Keith Newman asks whether Government-owned KiwiRail is putting profit before regional responsibility by shunting aside a plan to restore the Napier to Gisborne rail link.

The Hawke’s Bay Regional Council (HBRC) is asking for public views on a proposal to launch a private freight company to resurrect the washed out Napier-Gisborne line, despite every Government effort to derail the idea.

Since HBRC declared its interest in the Napier Gisborne Rail Establishment Group’s plan to transform the loss-making freight service into a profitable one, efforts to negotiate with KiwiRail have been stalled, misrepresented, mocked and generally fobbed off.

The latest jibe has come from Transport Minister Gerry Brownlee saying, if potential investors are so serious why don’t they fix the wrecked rail themselves.

The line was ‘mothballed’ after a March 2012 storm caused three washouts along a three kilometre stretch between Gisborne and Wairoa, but within a year KiwiRail was openly encouraging third parties to submit a business case for its reopening.

HBRC, the Napier Port and others spent over $70,000 on an engineering and business study confirming that a more efficient freight haul business would be viable, if it was backed by northern timber and produce exporters and private investors.

The NGR, formed with backing from HBRC, claims the re-opening is not only desirable but essential to relieve pressure on State Highway 2 (SH2), which it says will be unable to cope with the imminent produce and timber export boom. Its proposal includes steam train excursions as a tourism sweetener.

In the midst of those discussions KiwiRail appears to have settled on lightweight tourism uses, possibly as a delaying tactic until massive northern Hawke’s Bay forest harvests make it worthwhile to repair the line and get back into the freight business.

HBRC councillor and former Napier mayor, Alan Dick, had hoped repairs would be well advanced by mid-2014 so seasonal produce and timber exports could be rail freighted to Napier Port from Christmas onward.

HBRC, through its 2014-15 annual plan, is considering taking a 51% share in a private rail investment company. Despite being fobbed off by KiwiRail, Transport Minister Gerry Brownlee and both Hawke’s Bay MPs, Dick, interim vice chairman of NGR, insists the plan is robust and has been misrepresented.

Hope beyond heritage

The Institute of Professional Engineers (IPENZ) describes the 191 kilometre line, built between 1911 and 1942 over steep hill country and gorges, as a major feat of engineering. It has five steel viaducts more than 60 metres high, a reinforced concrete arch viaduct, bridges, numerous tunnels and heavy earthworks.

The line has recovered from major challenges in the past including the 1931 earthquake, two disastrous floods in early 1938 and most recently the washout near Nuhaka. If HBRC and its backers have their way it will continue to be a critical freight link between the two East Coast cities and points between.

If, following public consultation, Council approves a regionally-owned enterprise – most likely under the Hawke’s Bay Regional Investment Company (HBRIC) – it would put up half the $11 million to lease, hire or own locomotives, rolling stock and plant.

Dick, in his capacity as HBRC regional transport chairman, says funds could be transferred from the now defunct proposal for an inland port at Whakatu. There’s an impressive list of potential customers and he wants the plan given urgency “before any super council bumps it” down the priority list.

Although NGR was assured KiwiRail would support and work constructively with “a proposal that has merit”, KiwiRail Freight’s general manager Iain Hill says NGR’s case “has yet to be proven”.

He told BayBuzz the Napier-Gisborne line is unlikely to be part of planned improvements and growth and any KiwiRail investment, including repairing the track, must be financially sustainable “with commercial opportunity in mind”.

Hill said KiwiRail’s analysis of a 10-year business case didn’t stack up with the $4-6 million cost of restoring the
track, plus ongoing maintenance and renewed infrastructure. He claimed the potential for forestry growth was “still a number of years away”.

There was no certainty that rail would be cost effective for forestry owners and over shorter distances it would be “generally cheaper” for logs to remain on trucks, a point reiterated by Hawke’s Bay MPs Chris Tremain and Craig Foss.

Waiting on the line

Transport Minister Brownlee, after taking nine months to get back to NGR, stated in December last year that the Government wasn’t interested in loaning, investing or subsidising any private company.

NGR subsequently rejigged its plan to be fully self-funding, simply asking the Government and KiwiRail to restore the line so it was ‘fit for purpose’ and to sign a 50-year lease at ‘reasonable’ terms.

NGR would cover all future maintenance costs and bank a $3 million disaster recovery reserve in case something went wrong … another slip or washout for example.

