The Railway buy back decision and economic sense

Over at the Standard, Steve Pierson points out a TV1 poll that shows that the majority of New Zealander’s are happy with the decision to buy back the railroad at a cost of over $1bn. That is cool, if society is happy with doing something and has full knowledge of the costs and benefits, then it is the right decision. Ultimately, the purpose of government is to maximise social welfare, and as long as the welfare cost to the 24% who don’t like the decision is less than the welfare benefit gained by the 68% of people that are for the decision then this appears like a fair tact to take.

However, I was a bit confused about this comment:

The Government has acted in a way that makes economic and environmental sense. The only opposition has been from the ‘free market is always right’ lobby and National.


I have stated before that the direct economic case for a rail buyback is difficult to make (insofar as it require some hefty normative assumptions), and other economists have also stated that in an a strictly monetary sense, this is likely to be a bad idea (Andrew Gawith, David Grimmond).

In all truth, the government’s policy may not make economic and environmental sense – insofar as the funds could be used to achieve both goals in better ways. However, if the public realises this, and is still for buying back the Railways – it is the right thing to do. I suspect many people might disagree with me here, but the will of the people, when they are fully informed, is what the government must satisfy.

Of course, maybe the public hasn’t been fully informed – in which case, this poll tells us nothing 🙂

  • Kimble

    The public is only very rarely fully informed, so anyone that is wanting an honest debate on issues such as this should never claim that a poll makes a case one way or the other.

    Polls can be used to determine whether the public likes something (or not), what actions they are likely to take (and why), and also gauge how much they actualy know (or don’t).

    To use polls other ways is cheap thinking at best and, as in this particular case, results in nothing but worthless “spin”.

  • Hi Kimble,

    I agree that I don’t think the public is fully informed on the Railway issue, however who knows, they might be in which case Labour was right to buy it back 😛

    I’d really like to know why people think buying it back was a good idea, and then I would like to look at those thoughts and see if they stack up.

  • goonix

    The poll merely demonstrates the stupidity of the average person and has nothing at all to do with ‘economic and environmental sense’.

  • adamsmith1922

    My concern here is the nature of the question, for example:-

    A number of years ago a polling company ran a poll in the UK which asked do you support the government spending more money on the National health Service? Predictably, the responses had a majority ‘Yes ‘ answer.

    Then people were asked a second question, something along the lines of “would you pay an extra 5 pounds a week in tax to enable that to happen”, equally predictably the answers were very different.

    The problem is that a billion dollars is such an abstract sum that I doubt any of us see the question as relating to ourselves. In that sense it is the scenario of ‘gummint’ spending, yet many in NZ, and elsewhere do not seem to grasp that ‘gummint’ spends their money, it is not the ‘gummint’s’ from some strange money tree.

    Therefore, I suggest that if the question was say – The Government will need to reduce the promised tax cuts by $20 per week to pay for investment in KiwiRail, then the answer may well be different. The sums are no longer abstract and are related to a reality we can all grasp.

    Partly that is why governments of whatever political colour like polls based around ‘big picture’ generalities.

    Further, and I am not certain as yet that I fully understand this, some how the Government has created a climate where increasingly private enterprise is in many sense seen as somehow inimical to the individual.

    In the case of KiwiRail this has been accompanied by the spectre of taking it away from nasty foreigners.

    But the most intriguing part of the whole affair is that given the current reach and range of the rail network for the average individual worker it is unlikely to be able to assist their travel to work, and for longer distances the track gauge would appear to mitigate against train as an alternative to road or plane.

    In Europe the train can be competitive because of distance, network, speed and frequency. This is not the case here. Yet people have been persuaded to think this is a good thing!

    It will be very interesting to see whether people think the same in 2 or 3 years time.

  • I’m afraid I’m think that current public poll methodology is, at the very least, grossly inaccurate. essentially it relies on an assumption that the people you get on a listed landline phone and who are willing to answer questions are at least partially representative of the population.

    After doing canvassing for a couple of decades, I’d say that most of the assumptions are getting increasingly unrelated to reality. It ignores the increasing disparity about listed landlines – about 35% by household in parts of south auckland and about 85% in the north shore. Perhaps you should look at economics of prepaid cellphones?

    Anyway with that rant out of the way, I suspect that most of the reason for buying back the rail system is to do with managing forward risk. Such as what is the risk that oil will slowly rise to (say) 10x its current cost over the next 30 years, and no equivalent fuel source is efficient enough to replace it. Personally I’d rate that probability quite high based on my science background.

    Rail has a proven track record as being quite efficient at moving large numbers of people and goods on quite low energy fuel sources. It also has a very high and long cost for installing the required infrastructure. Just look back into somewhere like papers past to see the time it took here last time. It seems sensible to me to manage the risks in future energy by maintaining a viable albeit, possibly currently uneconomic, transport system.

    Isn’t economics at least partially about looking at risk?

  • John

    I think you have to factor in Faye-Richewhite etc. In the public mind anything privatised gets large chunks bitten out of it.

  • Hi guys, thanks for the comments.

    “Isn’t economics at least partially about looking at risk?”

    Yes, but government isn’t the only institution in the economy that is forward looking – businesses are as well.

    The only reason it would be preferable to have government ownership ahead of private ownership would be if we believe there is some social benefit that is not taken account of by the private firm. For example, in the case of risk we might believe that private firms discount the future more heavily than society as a whole does – in which case some form of public intervention could be beneficial.

    However, in the case of rail I suspect we would have been better off with a split – sell the urban networks to government, a PPP, or some private firm, and sell bits of the main truck line to interested businesses (eg Fonterra). That way we provide industry with security of supply and can also do whatever we want with the urban lines.

    Furthermore we have to ask – is buying back the railways really a good method of managing uncertainty (which is what we actually face – risk is quantifiable, uncertainty is not). Now if the government answered this question before the sale buy publishing some reports thats fine – but did the government even do any full costings? We can’t just appeal to potential risks as a reason for doing something – we have to show it is better than alternatives!

  • Mark

    I don’t think that social benefit is the only reason for government privatisation.

    There are several factors where free market principles and private ownership let down the consumer quite badly. Two that spring to mind are Monopolies and Core Infrastructure.

    Part of the natural efficiency of the market is that competing forces will force each other to be honest. But this breaks down when one company finds itself in the position of having a markest monoploy.
    http://en.wikipedia.org/wiki/Monopoly

    The owner of the monopoly is under no compunction to compete with others and deliver efficient services. In those cases I think that an inefficient government organisation delivers better services than an ineffecient private provider.

    The second case is Core Infrastructure. Part of what keeps the market honest is that the companies which make poor decisions go out of business. But we as a country cannot afford to let our banks or power companies or national airline simply go under. This means that private companies can assume a much higher level of risk (and correspondingly get higher returns) because if they ever swing for the fences and miss then the government will bail them out with corporate welfare. Witness Fannie Mae and Freddie Mac
    http://www.marketoracle.co.uk/Article4063.html

    I think that in both these examples the ‘free market’ is less efficient than a regulated state owned equivalent.

  • Hi Mark,

    Those were points I made in the preceding discussion on the economics of the railway:

    http://tvhe.wordpress.com/2008/05/06/why-is-the-nz-government-buying-the-rail-lines/

    However, it is far from conclusive that buying back the trains was a good idea from a strictly economic growth focus