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Productivity Commission Release Draft Report On International Freight Transport

Posted on January 12, 2012 at 3:25 AM
The Productivity Commission today released its preliminary findings on the New Zealand International Freight Transport sector. 
 
Key findings were in the area of Governance and  ownership structure of the nation’s Ports. In particular there were findings around accountability structures and a suggestion that Port companies governance should be put under a type of SOE model format with less interference from Councils (more independent directors - no Councillers or Council officers) and independent external monitoring by an agency like COMU which does that for the Crown owned SOE's.
 
Submissions on the draft report close on 27 February 2012 with the final report due out on 1st April 2012.
 
This report is to be welcomed and we look forward to similar reports on the domestic transport sector in due course. This is foreshadowed to some extent as the following comments are made on Rail:
 
"The New Zealand Railways Corporation (trading as KiwiRail) is a state-owned enterprise. Governance and other arrangements are specified in both the State-Owned Enterprises Act 1986 and the New Zealand Railways Corporation Act 1981, which is a potential source of ambiguity and inefficiency. It would be preferable if KiwiRail’s governance arrangements were specified only in the State-Owned Enterprises Act.
 
KiwiRail is currently classified as a ‘multiple objective company’ whose financial expectations are moderated by public good delivery requirements. However, there is little transparency about exactly what public goods are being delivered and at what cost to the taxpayer. The State-Owned Enterprises Act contains provisions for SOEs to receive direct payments for non-commercial activities (s.7), and it would be preferable if these provisions were used to identify expectations delivery of public goods by KiwiRail and the costs incurred in their provision.
 
The transparency of KiwiRail’s longer-term investment plans is less than might be expected from an equivalent private company (at least one listed on a stock exchange). The public justification for the Government’s initial $250 million contribution towards KiwiRail’s $4.6 billion Turnaround Plan was very limited. This is unusual given the poor history of previous large capital injections into New Zealand railways. A full cost-benefit analysis, comparable to the ones produced for major road projects, would be a valuable contribution to the public debate."
 
 
Further…
 
“A full cost benefit analysis (ie, including all externalities) should be published for government investments in rail infrastructure, including further investment in the KiwiRail Turnaround Plan. These analyses should be directly comparable to those produced for major road projects.
 
Proposals for investment in road and rail should be subject to rigorous investment screening in a coordinated way, which enables the best projects to selected – be they road, rail, or a combination of the two. Without this level of transparency, the public cannot be confident that scarce resources are being allocated to the most beneficial projects."
 
 
The report has much more to say about Rail and Road. Here are some further extracts
 
"The Commission’s preliminary view is that it is not correct to argue that road freight is subsidised on account of its PAYGO method of funding, which does not explicitly charge users for past road infrastructure investment. It agrees with the Australian Productivity Commission’s response to similar concerns: Capital costs are fully recouped under a PAYGO approach.
 
Under a pay-as-you-go approach… capital spending is recovered in the period in which it occurs. This means that users of roads, rather than road providers, effectively fund the investment. In principle, therefore PAYGO does not subsidise freight infrastructure users compared with an approach where users are charged an amount each year that covers asset depreciation and a return on capital. Australian Productivity Commission (2006), p.xxxii
 
Another argument put forward is that rail is subsidised by the government as it does not achieve an acceptable rate of return on the capital invested. This view is supported by Booz Allen Hamilton (2005b), who found that for 2001/2002 rail freight revenues were sufficient to cover operating costs (and track and rolling stock replacement), but insufficient to fund an adequate economic return on the total recoverable assets (including land and other infrastructure assets). The financial consulting firm Rockpoint also found that rail has generated an insufficient return on capital (Rockpoint, 2009). Section 8.2 provides information on the level of government subsidies to rail. The Commission has not undertaken the analysis needed to reach a conclusion on whether current and envisaged levels of rail subsidies are economically efficient, but it is concerned to see the investment of large amounts of public money without the presentation of a full business case.
 
The Commission therefore recommends (see Recommendation 9.1) that a full cost-benefit analysis should be produced for future government investments in rail infrastructure, including those in the KiwiRail Turnaround Plan. Such analysis would make the purposes and amounts of subsidies transparent and help inform public debate. A further concern raised in submissions is that prices charged do not fully reflect the external costs of different forms of freight transport. Such external costs include greenhouse gas emissions, other environmental impacts, congestion and accident costs. To the extent that these external costs are not incorporated into prices, they are implicit subsidies. For example, coastal shipping has the least greenhouse gas emissions and is the most energy-efficient mode per tonne kilometre, rail lies in the middle and road freight has the highest environmental impact.123 124 To the extent that New Zealand’s Emissions Trading Scheme does not fully incorporate the impact of greenhouse gas emissions then, this ordering implies a parallel set of subsidies with coastal shipping disadvantaged relative to road and rail, and rail disadvantaged relative to road.
 
Subsidies and the economics of coastal shipping and rail
 
If it turns out that public investment in KiwiRail has a large subsidy component and so does not earn an economic return, and coastal shipping has smaller environmental impacts than rail and particularly road, then the playing field is indeed tilted against coastal shipping. Despite freight charges for coastal shipping being lower than for rail and road (see Table 4.6), it attracts relatively low volumes of freight because of slow transit times, infrequent services and other features. However, on a more level playing field, coastal shipping (both domestic coastal and international operators) would have an even greater price advantage and could attract more custom. In turn this could make it economic for coastal shipping operators to offer more frequent services, which will reduce transit times and further boost custom. Without a good justification for the current pattern of subsidies, such a change might well improve the overall efficiency of domestic freight transport.
 
As mentioned, coastal shipping is suited to longer routes such as between Auckland and Christchurch. Yet this is just the route that the KiwiRail Turnaround Plan is targeting, including investment in expensive ferries that can carry rail wagons. This deployment of resources does not, on the face of it, seem efficient."
 
 
These comments are not at all surprising to me and are to be welcomed. Not because I necessarily agree with all the comments or their conclusions but because it is clear to me that Rail has still not sold its business case well enough yet to external parties such as the Productivity Commission. You would have to acknowledge Kiwi Rail has done a great job at selling their Business case to the current Government administration and Crown officials. They did afterall get the Government to sign off on a $4.3 Billion Turnaround Plan - a Herculean achievement by any account but that is still not enough. Life is tough. It must go further  if Freight Rail is to survive and prosper in a sustainable way in this country otherwise we will back revisiting the Rails failures of the past in due course. Greater transparency will be required of all major transport participants, especially where Central or Local Government Investment occurs. This is doubly important given the importance of this sector to the economy. From Kiwi Rail's perspective if there is to be long term buy in by future Government’s on their commitment to the future of Freight Rail investment, the business will have to behave more like a Public listed company. This will enable public scrutiny with external analysis of its operational and financial performance. This would be very much welcomed as there are currently huge amounts of public money being pumped into Kiwi Rail for the benefit of their customers. How this benefits New Zealand more broadly needs to be clearly spelt out and hopefully would help secure Rails long term sustainable future despite the winds of political change from time to time. Currently there is much “chatter” that Rail is simply subsidising the freight costs of its key customers via Government capital investment.
 
NZTA too need similar scrutiny for "Roads of National Significance" (RONS) investments by the public although they are ahead of Kiwi Rail generally in Business case presentation due to decades of experience in that field.
 
The report can be found at the following link 
 
 
 
The video presentation is at this link
 
 
 

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