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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  1. Obsolete rolling stock? What then about the microprocessor controlled members of the DFT and DX classes and sub-classes, some of the most up-to-date technology available on world railways.

  2. The rolling stock, as I said, is largely obsolete.

    The passenger rolling stock for example , in some cases dates back to WW2 and the newest locomotives are more than 30 years old.

    Modern rolling stock in freight would allow piling stock on double stacks, like containers for example. We cannot use these though because of inadequate tunnels and the wrong gauge lines.

    This is all a moot point though because rail in New Zealand is highly inefficient, with the possible exceptions of long-haul bulk wood and coal.

    But we know we cant use coal and are not allowed to easily cut down forest.

    Freight rail can only work in large geographical areas over long distances. Trucks are needed in New Zealand because we are too small.

  3. NZ is too small?! What about Switzerland, Netherlands, UK? We are larger than each of those.

    As the 2005 transport dept study found, road freight in NZ is right now subsidised 44% of their costs in using the roads. Rail received only an 18%. The recent rise in road user charges aims to balance this.

    It is rather amusing to see how many free market people we have decrying the removal of a subsidy the NZ public has effectively been giving to road freight haulers. If road freight is so much better, it shouldn't require this taxpayer subsidy to operate.

  4. In the 3 countries that you mention, rail is heavily subsidised, as it will be here. That is simply because it is inefficient. Passenger or freight.

    As I said, Investors Like Warren Buffett know this and have put money into railways that operate BULK goods over very long distances.

    The study that you relate to is a biased one and factually incorrect. Trucks in fact pay more than their fair share for the roads that they use.

    If you put more cost on the road transport industry it will just end up costing everyone more. This is s clear economic cost and highly inflationary.


  5. Darren with all due respect when talking about rail efficiency in NZ you dont know what you are talking about, the worlds first single man operation, remote controlled yard loco's etc etc all NZ firsts, rail challenge in NZ is the plethora of small regional Ports that are subsidised by local taxpayers and off course a 4m population base, and the report you dismiss was not biased but based on facts that your mates at Mainfreight will not have a bar off constantly refusing to participate in transport studies hiding behind the facade of customer confidentiality.Ask Fonterra why they use rail so much if it is highly inefficient.

  6. If rail is so efficient then why, by your own admission, does rail not make a profit and is susidised by the national taxpayer.

    You also ignore that the bulk of freight carried around New Zealand for domestic use is carried by Truck.

    Fonterra use Rail because they have bulk goods for export that make sense to shift in that way across the country a fact that I agree with and have pointed out elsewhere on this blog but that isn't going to make KiwiRail a going concern any time soon.

    Rail never has and never will make a profit in this country and trucks are far more effective and efficient and gee-wiz they make a profit.

  7. Great!!!
    Good site! I'll stay reading! Keep improving!.
    It is Very informative blog.

  8. Cheers, how is the logistics biz in OZ doing?

  9. Darren
    you are of course correct in that rail in NZ has never returned a profit sufficient to fund ongoing asset renewals never mind a return on capital to its shareholders, however name me a network rail operator in the world that provides a return on capital to its shareholders anywhere near its WACC- i can tell you now there isnt one, so my your measure rail freight worldwide should be closed down overnight. the future for rail in NZ is not long distance inter island overnight services for the mainfreights or tolls of this world it is in supporting our international trade both imports and exports containers and bulk, NZ desperately needs to rationalise its ports so that the investment neccesary for larger ships to call here can be accomodated, the prize for NZ is in the billions of dollars a year and port rationslisation can only work with efficient rail

  10. Welcome back Anon,

    Where your argument falls down is that KiwiRail is and never will be efficient. If it was it wouldn't require billions of taxpayer dollars that put the likes of private business like Mainfreight under pressure.

    The only place rail works in New Zealand is transporting bulk rail to Ports of Tauranga but it aint particularly good though because it is still less efficient than road.

    As far as the ports thing goes you are right, but unfortunately you have the moronic hands of local government there wanting to have their own little tug boats, etc.

    The rail operator that returns a profit to its owner is Burlington Northern Sante Fe and the majority of it is owned by Warren Buffett.

    Lets keep the State out of our private business anon, it NEVER works properly when they get involved.

    Cheers, Darren

  11. Darren

    great blog by the way

    BNSF is not a network operator, the US sliced up the network years ago and the class 1 operators cherry picked the routes and guess what the short haul operators class 2 & 3 receive subsidies! go figure

    rail in nz is as efficient as the terrain and rolling stock allows, whilst productivity gains have stalled over the last 15 years nz rail have been at the forefront of rail innovation and given support could be in the future

    rail to ports of tauranga is efficient and competes with the marginal cost of blue water shipping not road, however how smart is it to rail 70% of our imports 280km to auckland when auckland has a port on its doorstep, metroport only came about because of incompetent management at PoA

    rail works for Solid Energy, CHH, Fonterra Bluescope etc etc, will never work for forwarders, need to rationalise the network and let M/F etc use road or the coast and retire the rail ferries which are a $500m ticking time bomb

  12. Hi Anon, I don't think we will ever agree with each other but it is an interesting debate nonetheless.

    If rail had a good business case,then it would be self sustaining without taxpayer help.

    Until I see that sort of scenario I will not be convinced.

    Long-haul bulk goods is all rail is good for(we don't really have that in NZ) but even if that is so efficient why do we have such a massive trucking industry?

    Answer, it is far more efficient and it makes money.

    Thanks Anon, Darren

  13. Darren

    Rail share of the total freight market in NZ is in line with overseas experience, i believe we have so many trucks due to the predominance of SME's in our economy thereby lacking the scale to engage with rail,look past M/F and Toll and there is a very long tail of operators usually heavilly dependant upon one or two customers usually to avoid union labour with its high costs and restrictive practices ( as with rail) also average linehaul distance is insufficient to absorb the cost of the modal switch ie via rail terminal.

    One other point and a bug bear of mine is the insistance of the end user on JIT/overnight delivery which all but rules out rail- i wonder if JIT is really neccesary as I cannot believe that enterprises in NZ run their inventories so tight - i know the customer is always right but i do sometimes wonder

  14. your comment on long distance for bulk rail is not correct in the NZ context, Fonterra's crawford st operation cost effectively moves cargo circa 150km to either tauranga or auckland port, they do this because of consistent volume providing good asset utilisation, so it can be done but needs high levels of integration between all partners in the supply chain

  15. Anon, I don't disagree with you about your comment re Fonterra Freight in the geographical area that you talk about.

    It works.

    But it is only a small amount of freight over a small distance.

    The bulk of KiwiRail freight business is a dog.


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