160 million announced over weekend for elective services).

* $621 million in total over five years to boost Ministry of Foreign Affairs and Trade.

* $446 million over four years to boost funding for community organisations.*
.
* $164.2 million over five years for a cervical cancer immunisation programme.

* $150 million a year on educational changes to keep young people in school or training until they are 18.


The cost so far to the taxpayer?

Just over $18,000,000,000.00 , that is Billion with a capital B folks. You will have to pay this out of your taxes should Labour buy their way into power.

Keep checking back. I will update this list as the election grows nearer and Labour gets more desperate and disparate.


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c Political Animal 2008

Commerce Commission needs to derail KiwiRail owners

When your competitor sets the rules for competition you know there is something horribly askew.

With the buyback of Toll Rail, in the form of KiwiRail, the New Zealand Government, by way of legislation, can pass any sort of tax, competition law or edict, making things difficult for rail's competitors, the trucking industry.

Even before Toll Rail passed into taxpayer hands midnight Tuesday 1 July, a deal had been stitched up to allow free rentals for several years, on freight depots for the trucking division, the only profitable part of Toll's NZ freight business that the NZ government let them keep.

When that was proven too politically volatile for the public to swallow, the check book was pulled out again and NZ$18 million of taxpayer cash was added to the initial purchase price to put Toll's trucking division in a enviable position when compared to its competitors,.

Now the skewing of the fork when it comes to competition in the freight sector continued with an up to 10% increase in road user charges for diesel trucks on Tuesday July 1, the same day rail was renationalised.

So what is happening here-avoiding the obvious political point of using taxpayer money-is that money and legislation is being used by the government to not only give corporate welfare(sorry I couldn't help myself) to a private company by handing them $18 million bucks to compete against other private trucking companies, but you have the owner of an inefficient, loss making business that will never make money, trying to even the competitive playfield, for them, by penalising its competition with extra taxes!

My head is dizzy with vitriol!!

I will be indirectly hit in the pocket here because I own shares in Mainfreight[MFT] a very competitive, efficient and profitable transport player . Toll trucking have a definite competitive advantage over such companies with that $18 million of taxpayer funds in their back pockets.

Like the State run Air New Zealand[AIR] freezing out competition in the domestic airline industry, the squeeze on transport and trucking companies by the Labour government will continue as long as they remain in office, because rail just cannot compete on a even footing.

Finally, the main point of this column was to make a point to the Commerce Commission, who always check out this blog when their name is mentioned, and one of their office drones googles over a soy latte to find out who is talking about them. Such actions described above are clear violations of competition law.

Instead of salivating over hot State funded QC's appealing against the The Warehouse[WHS] case that you lost in the High Court why don't you get off your ivory soaked easy chairs and do something in the trucking business Vs KiwiRail anti competitive case.

Government's actions via their ownership of KiwiRail make their anti-competitive moves against the private transport industry a banner case.

To win this Ms Rebstock, Chairman of the CC {photo above} would be an easy case and get you the attention that you so obviously desire.

I'm waiting with baited breath for you to file your writ against KiwiRail.

Tell me when to exhale.

Related Share Investor reading

Why did you buy that Stock?[Mainfreight]
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c Share Investor 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.

Related Links


• Toll books $235 million profit on sale

• Govt buys back rail, ferries for $665m
• History of NZ railways
• $665 million buy back
• Rail buy-back condemned as 'reckless'
• Blog: Dr Cullen changes trains
• Commerce Commission needs to derail KiwiRail owner
• Cullen Pays 6-fold more than KiwiRail worth


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