Governing well, or just slowly making us poorer?

I noticed in the Herald this morning Audrey Young’s article running the line that (a) it had been a good  –  in fact, exceptional – week for the government, which had (she claimed) been governing well, and (b) that one example of this was yesterday’s reopening of the Wairoa-Napier railway line.   There was a celebratory article on the reopening in this morning’s Dominion-Post, which might better have been labelled as advertorial, and could easily have been taken straight from Shane Jones’s press secretaries.  It was, after all, only reopened with the (as yet) rather small amount of the Provincial Growth Fund that has actually been spent.  For this particular project, $6.2 million of taxpayers’ money, given to a loss-making SOE that, even running losses, had not itself considered the project viable.

This project was first announced in February 2018 and then I wrote a post about it, under the heading “The boondoggle”.   Here I’m repeating the bulk of that post.

Earlier this week, Kiwirail released its most recent half-yearly financial result. Once again, the taxpayer was poorer for their operations. They make great play of a modest “operating surplus” but I rather liked this summary table from their latest Annual Report


In other words, no returns to shareholders at all; in fact, losses in one year of a third of the (periodically replenished) shareholders’ funds

Last year, they had operating revenues of $595 million, and an overall loss of $197 million (much the same as the year before). So roughly a quarter of their overall costs are not covered by income. As an organisation – and with all due respect to the energies of individual employees (including the five earning in excess of $500000 per annum) – it has all the appearance of being a sinkhole, absorbing more of the scarce resources of taxpayers each year.

And before people start objecting that roads don’t make a profit, it is worth remembering that airlines do and coastal shipping operations do – and, if they don’t, they usually go out of business.

An organisation that operates such large losses (acquiesced in by successive shareholder governments) clearly isn’t one that applies the most demanding tests possible to the question of whether individual lines should be opened or closed. Occasionally people attempt to justify government intervention in this or that activity on (questionable) grounds that the private sector is applying too high a cost of capital. But in this case, the state operator’s average return on capital (ie over all its operations) is substantially negative, and it has no expectation of changing that.

A few years ago, Kiwirail closed the Gisborne to Napier line. Rail volumes had been low and falling – some trivial portion of the volume that Kiwirail estimated would have been required to make the line viable. But ever since, there have been people hankering for the line to be reopened.

And yesterday, as part of the first wave of projects approved under the new Provincial Growth Fund, the Minister of Regional Development announced that

“We’re also providing $5 million to Kiwirail to reopen the Wairoa-Napier line for logging trains, taking more than 5700 trucks off the road each year.”

In the more detailed material released with the announcement there is a suggestion that the Hawkes Bay Regional Council may also be putting in money.

There is no sign of any cost-benefit analysis of this proposal having been released at all. But we can assume that the proposal wouldn’t pass any standard (weak) Kiwirail commercial test since otherwise Kiwirail would have reopened the line without taxpayers’ having to chip in more money directly.

There used to be some logs/timber carried on the Gisborne-Napier line, but a reader pointed me to the numbers: in the final full three years of operation, a total of 327 tonnes of it. There are, apparently, going to be a lot more logs to move in the coming years. In the Minister’s words

“The wall of wood is expected to reach peak harvest by 2032 so reopening this line will get logging trucks off the road and give those exporting timber options that they currently do not have,” Mr Jones says.
“It makes sense to consolidate that timber in Wairoa and use rail to take it to the Port of Napier.

Except that apparently officials and Kiwrail had already looked at this option a few years ago. In a report released only a few year ago it was noted that

“We note that Kiwirail was not convinced this would be finanically viable for users given the relatively short distance involved and the need to double-handle the logs. Industry feedback has also indicated that transport of logs on rail across the study area was unlikely to be economic.”

Perhaps the economics has suddenly changed? But, if so, where is evidence? None was published yesterday. We aren’t even told what assumptions are being made about how much of the logging business will be captured.

The Minister’s release also argued that there were climate change benefits from this move

“It will also mean 1,292 fewer tonnes of carbon dioxide released into the atmosphere each year.”

Even if this were relevant – don’t we have an ETS supposed to deal directly with pricing emissions? – and accurate (what assumptions are being made, including about the carbon costs of the double-handling?), it sound doesn’t terribly impressive. A single 747 flying to London and back once apparently emits 1100 tonnes of carbon dioxide.

This is just one of the numerous projects the government is going to spend money on in the next few years.

A couple of weeks ago, I commented on the Minister of Finance’s underwhelming exposition of what the government was going to do to transform the productivity outlook in New Zealand. The Minister noted

A major example of this is the Provincial Growth Fund developed as part of our coalition agreement with New Zealand First. This will see significant investments in the regions of New Zealand to grow sustainable and productive job opportunities.

To which my response was

If it ends up less bad than a boondoggle we should probably be grateful. It isn’t the sort of policy that has a great track record, and it is hard to be optimistic that one new minister – with a vote base to maintain – is going to transform the sort of flabby thinking around regional development presented at Treasury late last year.

Sometimes economic policy in this country seems almost designed to defy reason and evidence in an effort to make us poorer, to hold back national productivity prospects. Spraying around $5m here and $5m there – $3 billion over three years, in some scheme reminscent of congressional earmarks in the United States – not backed, it seems, by any robust supporting analysis, seems just another step along that path.

But at least one senior journalist thinks this is an example of governing exceptionally well, making us poorer one earmark and subsidy after another.

There was an interesting range of comments on the earlier post, including some from champions of rail.  Not one attempted to defend the economics of the Wairoa-Napier line, and to anticipate some similar comments this time round here was my response to one commenter, focusing on my key points.

My specific point was two-fold:

1. Even allowing for arguments about the extent to which road use isn’t fully priced (on average – it clearly isn’t fully priced at the margins) other competing transport operators successfully meet the market test (air, coastal shipping). It isn’t immediately obvious why rail freight (the issue here) shouldn’t be held to the same standard

2. Successive govts have been happy for Kiwirail to operate in very low (negative) returns to shareholders – perhaps partly to reflect presumptions around road pricing etc – but even by that undemanding standard, Napier-Wairoa doesn’t appear to be have been viable.

There are various interesting comments to my post. But I haven’t seen any that suggest Napier-Wairoa is an economic proposition. It is still possible, of course, that in fact it is, but then one might have hoped for a cost-benefit analysis to have been (a) done, and (b) published.

And don’t suppose this is the end: in that Dominion-Post article we read this

On whether there was a possibility of extending the line to Gisborne, Jones said any business case would be pushing on an open door.

That might rival light-rail in Wellington for the most uneconomic transport proposal the government could fund.