Land transport deregulation comes to pass

From the 1936 until 1983, transport of freight within New Zealand was subject to fairly blunt distance limits restricting competition between rail and road.  Initially, road freight was only allowed to haul goods no further than 30 miles from the nearest railhead, whether it be the end of a line, or a railway station with freight service.  It was designed to save the economy money, primarily by ensuring that capital investment in New Zealand Railways (NZR) was not wasted and undermined by competition from road freight, as it was thought the country it would be wasteful to have to upgrade the highway network to handle long-distance road freight traffic, as well as maintain and develop the rail network. "Unnecessary duplication" was the catchphrase.  It gave NZR a monopoly on all medium to long haul freight, and limited truck operators to feeding the rail network, although there were parts of the country much further than 30 miles away from the rail network, so some trucking companies focused on the gaps. 

Some of the largest centres without rail access were (and are) Kaitaia, Taupo and Queenstown.  The 30-mile limit (50km) was extended to 40 miles in 1961, reflecting improvements in road and truck technology, and the shift of the rail network from steam to diesel traction, indicative of the inefficiencies of rail handling short freight movements. This saw some lines close not long after.  However, by 1961 exemptions based on types of goods were also being introduced.  Early exemptions included household removals and livestock, and the list of exemptions would grow over the subsequent twenty years. 

In 1969 US consultants Wilbur Smith & Associates published a comprehensive review of transport policy in New Zealand and recommended removal of the distance limit, but only if road user charging was introduced concurrently.  In 1978 this partly happened, when the limit was increased to 150km and Road User Charges were introduced for all heavy vehicles (over 3.5 tonnes gross vehicle weight) to recover the costs imposed by higher weight vehicles on the road network.  The shift to the 150km limit saw NZR abandon multiple branch lines almost overnight (see Methven, Waiau, Tuatapere), but it was only a short reprieve.  

After the Railways Department was restructured into a business as the NZ Railways Corporation from 1 April 1982, the then Muldoon Government proceeded to remove remaining distance limits on road freight.  The article below reports both on the merging of Trailways and ASC Flowers trucking companies. 

It also noted the curious way deregulation was implemented. Trucking operators had to buy licences based on capacity to operate further than 150km. This requirement was phased out over three years. 100,000 distance permits had been printed to be displayed in trucks.  Licences were available at Post Offices and MoT offices (when there were many of these).  The final stage was the abolition of quantitative licensing in 1984, replaced with qualitative licensing. Quantitative licensing meant that new trucking operators would have to demonstrate demand for their services due to insufficient capacity provided by existing operators and NZR.  Qualitative licensing simply meant that a trucking operator only needed to prove it met basic legal standards around safety and competence.

Restructuring - Coopers & Lybrand report damns main trunk electrification and writing off of NZR debt

This series of articles covers the restructuring of NZRC from 1985 through to 1990, specifically:

• NZRC announcing a loss for the 1985 financial year but predicting profitability in the 1990s, including a description of a wide range of restructuring measures following the Booz Allen report
• Coopers & Lybrand report in 1987 focused on the economics of North Island Main Trunk electrification, but also what else NZRC would need to do to become financially viable
• Agreement with unions to have single person crewing of most freight trains (removing locomotive assistants)
• 1989 article on review of governance of NZRC (which resulted in all of the non-land assets being transferred into a full-fledged SOE - NZ Rail Ltd) and disposal of non-core assets
• 1989 article on the possibility that some NZRC business units could be sold
• 1989 article on the $0.5b loss of NZRC, primarily due to writing off asset values, redundancy costs and interest on debt
• Government writing off $360m of NZRC debt for the cost of the North Island Main Trunk electrification.
• Government writing off the remainder of the $1.1b of debt as part of the process to convert NZRC into a state-owned enterprise. This debt was considered to be due to the cost of restructuring including redundancies.

Key points from the articles include:

• NZRC made a profit of $24m in 1983, but lost $20m in 1985 (this is after "social services subsidies" from government to cover losses for commuter passenger rail and bus services, long distance passenger rail services and marginal branch lines for freight)
• In 1985 NZRC believed it would be returning dividends to shareholders within five years
• 130 "repositioning projects" existed in 1985 to restructure the business
• Deregulation of land transport along with becoming a Corporation had had a traumatic effect on NZRC as it was simply not responsive enough to changes in demand from customers or in responding to competition more generally. "Inefficiency was built into the system". 
• In 1987 Coopers & Lybrand suggested some lines would need to close, RUC would need to increase and NZRC would need a major capital injection if it were to survive
• Coopers & Lybrand said the North Island Main Trunk electrification project should not have proceeded and would lose NZRC $100m over 35 years (even if electricity were free, it would still lose $76m over 35 years).  The main reasons being that deregulation of land transport had reduced demand below levels needed to justify the project, and forecasts that oil prices would rise sharply compared to electricity were wrong (oil prices having dropped 50% since the decision to proceed with the project had been made).
• Coopers & Lybrand also noted that while NZRC had responded to the challenges of reducing costs and becoming more competitive, it needed to do more.  This included having stronger drawgear to enable longer trains and to concentrate on markets where rail can be most competitive, such as haulage of containers.  
• In 1987, Minister of Railways Richard Prebble asked Cabinet for NZRC to get a $400m capital injection (this was subsequently approved for the write-off of debt incurred for the main trunk electrification
• North Island Main Trunk electrification was estimated to cost $337m in total
• NZRC lost $0.148b in the 1987 financial year, primarily due to debt servicing costs
•  NZRC lost $0.57b in the 1989 financial year, although it was only an operating loss of around $41m for the previous 15 months.
• Average train size had increased 20% between 1983 and 1989
• tonne-km of freight moved per staff member had increased 94% between 1983 and 1989
• Staff numbers had been cut 60% between 1983 and 1989

