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Gisborne rail line could quickly be profitable, says independent review

Press Release – Gisborne Rail Action Group
An independent review of a KiwiRail report used to justify closing the Gisborne to Napier line has been released. The review was paid for by donations from the public and undertaken by economists at BERL and a specialist international rail engineering consultancy reviewed the capital aspects of the report.

A number of significant inconsistencies within the KiwiRail report have been identified, and a series of questions raised about the figures used and conclusions reached in the report.

“The main finding is that the numbers are a heck of a lot closer to break even than previously claimed and with a tiny fraction of the massive amount of wood coming onstream put on rail, the line will quickly be profitable.

The Government needs to make a small investment now to save provincial jobs and some horrific roading costs if the wall of wood was to travel by road, said Gisborne District Councillor Manu Caddie who led the fundraising campaign.

“With a margin of error of +/- 30% KiwiRail need to provide a more accurate estimate to justify their decision that undermines Gisborne and Wairoa employment and potentially closing down businesses in a region desperate for work” said Mr Caddie.

“National Party MPs have been suggesting ratepayers should pay for the line repairs, next they’ll be expecting councils to fund schools and hospitals. The rail is public infrastructure paid for by taxes and 100% owned by central government – just like state highways.”

Gisborne Mayor Meng Foon said “I ask the Government to give us a chance to prove our ability to use the rail sustainably, it is only $4m for the capital repairs and we’ve seen how quickly KiwiRail committed to repairing the flood damaged West Coast rail earlier this month. Is it just the East Coast that is no longer important?”

“KiwiRail is in a bind as they have been tasked to deliver a return to government which is very hard to achieve when the asset they were given to do this on is in such a poor state of repair having been neglected for 10-15 years during privatisation.

Freight had increased on this line and potentially there is a lot more to be had if the line was up to spec and well run” said Richard Burke from LeaderBrand, a major food exporter based in Gisborne.

Mr Burke believes there is a compelling case for the government to make a capital investment to protect an essential public asset that benefits the regional economy.

“The costs to both repair and maintain the line vary significantly from what has been reported and give rise to questions of the government’s commitment to rail and even to regional New Zealand” said Mr Burke.

“Little consideration has been given to the impact of forestry on road network, the truck volumes are huge, not the five trucks a day Anne Tolley quoted. To bring the line out of mothball will not be viable, getting rail to a state where it can be competitive and ready for increase in log traffic has not been properly considered.”

“Commitment from more business in and out of region is a case of chicken and egg, wait until the rail is needed before investing, or set up now and be in a position to capitalise. Government wants assurances from users, users want an efficient cost effective, environmentally sustainable transport system. Our challenge is to government to give KiwiRail the opportunity to be just that!” said Mr Burke.

When capital costs are adjusted to more accurate figures (based on advice from the assessment of a specialist engineering consultancy), the rate of return on capital is brought into line with similar national infrastructure assets and more accurate existing freight volumes are input, the line is very close to break-even and – with some capital investment and a regular service – will quickly see a transfer from road to rail of some of the vast amount of wood coming on stream1 resulting in Gisborne-Napier becoming profitable.

And this is before the tremendously adverse impact on the roading budget of scrapping the rail line, is factored in.

The likely per annum cost addition to the upkeep of roading from removing the rail option will exceed the per annum cost of retaining the rail by later this decade.

KiwiRail and the Government have an opportunity to relook at the situation before the report is publicly released in early January and reconsider the decision to mothball.

1 There is in the order of 25-30 million tonnes of forestry for harvest within 25 kilometres of Napier-Gisborne rail line (according to MAF, 2008).

MAF forecasts that by 2020 the volumes of forestry being extracted in Hawkes Bay will be 50% higher than today (page 14, MAF report).

A meeting between Kiwirail, the Minister of Transport and a small group of business and community leaders from Gisborne and Hawkes Bay to discuss the reports has been agreed on but we are still waiting on his office to confirm a date.

Full report: berleconomicsnapiergisbornerail11dec.pdf [1]

POINTS TO NOTE: a) The break-even tonnage for the line is less than 200,000T per annum rather than the 400-800,000 suggested in the report, if a return on capital is not included (as it is not for roads).

If a 5% return is required then the required tonnage is 280-290,000T.

This is on the basis of revenue charges per tonne seen elsewhere in KiwiRail’s NZ network, and holding operating margins at the level projected for FY12 on the Gisborne line by KiwiRail in its report.

b) The figures quoted in the forecasts for capital track expenditure (e.g.

track renewals) have not been based on a detailed survey and a thorough condition assessment of the track infrastructure on the route.

Hence, there is a very wide tolerance on these figures that the engineering consultancy has not been able to independently quantify as part of this review.

However, KiwiRail has stated that the figures may have a tolerance of +/- 30%.

c) KiwiRail identified a major capital expenditure programme was required at the same time as an increase in maintenance expenditure.

The engineering consultancy believes the increase in maintenance expenditure may not be necessary if the capital expenditure was split between sleeper life extension and renewal processes with poor sites being targeted early in the rehabilitation campaign.

