Speech to 2010 New Zealand Rail Conference

Good morning - it's a real pleasure to be here for the Australasian Rail Association's second annual conference.

New Zealand and Australia already share strong ties, but events such as this are important to continue the sharing of ideas and keep the important discussions going.

I hope this conference continues to be a regular stop on everyone's calendar.

I would like to take this opportunity to acknowledge Jim Bolger's contribution to the rail sector since becoming chair of KiwiRail in October 2008.

During this time Jim has been a steady hand on the tiller and has done an admirable job of welding all the parts and cultures of this varied business back together again.

Jim - the government is very grateful for your service and we wish you all the best for the future after you step down as Chair later this year.

Incoming chair John Spencer has a wealth of commercial governance experience which I am sure will put him in good stead to guide KiwiRail successfully through the challenges ahead.

Since attending your inaugural conference last year a lot has been happening in the rail sector, so I'm pleased to have the opportunity to update you on the government's work in this area.

But first - a bit of context.  

The John Key National-led government was elected at the end of 2008 with a clear mandate.  A mandate to secure a brighter future for New Zealand.

And we have quickly set to work on that since then.  Whether it's working to improve our education outcomes, improving the safety and security of New Zealanders, or putting the building blocks in place for a stronger growing New Zealand economy, Ministers have all been determined to do the work to help secure that brighter future.

Ours is a plan that values enterprise and entrepreneurialism. 

It's a plan that rewards people for effort and encourages them to get ahead under their own steam.

There are six main policy drivers essential to boosting New Zealand's productivity and competitiveness.

•  1.  Regulatory reform. 
•  2. Better public services.
•  3. Education and skills.
•  4. Smarter innovation and business assistance.
•  5. A world-class tax system.
•  6. Investment in infrastructure.

So today, obviously, I am focusing on infrastructure - transport  infrastructure, and more particularly rail infrastructure and how it fits in with our broader economic goals.

Firstly, getting into a debate on rail verses road versus coastal shipping is not what will get the country where we need it to go. 

Its not about which one you like the most.

The reality is we need to have all three transport modes working to complement each other, and have their level of usage determined by their relative costs and convenience, and therefore suitability for the myriad of different types of freight carried on them.

The best way to achieve this and ensure all three modes are used appropriately is to ensure that each is priced at a level that reflects their costs so that freight-forwarders, exporters and importers all have clear choices.

Only when we achieve that will our transport system really deliver on its promise for the economy - getting our goods to market as quickly and efficiently as possible.

Therefore, turning to rail, the government is working to encourage an environment where rail can operate efficiently and with strong commercial imperatives to provide the greatest benefit to the New Zealand economy and rail customers.

I think our view on the previous government's purchase of KiwiRail is well known.

In opposition, National had serious concerns about the purchase price paid by Labour for the rail company and nothing has happened since to change that view.

I won't dwell on that too much today - except to say that once you have spent a billion dollars of taxpayers money on an asset that is now valued at just $388 million - there's some understandable cynicism around about what you do next.

So given that's the starting point, we do need some hard-nosed realism about future investments.

And now we're down to decision time.

For the past several months, KiwiRail has been working on a Turnaround Plan which is being reviewed currently at great depth and length by officials from the Ministry of Transport and the Treasury, and various outside advisors.

The plan aims to see the KiwiRail Group become, within ten years, a sustainable freight-based business that is able to fund its ongoing operating and capital expenditure from customer-generated revenue.

It's a challenging goal.

The condition of the below track infrastructure and rolling stock continue to present serious issues for the company - the problems we've seen with Metro rail in Wellington over the past six months are just one example.

There has been a lack of a consistent and clear customer-focused strategy to preserve market position over a long period of time and a number of owners. This has led to a lack of customer confidence. There has also been an absence of organisational certainty due to differing ownership objectives.

The net effect is that rail has lost relevance as a time-dependant freight option and has seen its share of the total freight task decline over time. 

Since 1993 rail's share of the net-tonne kilometre freight task has declined from approximately 20% to 16% in a period where the total freight task grew by 87%.

Nevertheless that is the challenge we have all been given.

The government will soon be in a position to announce the approach that will be taken, and how those challenges will be addressed from the government's perspective.

However for any Turnaround plan to be a success, we're going to need all stakeholder groups to get in behind it and play a part.  Frankly everyone is going to have to hold hands and jump together if this is to work.

The Crown's role would be to front up with some capital. 

We'd be doing this cautiously because this is taxpayers' money.  Before we part with any more public money we need to see sound business cases that clearly demonstrate how services will be improved and revenue will flow from those improvements.

The next group of stakeholders we would need to step up would be KiwiRail's big freight customers.  The current reality is that because of historical arrangements some freight is currently being carried on Kiwirail at prices approaching a marginal cost basis.

Those arrangements will have to be altered to ensure that Kiwirail can meet the reasonable costs of track maintenance and renewals from the freight they carry.  That is urgent, and I understand Kiwirail is already having talks with customers about that.

