Stop Taking the Mickey

Cullen, Greenism and Waste

So, the Government has bought a train set. What we see on display here is the wont of all socialists to plan, arrange and control. Out of it come a cluster of useful and instructive lessons.

Firstly, we see how modern greenism and a planned economy fit together like hand and glove. The former requires the latter. To “save the planet” environmentally, the economy needs to be steered in a certain direction—which inevitably requires centralised planning, state planning—which, in order to execute the plan, requires state ownership and increasing state control over the means of production (capital and labour). It is the only way to “make” the economy move in a certain direction.

This is not just hinted at in the re-nationalisation of rail in New Zealand—it has been overt. It has been trumpeted as one of the justifications for buying the trains. The Minister of Finance, Dr Michael Cullen, has made reference to “strategic” reasons when justifying the purchase. Whenever governments start using the “s” word, state planning of the economy is moving up rapidly from the rear. We need to have the government owning rail to make New Zealand more “environmentally sustainable”, to reduce the “carbon footprint” of our transport system, and to extract greater fuel efficiency, we have been told.

Moreover, the political ideologues want to create an integrated transport system (road, rail, air, and sea). What they mean by this is a centrally planned transport system. Once again, Cullen has been explicit about this. He wants to “orchestrate a major strategic (there's that word again) shift in the country's transport architecture.” (NZ Herald, 2 July 2008)

Centrally (bureaucratically and politically) planned transport systems fail abysmally—they always have, and this will be no exception. Why do it then? Why is the government being so stubbornly foolish? Why did Cullen deliberately sideline his own Treasury department in buying the train set? Because greenism provides a moral imperative that overrides all previous failures, wastage, suffering and ruination of lives. Greenism requires an increasingly planned economy. It's provides the excuse that Cullen and his colleagues have always wanted. Again, to his credit, Cullen has been quite overt about this. He has candidly stated on more than one occasion that he and his colleagues are socialists and that we should expect them to act accordingly.

Marxism, as a socialist variant, did not explicitly call for central economic planning. It's just that it could not achieve its aims without it. So Marxist socialism, Fabian socialism, communist socialism, democratic socialism—they all ended up engaging in central economic planning. Now greenism is the new socialism. As night follows day, suddenly the government moves back to the future: central economic planning is not only back on the menu, it is being served up at the tables.

To the extent greenism inevitably requires a planned economy it represents “new age” socialism. Now, most people are vaguely aware that socialism as an economic ideology lost its gloss in the previous century. Actually, it proved to be a dismal failure. Those economies which applied its theories ended up impoverishing its people. But socialists, like old soldiers, do not die. Unfortunately, neither do they fade away. Rather, they put on new clothes and come bursting forth again.

Marxist socialism proved an abject failure, resulting in the deaths and suffering of millions. Greenist socialism will generate results that are exactly the same.

Secondly, Cullen has already fallen into the inevitable trap awaiting all central economic planners. They are unable to measure the true cost or price of capital. For socialists and central planners, capital has no economic cost. It comes out of the pockets of taxpayers. To be sure, this has (in the end) a political cost, but when government (immorally expropriated) money is applied to businesses, as is inevitably the case in a planned economy, it has no economic price. Money is free for the central planner. Need more money?—well, just up the taxes or print more.

In a sane economy, the price of capital is the return which needs to be generated on every invested dollar, in order to persuade people with savings to invest. Otherwise, they will keep their capital to themselves, thank you very much. Central planners don't have to face this economic hurdle. So they end up wasting large quantities of other people's money. Your money. They steal and squander. Once again, this shameful, wasteful reality is already evident in the act of purchasing and re-nationalising the rail system. (By the way, it is more than a little ironic that greenist socialism, which purports to oppose waste and needless consumption, is perfectly relaxed consuming, wasting and squandering millions of dollars of other people's money.)

The final price of the rail business is literally incalculable. But that has not deterred the central planners. Why? Because for them capital has no cost. It is simply not a factor worthy of consideration by central planners. For them, there are bigger fish to fry. Your fish.

The former owner, Toll Holdings was not investing substantially in the rail business. It was busy extracting profits. Effectively, Toll was running the business into the ground. Anyone beyond primary school age knows that if a business is to continue as a going concern it has to invest capital continually to maintain its current operations. Plant, equipment, buildings, trains wear out. They have to be maintained, then eventually replaced with new plant. Toll was not investing even to maintain the business. Why? Because Toll worked out that given the real cost of capital it simply could not generate an adequate return out of the business going forward.