While the venture anticipates losing a couple of million dollars in the first two years, mainly through catch-up maintenance, it expects to be generating several million in annual profits during its first decade.

In May 2010, East Coast MP Anne Tolley and Hawke’s Bay MPs Tremain and Foss began urging East Coast and Hawke’s Bay businesses to use the rail service. The Government had budgeted $750 million for KiwiRail over three years, but only profitable business cases need apply.

Three months later KiwiRail began talking about inland ports at Wairoa and Gisborne and ramping up the rail capacity to handle a large increase in timber freight.

Tukituki MP Craig Foss seemed conflicted at the time; the thought of freight migrating from road to rail had him predicting “massive” job losses in the trucking industry.

Clearly KiwiRail saw the big picture, investing around $300,000 to lower the bed in three tunnels to enable the use of higher capacity 40 foot high-cube containers and then ramping up its pitch for new business.

It met resistance until Weatherell Transport chief executive Steve Weatherell stepped up as a freight forwarder, encouraging his larger clients to move to rail. “No one wanted to trust them (KiwiRail) to get it right so I pulled together some numbers … and told my customers that if there were reliability issues I’d back up the rail option with my trucks.”

Weatherell, who runs about 80 trucks, was soon filling 20 wagons on three trains a week with squash and other goods, and claims he could have doubled that if KiwiRail had provided a more frequent service.

The deal took the pressure off during the peak season; rather than moving 70 loads of squash to Napier by road each week, his trucks spent five hours loading containers and were freed for other work.

Rail was allegedly beginning to make economic sense for everyone and discussions were underway to increase peak and off-peak capabilities when the washout hit the line in March 2012.

KiwiRail report skewed

After estimating repairs would take five months and cost up to $4.3 million, KiwiRail decided there was no money in it. Like a number of provincial lines, the Napier-Gisborne track had been a loss-maker, operating at a fraction of its capacity, and under threat of closure for some time.

Even doubling the $1 million turnover from 2011 wouldn’t stem the alleged annual bleed of $4-8 million.

Shocked at the decision to shut the northern link, a group of local businesspeople funded BERL (Business and Economic Research Ltd) and its specialist rail engineering consultancy to review the KiwiRail decision.

Its December 2012 report claimed inconsistencies and unsupported assumptions that hid the possibility the rail was nearing break-even. With capital investment, extra customers and a more regular rail service, BERL suggested it might quickly become as profitable as the Kawerau to Tauranga line.

It urged the Government and KiwiRail to reconsider, and to channel money back into rail rather than the road, otherwise the line was likely to “deteriorate rapidly”.

The report alleged KiwiRail’s ongoing maintenance costs were inflated by as much as 30% and hinted at “double counting” of assets such as locomotives and wagons before actual company “cash flow” was put on the books.

BERL stated that rail was part of New Zealand’s core public infrastructure, and like public roads “should not need be make a full commercial return” of 8.9% to KiwiRail.

KiwiRail executive at the time, Jim Quinn, dismissed the BERL report as “a brief desk-top assessment of a highly complex business case”.

Alan Dick says KiwiRail’s report was too focused on negative aspects. In its own assessment NGR’s experts found nothing of any significance that would need major work over the next 10-20 years.

Everything was up to scratch when the washout happened; besides $4.3 million for repairs was “not a hell of a lot of money in the wider scheme of things”.

Nationally, the Government had invested a billion dollars in KiwiRail to get it back to break-even. While continuing to strip out $200 million in spending, it invested $337 million in 20 new locomotives, 300 new wagons and infrastructure upgrades.
According to KiwiRail financials, it made $108 million profit on revenues of $727 million in the August 2013 year, largely through growth in the export and forestry sector.

Line dance begins

The NGR first got on track in March 2013 when a group of rail supporters, headed by Steve Weatherell of Gisborne’s Weatherell Transport, met with Dick and HBRC chairman Fenton Wilson with a strong commercial plan.

The group included Graeme Carroll, a business consultant; Neil Buchanan an engineer and recently retired general manager of KiwiRail’s property group; Dean McQuiod, a director with 20-years’ experience in road and rail transport; and Don Selby, a chartered accountant who, along with Ian Welch, owns and operates a short-line rail company in Australia.

With commitment from large exporters wanting a more efficiently run freight service, they attempted to engage with the Government and KiwiRail, but met with a stony silence.

