So its official – our government has repurchased the rail network (blog commentary here, here, and here). Now such a purchase only makes sense if there are positive externalities from rail that the market was not accounting for (or if the horizon of the company was too short-term, but I don’t get that feeling). These externalities all stem from rail being a substitute to other forms of transport, namely road transport. This is covered in detail in this article by Andrew Gawith.
A list of the potential positive impacts are:
- Rail has lower carbon emissions,
- Industry has already sunk infrastructure around rail lines (namely dairy) so it allows them to increase capacity,
- Rail is less congested than the roads,
- Network effects.
The first argument shouldn’t matter as we are effectively pricing carbon with the emissions trading scheme, implying that the carbon emission choice should be internalized by firms (as the rail network did exist privately).
The second argument shows an unfortunate cost – however, it may be more effect to subsidise the movement of effected factories, or the decentralization of say milk production, then to run a inefficient rail system – cost benefit analysis is required here.
The third argument is too indirect. Urban rail schemes may be useful at dealing with congestion by providing substitutes. However, the rail line running through Otorohanga won’t have much impact! The scheme could be more targeted than this to achieve this goal at a lower cost.
The final argument is the network impact argument – I find this one not compelling for New Zealand as we are a small thin country. Given that we are a small thin country with a low population, there seems to be more scope for investment in sea transport around our coast, and as we have a small population road transport to these ports seems like the most effective way of getting it there. The government agrees with this and is planning to invest in sea transport – something that will compete directly with their new rail line.
I’m not sure whether this purchase was based on any effective cost-benefit analysis, as it seems quite sketchy to me. Ultimately, if the government uses any of the fluffy arguments provided above to justify the network, we have worked out some counter-arguments.
Hopefully, given this the government will show us some stunning cost benefit analysis that justifies their decision, rather than the sort of fluff that has been provided both by government and other parties on other network investments (eg NZI’s weightless economy jazz).