Booz Allen Hamilton report recommends major reforms to how NZ Railways Corporation operates

In 1984, the international management consulting firm Booz Allen Hamilton (BAH) released a comprehensive report on the financial, operational, governance and capital position of the New Zealand Railways Corporation. The report was commissioned to identify what NZRC needed to do to respond effectively to the deregulation of land transport (removal of the 150km limit of competition between rail and road).  It compared NZRC to other railways globally and modelled various scenarios as to what it would take to make NZRC financially self-supporting (independent from subsidies for urban public transport operations).  The recommendations were far reaching.  The article below contains some major points from the report including NZRC's response to the report.  At the time NZRC had 19 975 staff (Kiwirail has 4 500 staff today).

The BAH report was a groundbreaking study that informed the transformation of NZRC in the following years, more detail of the report will be published in a later post, but this article reported on the findings in early 1984 (this was in the final months of the Muldoon Government, but the Lange Government allowed NZRC to proceed with the recommendations as it saw fit). 

The key motivation was to survive intense competition particularly from road freight, but also interisland ferry services.  

 Key points were:

- Staff to be cut by over 6000 over five years, of which around 500 a year will be through natural attrition (BAH recommended 8000 be cut)

- Guards vans expected to be removed from trains along with locomotive assistants (the latter cost $20m a year essentially to provide train drivers with a companion), reducing staffing of most freight trains from three to one (three being a legacy of the steam age)

- Train lengths to be increased (noting train lengths in NZ are relatively modest by global standards) with increased drawgear (coupling) capacity, including introduction of automatic couplers (most couplers at the time needed manual hooking - unhooking adding considerable costs to shunting)

- At least one of the five workshops to close (BAH recommended two, ultimately three were closed).  Although employees were hard working in workshops, work methods and machinery used were antiquated and labour intensive

- Ferries to be staffed on a volume-variable basis, whereby staffing was based on need due to demand, rather than the same staff regardless of numbers of passengers, rail and road vehicles per crossing.  Ferries performed well but were generally over-staffed and had poor cost control

- Road Services bus operations needed to be better co-ordinated with rail.  Long distance coaches were substandard in terms of reliability, performance and passenger amenity. Curiously the consultants said personnel were "unusually friendly and helpful" (which may reflect culture)

- Restructuring into business units, away from input based units. Three units were freight, passenger and property. Previous structure had separate divisions for locomotives, rolling stock, track infrastructure, stations, ferries, Road Services and catering.  Freight will be responsible for infrastructure and ferries. Passenger will include Road Services and catering. 

- Consolidation of freight stations (significantly reducing the number of stations which will handle freight into fewer major customer or regional centres)

- Increasing weekend operations (for better utilisation of rolling stock) 

- Modernising the wagon fleet (bogie wagons to replace 4-wheeled wagons)

- Options for long distance passenger trains were presented, with the preferred one being for main trunk trains to be upgraded by refurbishing the mothballed Silverstar to be a single daylight and overnight train (half sleeper/half seated) for Auckland-Wellington to replace Northerner and Silverfern services, with the Silverfern railcars to operate Picton-Christchurch-Dunedin. No comment was made of regional services, but it was expected no service would operate to Invercargill.  Ultimately, the Lange Government did not fund the Silverstar refurbishment, and instead provided a capital injection for NZRC to restructure long distance passenger rail to be financially sustainable.

- New Deputy General Manager to be Bob Henare. 

- NZRC's 1984 financial year to end in a modest profit but under $24m, which for assets worth around $1b was not seen as sufficient

- Overall revenues were expected to decline 25% due to competition.

- Condition of plant (infrastructure and rolling stock) was considered good, but plant replacement was considerably over levels needed

- Unions exercised significant power over operational policy.

Note: I worked for Booz Allen Hamilton and its then successor firm outside the US, Booz & Co, from 2005 until 2013. Booz & Co was purchased by PWC, and subsequently Booz Allen Hamilton expanded internationally once more.