After nine months, Napier MP Chris Tremain finally brokered a meeting with Minister Brownlee, who flatly refused Government investment. The proposal was rapidly reworked so it cost the Government and KiwiRail nothing but restoring the track. Again the silence was deafening.

When the response finally came on 10 March of this year, NGR was stunned; it was simply a restatement of the Minister’s original rejection. “I thought they’d sent the wrong letter,” says Dick.

Brownlee, or whoever wrote his letter, still assumed NGR was asking for “significant subsidies…with no dividend forthcoming” and concluded there was no good case for the “government to invest in the shortline proposal”. A request to lease surplus carriages and locomotives, currently being sold off overseas, was denied.

NGR restated its case on March 18 and again in exacting detail on March 24, insisting “verifiable projections” for freight growth in the timber market were “likely to be four times the operating and capital costs”. It wanted no government money and if KiwiRail wouldn’t sell or lease rolling stock, this could be sourced elsewhere.

There was no action on requests for an urgent response to meet with new KiwiRail CEO Peter Ready and Brownlee.

Wall of wood ahead

Despite claims there had only been a handful of extra trucks on SH2 since the rail closure and that only about 2,000 cars used the road daily, NGR and its backers continue to warn major congestion is up ahead if the line remains mothballed.

The fragile, steep and winding 215 kilometre stretch of seal is not a favourite with truck drivers or owners; it’s hard on engines and brakes and often on the produce being carried.

NGR has letters of commitment to move 30,000 tonnes of freight, including the Gisborne squash trade and claims support from major forestry companies, Gisborne Federated Farmers, Hatuma Lime, Heinz Wattie, Ovation Meats in Gisborne, export produce warehouses LeaderBrand, Four Seasons and Coxco … who all want more economical access to Napier Port.

Alan Dick claims that within three or four years log volumes from northern Hawke’s Bay will increase tenfold from about 90,000 tonnes a year to 900,000 tonnes sustained over 7-8 years.

Forest Management NZ and the Roger Dickie Forest Partnership, managers of more than 26,000 hectares of forest estate, mostly in the Wairoa and Gisborne regions, have a preference for rail. They expect at least 3.5 million tonnes of logs could be transported between 2020 and 2025.

Steve Weatherell suggests SH2 hasn’t got a show of coping. “It’s hard on trucks, is prone to slips and washouts and weather events and NZTA figures say it already costs $3-5 million a year to keep it maintained.”

That doesn’t take into consideration the risk to other road users as the commercial convoy gets longer or the inevitable increase in the size of trucks to meet growing demands.

Currently SH2 is approved for ‘50 max’, a gross weight of 50 tonnes, up from 46 tonnes with even larger and heavier High Productivity Motor Vehicles (HPMV) about to be approved to reduce freight costs.

Weatherell warns “the surface will give out” resulting in a major headache for NZTA’s maintenance programme. Besides, he claims there aren’t enough trucks or drivers to handle the projected volumes and argues that ferrying freight to Napier from remote harvest areas is an unproductive use of available vehicles.

It’s already challenging finding trucks to haul logs out of Wairoa. “With the shortage of drivers they’ll be struggling. They could be taking a lot more out of some of those areas if there were more trucks and they’d welcome the rail.”

Inland rail hubs

The approach favoured by NGR is to truck logs from harvesting sites to a rail hub in Wairoa for storage, weighing, batching and de-barking before being put on the rail to Napier.

Rather than the lumbering bureaucracy of KiwiRail, NGR would focus on running a tight efficient operation to complement road transport.

Rather than a five hour trip to the Napier Port, plus queuing to unload for storage, it might take an hour from harvest to rail head. Just-in time (JIT) management, would carefully schedule rail delivery to coordinate with the arrival of export container ships.

In Dick’s words: “A smaller, lighter, tighter and less bureaucratic operation focused on guaranteed delivery of goods to market … and consistency of service … which was not always KiwiRail’s forte.”

If the deal went ahead, KiwiRail’s mothball and maintenance costs would cease and it would generate passive income from freight moving onto its network. “Every $1 million of freight revenue generated would generate another $250,000 for KiwiRail,” says Dick.

Social and economic benefits would accrue from re-opening the intercity link, including choice of transport, improved competition, security of access and employment. With Gisborne’s log port already operating at maximum, its win-win for everyone, says Dick.