But the central planning socialists had other ideas. So they paid a premium price for a run down business. Then on top of this purchase price ($690m, plus $120m of debt) they will have to invest fresh capital to ensure that the train set becomes an “ongoing concern”. How much? Firstly, let's get the actual purchase cost right. In addition to the purchase price above, by buying Toll's business, the government will lose $340m of payments over ten years which Toll had to pay in order to “rent” the rail track system. The government will have to find that money from somewhere else. As Fran O'Sullivan has pointed out in the NZ Herald, the actual cost before any new investment to get the business back to a minimum operational level, is actually well over $1bn. Wait, no problem. We are central planning socialists, and capital is no object.

Now, KiwiRail's hand is already going out to the central planners for more money. And Cullen has promised to provide it. So, chalk up another odd billion. What's money amongst friends? But the economic reality remains: if Toll could not get an economic return out of necessary on-going capital investment, will the central planners be able to? No. Not a chance.

Rail is a bad business. Its economics are parlous at best—anywhere in the world. It tends to work better in vast countries that require massive volumes of long haul, raw material-type freight between huge population centres or export/import ports. Even then, the amount of investment required in rail tracks and rolling stock, makes the business highly risky. But nature in New Zealand stacks everything against rail. It is a long narrow country, with very few larger population centres, which on world scales are very very small. It is divided by the Cook Strait, complicating surface transport. Its terrain is both mountainous and extremely varied.

One cannot imagine our economy producing huge volumes of raw materials (timber, milk powder, caseine, frozen meat) that need to be transported from Auckland to Wellington. Rather, the materials we produce in huge volumes need to move to ports. For most large volume, raw material export producers, the nearest port is no more than a hundred kilometers away. Rail just does not cut it. It cannot cut it.

Meanwhile, the business is hugely capital intensive. Worse, the competitive pressures it faces are enormous and unrelenting. Trucks, courier companies, and aircraft are fast, efficient, and can operate in a co-ordinated fashion that brings door to door service to every hamlet in the country. The breadth of freight types they handle is prodigious. And, apart from airlines, they are not nearly as capital intensive as rail.

The upshot? Rail in New Zealand is an elitist, central planner's dream.

Here is the final kicker. Businesses and managements, like individuals, are adaptive. If capital in KiwiRail is cheap and there is no requirement to generate a commercial rate of return on that capital, the business will act rationally and will treat it as if it were cheap (which for them it is). It will adjust and adapt to produce a business operation and culture that is both inefficient and wasteful. To keep it afloat will require ever more injections of fresh funds and capital. Your funds. Your capital.

What should the incoming government do? Simple really.

1. Reject the ideology of greenist socialist central economic planning.

2. Write the investment down to the current market price if it were put up for sale in the open market today.

3. Ensure that the tax payer gets a return on the amount of capital that remains invested after the inevitable write-down—which would effectively quantify the waste and squandering of capital to date.

4. Refuse investment of any further public capital unless that investment is strictly on arms-length commercial terms.

5. Require the business to make a profit that represents the current market return on invested capital, adjusted for risk.

6. Refuse any cross subsidy from competitor transport and freight businesses. (That is don't use road-user charges to subsidise rail.) Robbing Peter to pay Paul disguises inefficiency and waste.

7. Hold the Board to account for the achievement of these commercial objectives.

8. Let the Board make the commercial decision as to whether they can justify additional investment capital, or whether the prudent thing to do is to run the business into the ground.

We suspect they will end up choosing the latter.

And, oh, one last piece of advice. Fire the new chairman. Mr Bolger, whatever his accomplishments, has never been responsible for operating a private business in a competitive environment. He farmed during the days of huge public subsidies to that sector. He has never had to operate a business under the discipline facing the true cost of capital. His political experience is a huge impediment: he cut his teeth under Muldoon's Think Big lunacy—the ultimate central planning exercise that, as is always the case, resulted in massive losses and waste. He would simply not have the requisite qualifications or experience for the job if KiwiRail were to be run as set out above.

On the other hand, he has precisely the experience that will make him a compliant Chairman if KiwiRail is left as a greenist central planning socialist dream.

At least we can credit Cullen with seeing a reflection of himself when he cast his rheumy eye upon one James Bolger.