The consultancy believes the rate of sleeper replacement implied in the Kiwirail report is likely excessive.

d) The engineering consultancy has some reservations about the manning requirements for this route as stated by the KiwiRail report.

e) The engineering consultancy strongly believes that to determine a more accurate forecast for the route a detailed condition assessment needs to be undertaken to determine the true costs of forward track maintenance and renewal costs.

f) The review concludes that the below rail capital expenditure forecasts were grossly exaggerated in the KiwiRail report “higher” estimates, but broadly accurate in KiwiRail’s “lower” estimates.

That is to say, over the next 10 years circa $15.9m would need to be spent on the line in capex.

g) The review has highlighted the erroneous double-counting of an 8.9% charge against the line made by KiwiRail for its own corporate assets, then followed up by KiwiRail further discounting the resulting cashflows from the line at a rate of 8.9% per annum to deduce a claimed “Net Present Value”.

h) The addition of tonnages up towards a total of 280-290,000T p.a.

(e.g. by way of capturing say even just circa 10-20% of the massive tonnage of forestry coming from the Mohaka area over the coming decades – see MAF’s 2008 Report projections) will then see a further increase in the item “Line Section Contribution to Other Sections” of the network in KiwiRail’s Report.

i) Together these impacts imply that at a 5% required rate of return for national infrastructure (even this 5% would be in excess of the government’s cost of funds) at 280-290,000T p.a. the line pays for itself.

This is before any allowance is made for the adverse impact on the roading network of the coming volumes of forestry (see k and o, below).

j) In 2011-2012 more than 50,000T was transported on the line, another 50-100,000 is guaranteed and the balance will be quickly found from wood freight, which could within 3-5 years reach 1,200,000T per year should the line: a. remain open with a regular, reliable service; b. provide a cost per tonne (to the freight customer) similar to other parts of the country; and c. have a small amount of capital spent on it to provide access from forests.

k) The impacts on road maintenance costs and safety is a factor that has been highlighted by BERL.

Impacts are likely to be much more significant than the KiwiRail report suggests.

83 trucks per day would carry 750,000T per annum (only half of the wood that the Ministry of Primary Industries projects from Mohaka alone) down SH2.

Using rail provides a significant saving to the roading budget and improves public safety.

l) The Port of Napier is now exporting more tonnage than the Port of Auckland and the transport needs for produce from north of Napier needs to be appreciated by decision-makers.

Industrial users have pointed out that the Gisborne Port is today circa 65% more expensive than the average of comparable New Zealand ports.

The international trend for reasons of port economics is for consolidation into fewer, larger ports serviced by rail.

m) BERL has been particularly conservative in their analysis and have not included freight opportunities like Ravensdown who said they have 2,000T/week to transport north.

A regular service offered at a rate comparable to other lines around the country would quickly see wood transferred from road to rail, and even more so if a short spur line was put into the PanPac mill at Whirinaki.

n) Independent expert engineering advice obtained as part of the review suggests that (based on the line being first repaired) if KiwiRail’s capital expenditure was “well directed and preferably ‘front- loaded’, the annual maintenance could be reduced”.

Another absolutely critical consideration is that railway line is part of New Zealand’s core public infrastructure, and the provision of that capital is for the government – like public roads, it should not need to make a full commercial return to the SOE KiwiRail.

o) Spending on the Napier to Gisborne road in the last ten years has totalled $102 million.

In the last four years it averaged $14.8 million per year.

If the number of trucks, and heavy trucks at that, increases as projected by MAF due to rising forestry harvest by 33% to 38% because the rail line is not available for wood freight, the annual spend on the road can be expected to increase at least proportionately, namely by $4.9 million to $5.6 million per year.

Note that this per annum projected increase in the roading budget dwarfs KiwiRail’s own per annum capital expenditure estimate on the rail line of an average of $1.58m per annum (refer page 38 of their report, note this average of Kiwirail’s includes the initial $3.3m to repair the March 2012 washouts).

This indicates that it would be in the national interest to make the capital expenditure required on the rail rather than having to increase spending on the road, and suffer the negative externalities on the road.

p) With a projected 750,000T (increasing thereafter) of logs annually to move from the Mohaka forestry area to the port of Napier, putting this volume (and weight) on rail would be the equivalent of taking off the highway a minimum of 83 trucks a day.

New Zealand Transport Agency figures in the KiwiRail viability report state that there are 220 to 250 truck movements per day on the road, so this gives an insight into what rail freight could substitute in kind.

q) Precise annual traffic volumes required for profitability are hard to quantify.

KiwiRail’s report lists a number of (conflicting) tonnages required for viability.

r) KiwiRail has added a 30% flat inflation in line maintenance cost to address “a backlog of work”.

Independent engineering advice is that with a proposed increase in capital works of about $925,000 per year proposed for years 1 to 10, there should be no need to increase maintenance expenditure by 30%.

s) BERL provides some calculations on the regional and national benefits of the line remaining open in terms of viability of local businesses, savings on road maintenance, road safety benefits and environmental benefits, particularly lower carbon emissions.

BERL notes that all analysis to date, including that within the KiwiRail report falls a long way short of an adequate cost benefit analysis of the national interest for this decision which has serious and long term economic repercussions.

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