Government closes ranks

Dick and his crew, still convinced they were in the midst of “sensitive negotiations”, were shocked when Gerry Brownlee virtually mocked NGR for its persistence in a NewstalkZB interview shortly after the draft HBRC annual plan went public.

Steve Weatherell

Brownlee claimed he’s already turned down HBRC’s proposal; what part of ‘no’ did Dick not understand? It was all over and to ensure he got the message, another letter was on its way.

KiwiRail did not wish to invest in restoring the line to compensate for what was essentially another 17 trucks on the road for two weeks during peak produce season. It is “a line that was unlikely to ever be profitable”.

However, Brownlee did concede what many were suspecting … the rail link might be re-opened if more timber than expected came online.

Then Brownee announced during question time in Parliament (10-04-14) that Government investment in restoring the line “would be a tragedy for the New Zealand taxpayer…and a bigger tragedy for ratepayers of the Hawke’s Bay” and threw down the gauntlet to the NGR to pay for the repairs themselves.

Meanwhile, local MPs also confirmed that the steam had gone out of the game. Tukituki MP Craig Foss said a long-term economic study supported by Napier and Hastings mayors agreed mothballing the line was the right thing to do.

Foss says, Government cannot subsidise an uneconomic option, particularly when there are alternatives available … it was committed to investing in cheaper alternatives. “The Port of Gisborne remains a cheaper option for the export of logs from around the Gisborne area.”

Road is the only way forward, he said. NZ Transport had invested $4 million on five new and four extended passing lanes on SH2, giving drivers an extra two kilometres of passing opportunities.

Napier MP Chris Tremain, having genuinely wanted to believe, is now convinced the line could never deliver economic growth and there is no case for re-opening it.

After all, KiwiRail are the experts, said Tremain; the NGR plan is unrealistic. “If I genuinely thought there could be economic growth I would be supporting it.” Why, he asked, would you think that fixing the line after the washout would make it any more successful in the future?

He cited the 2001 Tairawhiti Regional Development Study: the only circumstances where it might become profitable was if Gisborne Port closed. That isn’t going to happen, in fact it is in a growth phase.

However, Gisborne regional transport committee chairman Manu Caddie, after attending a series of meetings on transport priorities, lashed out at those who continued to denigrate rail as the way forward.

He accused transport agencies of operating from blinkered silos when they could be saving the environment, reducing road maintenance, and cutting export transport costs by getting freight off the roads onto rail.

An April, Gisborne Herald poll showed 70% of 500 responses favoured the HBRC short-haul rail company.

Afraid of competition?

Alan Dick believes KiwiRail’s focus on chasing profit through new, heavier, higher volume, faster locomotives on the main routes is detrimental to enhancing regional lines and branch operations.

“Since the washout the firm impression I get is that this was a good excuse to get out of it, and concentrate on main trunk operations.”

Steve Weatherell, under whose brokerage the line had been nudging toward viability, believes NGR has been stonewalled because KiwiRail is hedging its bets. “They see this big wall of wood about to come online in three years and won’t give us a 50-year lease in case they want it back.”

Ever the optimist, Alan Dick remains convinced NGR’s business case is watertight and may yet find traction that defies the naysayers. Whether Brownlee would stand behind his challenge for NGR to fix the line or was just being sarcastic, Dick took it as a positive and is now working to see if the investors are up to the challenge.

The impression BayBuzz gets is that KiwiRail never paid sufficient attention to the service levels required to win the trust of regional exporters. Maybe it doesn’t want to be shown up by some upstart regional company on a line it claims can never drive the dollars?

The default appears to that if KiwiRail couldn’t make it pay, then noone can; certainly a good case to make to Government if you’re protecting your back.

Certainly the NGR appears to have more committed investors, a more transparent business case and credible potential for job creation than HBRC’s Central Hawke’s Bay dam plan has so far disclosed?

Regardless of whether rail or road is used to meet increased output from the north, the HBRC-owned Napier Port will need to lift its game considerably if it’s not to become site of the ultimate logjam.

A decision on whether HBRC takes a 51% stake in the stubborn rail enterprise and how that might proceed is expected in June. Meanwhile, Dick warns if the Government and KiwiRail continue to put up barricades and fail to face the real problem, the issue will remain “a festering sore.”

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