It's not about pricing uneconomically.  It is quite possible for rail to be significantly cheaper than other modes for the types of freight it is most suited to carry; and cover its own costs.  And that is what will be necessary.

But as well as carrying freight at a fair price, Kiwirail will need to carry a lot more of it.  Rail is a high fixed cost business.  Low revenues and high fixed costs is not a recipe for financial success - I think we can all understand that. 

However, lift those revenues, and the accounts can look a lot better quite quickly.

The big customers have told us that they are very positive about putting more freight with Kiwirail; particularly on the main trunk; and if service times and delivery times improve then they will put much more freight through the company.  A number of them are already significantly invested in plant and infrastructure along the rail corridor.

However we would need those customers to come through quickly as services improved and at a reasonable price, to give the country and the taxpayer the confidence to keep investing.

The next important group with a major role to play in making any Turnaround Plan a success is the management and staff of KiwiRail, as well as the unions that represent those staff.

For a turnaround to work, KiwiRail will need to significantly improve productivity and that means being open to a range of possible approaches that can improve efficiency and reduce waste of resources.

And that of course is no different to what's been happening in businesses and organisations all around the country as we look to ride out the economic storm.

Kiwirail has a new management team let by Chief Executive Jim Quinn, and I am confident they have the ability to make those efficiency improvements, and to encourage a culture of constant improvement in Kiwirail.  And that is what will be needed.

The fourth group we need buy-in from are the regional councils in Auckland and Wellington which, along with the Transport Agency, are responsible for the commuter rail services in their respective cities.

The Crown has invested a huge amount in improving metro rail in the last several years, with much of the change just now becoming apparent.

In Auckland alone we're investing $1.6 billion to modernise and extend the network.  

That means double-tracking the Western line; a process that will be complete by June, plus new stations and facilities in places like Newmarket, Grafton, Kingsland, Morningside and New Lynn - all of which I have visited in various guises in recent times.

It also means half a billion for the infrastructure of electrification, with contracts underway for new signalling systems, and the poles and lines to provide the motive power.

And the further half billion for the new electric units to run on the network which I announced in November last year, and which Kiwirail is currently tendering for in the market for delivery commencing 2013.

And in Wellington the government has committed $258 million through a Crown appropriation to the Greater Wellington Regional Council towards the project and further sums directed to KiwiRail.

So the infrastructure is improving at a great rate, but the reality is this: neither Auckland or Wellington are currently paying the actual amounts required to maintain and renew their share of the network. 

By that I mean they're not paying enough to enable KiwiRail to maintain the tracks and ensure services are reliable.

Because of this, we are in the ironical situation where, here in Wellington, KiwiRail is constantly bagged because of its run down and sometimes unreliable services but no one has yet been prepared to fund the full amount to have the network adequately maintained. 

Well - for a KiwiRail Turnaround Plan to work, all customers, including those regions that provide metro passenger services, and their co-funder NZTA, will need to stand up.

The metro operations will have to meet the actual fair costs for the renewal and maintenance of the networks that they use going forward.  And discussions on that responsibility will start shortly.

The final stakeholder group I want to mention is rail advocates.

Rail advocates are passionate about rail and I understand and support that. 

However, if we are to successfully turn KiwiRail around and make it a strong positive contributor to the New Zealand economy, we all need to be realistic about what can be made to work and what can't.

And the reality is that there are a few of our smaller lines that literally are not used at all or are used very rarely.

The cost of maintaining these lines is significant and that spending is a drain on the rest of the company.

So we need to ask ourselves where that money is better spent - maintaining unused branch lines or developing the main lines that our economy needs to grow.

Now we are talking about a small part of the track network, and there are one or two branch lines that, despite carrying very little now - may have the real opportunity of a significant anchor tenant anchoring the revenues on the line in the near future.  And I am certainly supportive of staying in a holding pattern on those if that's what Kiwirail wants until those opportunities play out.

But more generally I suppose I'm saying that it's a good idea to pick your arguments.

You shouldn't die in a ditch for a line that's only carrying fresh air.

New Zealand's freight task is expected to double by 2040.  Fossil fuel prices are also likely to go higher over time.

These two important points suggest a well-run, successful rail company has an important role to play in New Zealand's transport future.

However we all need to acknowledge how big a challenge it will be to achieve that short phrase "well-run, successful rail company".

We need to acknowledge that we come from a long way back, with a long period of poor capital replacement across successive public and private owners that despite significant expenditure more recently continues to hamper the company today.

And we need to acknowledge that the company needs to be much more adequately supported by all stakeholders - not just the government and not just taxpayers.

And we need to acknowledge that it will take a significant period of time to get to that point - something like around ten years.  And that means that any turnaround plan will have to have regular progress checks along the way, so it doesn't become another spend and hope exercise.

So, in closing I want to stress that this government does see a future for rail; and it will shortly announce a decision as to what level of investment it is prepared to provide to the company to support that future.

But that future will only be realised with the support of all stakeholders.

While there is a very long way to go I am confident that we are at last on the right track, and that if we operate with a sense of realism and pragmatism and work together we can make this work and see rail make a significant contribution to our economic growth story.

Thank you.