Fast Track: The Case for Opening Up New Zealand’s Rail Network

The Māori Party recently proposed a radical reform to the New Zealand railways called IwiRail. This system would restore mothballed routes, whether or not it was economic to do so, and have employment as a key aim. While we agree that radical reform of the railways is definitely required, we certainly think increasing Government intervention in the market and using the railways as an employment centre is a flawed idea. It will further decrease the efficiency of the network and make it even more expensive for taxpayers.

New Zealand’s railways have a chequered past. Their structure and ownership has been changed multiple times and they have never truly managed to be successful, despite New Zealand being the ideal nation for a rail service, long and narrow with most of its major cities along one line. The railways have recently begun to turn themselves around, with prudent commercial management as a State-Owned Enterprise (KiwiRail Holdings Limited) and a massive capital injection from taxpayers. However, for our railways to truly excel and provide a good service for New Zealanders, enhancing our economic growth, they need yet more capital, proper competition and serious ownership discipline.

Some, like the Māori Party, may favour another capital injection from the Government to allow KiwiRail to grow and expand its operations. We, however, see such a move as counterproductive and unfair to taxpayers. Why should already overtaxed Kiwis be required to prop up what is essentially a commercial operation? Our arguments in this piece on wider SOE reform particularly address this point. Surely, if the investments KiwiRail want to make are worthwhile commercial investors would be willing to finance them.

Private investment would also provide much needed market discipline in the rail sector. The market can devote far more of their time to analysing the operations and financials of KiwiRail than the Government ever reasonably could and can use the mechanisms of annual general meetings and the stock price to discipline the company.

The proper competition issue is however more complex. Rail is a difficult place in which to have competition, with it requiring very expensive equipment and coordination between the different competitors for safety and scheduling reasons. However, competition does exist in parts of Australia and the European Union – especially in freight rail.

Our proposal that follows will provide a simple, cost-effective and liberal solution to the issues facing our country’s vital rail network.

Our Proposal

KiwiRail will be split into five segments: Freight Rail, National Passenger Rail, Wellington Metro, Ferries and Network. We will deal with each of these components separately. Our reform would also establish a new regulatory agency called the Rail Commission, uniquely specialized in matters of railway regulation.

This Rail Commission would manage competition, safety and security in New Zealand’s rail network. It would be an independent regulatory body under the Ministry of Transport. It would be headed by a group of one Commissioner and two Deputy Commissioners – one of whom would have to be a lawyer, another a rail engineer or safety expert and the third an economist (preferably specialized in infrastructure or market structures) – all appointed by the Governor-General, on the advice of the Minister of Transport. The Commission would have powers to bring cases to the High Court for violations of safety and competition laws. Such cases could result in fines, suspensions of rail operation and compulsory divestment of various assets by rail firms. The Commission would cooperate with the Commerce Commission with regard to competition in the rail market and all regulatory actions in such a vein would be conducted together by the two Commissions. The two Commissions would be able to regulate and stop mergers and other consolidation in the rail network – such decisions would be appealable to the Court of Appeals. All companies involved in the railway sector of New Zealand as a major component of their business would be regulated by the Rail Commission – including the NZRC and other track companies, maintenance companies and rail operators.

With regard to KiwiRail, we will begin with the InterIslander ferry operation, to which we propose a total privatisation. We see no issues with competition with Bluebridge also competing on the Cook Strait. We see the best way of gaining value for taxpayers as a listing on the NZX, with the government listing 100% of its shares and issuing a new allotment to capitalise the new firm further. The independent InterIslander firm would be regulated by the Rail Commission, with regard to its rail operations. This privatization will provides funds to the Crown which it could then use for a variety of purposes, including topping up the NZ Super Fund.

We also propose fully privatizing Scenic Journeys (KiwiRail’s national passenger rail component) with a due allotment of locomotives from the fleet to continue their business. While this business may not have all that much value as of now, it is possible that market discipline could allow it to streamline its operations and begin appealing to New Zealand’s large tourist market. The competition issue here is negligible with passengers having many other alternatives including intercity buses and domestic air travel on the two airlines.

With regard to the rail network infrastructure and engineering division of KiwiRail, we propose it be split into two.

The parts of the division related to locomotive engineering and maintenance would be privatized, contracting to the various railways companies established by this plan and thenceforth. We see an opportunity here for competition to arise independently but, until then, as always the Commerce Commission would regulate any unfair pricing structures resulting from having one major maintenance firm.

Meanwhile the parts of the division related to track and other network facilities would be joint with the land-owning New Zealand Railways Corporation (NZRC) and the joint firm be turned into a Crown Provision Corporation. This would allow the infrastructure team to serve all of the users of the rail network, as a component of their rail access fees discussed later.

With regard to freight rail, we propose that KiwiRail Freight be split into two separate State-Owned Enterprises, each comprised of an approximately equal balance sheet of equipment and locomotives, with an equal complement of customer base, divided on no geographical or functional basis by a consortium of independent railways and financial experts. This would immediately introduce competition into the freight rail market. The existing KiwiRail staff would be split among these two firms and they would begin operating as independent firms six months after the split is confirmed. These firms would have founding Boards of Directors and Chief Executives appointed by the Minister of Finance to manage the new firms and establish their identities and operations.

After a suitable period of operation proving their effectiveness and maximizing their value, the new competitors would be listed onto the public markets, including the NZX and perhaps the ASX and other foreign exchanges, with 100% of the Government’s holdings and a complement of newly issued shares being offered to raise the needed expansionary capital for the new firm.

This approach would ensure the competition in the freight rail industry that it so badly needs, raise the much needed capital and provide new funds to the Government for use on public services.

These new freight firms, Scenic Journeys and any future private competitors would pay network charges to the New Zealand Railways Corporation. How these charges would be calculated and how track access would be allocated would be left to the discretion of the independent management of the NZRC. Charges could, for example, be charged on a per-tonne, per-kilometer rate. Such charges would be set annually and would be calculated to cover the costs of network operation and expansion. The NZRC would also be entitled to seek funding from individual and consortia of rail firms to fund expansion of the network in various areas, in exchange for discounted network charges and some preferred access. The overarching objective of the NZRC in determining such expansions and deals would be in providing a better service for New Zealanders and the national economy, with competition being especially important.

Firms would also be entitled to build their own track and manage new networks independent of the NZRC. Such networks would remain under the jurisdiction of the Rail Commission. We see track access requirements of the sort implemented overseas as unfair impositions on private property and would prefer the firms be able to use the property as the wish. The Rail Commission would regulate competition in the market to ensure rail companies did not use their exclusive ownership of track to corner the market and harm consumers.

This new railway system herein described will create a competitive marketplace for rail services and will allow the rail industry for which New Zealand is uniquely suited to flourish under the demands of market discipline, while protecting the important strategic assets that are our railway network and the land on which it sits. It will also allow the Government to redeploy these public assets trapped in the railways to more effective public expenditure, including the development of infrastructure for the rapidly growing population.

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