Michael Reddell is worried about the emphasis on rail projects in the new regional development strategies, defying reason and evidence in an effort to make us poorer, holding back national productivity prospects

By Michael Reddell*

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.  I’ve only looked through the Gisborne/Hawke’s Bay list, and none of it fills me any confidence.   What, for example, is central government doing on this?

The Provincial Growth Fund will provide $2.3 million to redevelop the Gisborne Inner Harbour as part of a wider tourism investment programme.

If, as the Minister claims,

“Tairāwhiti is brimming with potential and untapped opportunities

you would have to wonder why the private sector, and the local authorities, don’t seem to think them worth spending money on.  (On my story, a materially lower real exchange rate would help quite a bit, but the government shows no sign of addressing that.)

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.  

Then again, the Secretary to the Treasury might quite like the idea of paying to reopen the Napier-Wairoa line.  I’ve told previously the story of Gabs Makhlouf, fresh off the plane from the UK, lamenting that the one thing New Zealand hadn’t sufficiently taken from the British Empire experience was to invest more heavily in rail (in response, assembled Treasury officials were not quite being sure where to look).

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.

Michael Reddell is a macroeconomist who blogs at croakingcassandra.com and where this ariticle was first posted. It is here with permission.