Climate change, diesel trains, and flawed logic on the main trunk line

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by Roger Blakeley, Bob Norman, Alex Gray and Keith Flinders
Leaked documents show that KiwiRail’s decision last December to replace electric locomotives on the electrified section of the North Island Main Trunk (NIMT) with diesel locomotives was based on flawed logic and justified by misleading information.

Under the Official Information Act (OIA)1982, we applied in March to the Minister of Transport for the business case on which the KiwiRail decision was based. In response, we received a heavily redacted version of the Better Business Case dated 21 December 2016.

Recently we received a leaked copy of the unredacted version of that business case. It is revealing.

We are releasing this information because the decision will exacerbate climate change. It will result in an extra 12,000 tonnes of carbon dioxide per year being released into the atmosphere – a giant step backwards when New Zealand has committed to reduce its greenhouse gas emissions under the 2015 Paris Climate Change Agreement.

The decision does not stand up to scrutiny, now that we have the redacted sections of the business case.

1.The KiwiRail Decision

The KiwiRail better business case states that it considered four options: 1) electronic control system upgrade to the electric fleet, 2) second-hand electric locomotives, 3) new electric locomotives, and 4) replace electric locomotives with diesels. The first two options eliminated were the upgrade of the electric fleet electronic control system ($10m cost) and purchase of second-hand electric locomotives (a fraction of the cost of new electric locomotives). These were the two lowest-cost options. They were rejected because: “they did not meet the business objectives of simplifying the operating model and standardising the asset fleet”. Long-run Net Present Value (NPV) cost cash flow was calculated for the two remaining options. The diesels were assessed to have a lower cost, and the decision was made to replace the electric locomotives with new diesel locomotives.

2. What the Leaked Documents told us

a). Delays due to changing locomotives at Te Rapa and Palmerston North

KiwiRail said that a reason for the switch from electric locomotives to diesels was to “improve reliability and efficiency for KiwiRail’s customers”. Reducing delays caused by switching locomotives from diesel to electric and back again at Te Rapa and Palmerston North was an objective. The scheduled delays are for 40 minutes at each location. The redacted sections of the business case included four trials in July 2016, which found that the delay for each locomotive change was on average 5 minutes, rather than the 40 minutes scheduled. The average 5-minute delay at both Te Rapa and Palmerston North is negated by the faster speed of electric locomotives on the electrified section of the NIMT, which makes up 10 to 20 minutes. Therefore, the decision to switch from electric locomotives to diesels does not save time.

b). Assessment of actions taken to resolve criticisms in the WorleyParsons Report

KiwiRail commissioned WorleyParsons (WP) to conduct a peer review of a late-2015 board paper and cost model. It identified serious flaws in the Board paper. The leaking of their peer review report, and another internal report, was referred to in a TV1 6pm News item on 12 May:

KiwiRail says the reports were written in 2015 – a year before it made a final decision. Chief Executive Peter Reidy says there were three or four reviews. “It matured all the way through, so the initial information that we were looking at at the start looked very different towards the end,” he said. “It’s not our job to cook the books – we are very comfortable that this is the right decision for our business”

Our analysis shows that many of the flaws identified by WP in their 2015 report on the board paper do not appear to have been corrected in the final better business case. We checked that against the unredacted version. Three examples are:

(Example 1) WP said: “The overall performance of the DL project has been, by any rational industry measure, extraordinarily poor. lt is remarkable that additional DL locomotives could be recommended as the solution to a locomotive reliability problem without first recognizing this state of affairs, and secondly, conclusively demonstrating that all problems, current and potentially arising have been identified and satisfactorily managed”.

Our Comment: In the redacted sections, KiwiRail acknowledged that performance was not satisfactory in the first batch of diesel locomotives, but said a performance-based contract (with financial penalties) had been applied to all future purchases. Mean Distance Between Failures (MDBF) rates for the DL locomotives are still lower than expected.

(Example 2) WP said: “the discount rate for NPV of 8.9% is higher than the NZ Treasury 10-year bond rate of about 3.5% currently (risk free rate, including inflation) (www.rbnz.govt.nz/statistics/tables/b2/)”. WP continued: “It is presumed that this rate includes project risk premium. The basis for the rate used should be stated”.

Our comment: The effect of a very high discount rate in the NPV calculation is advantageous to the new diesels option (lower capital costs) compared with the new electrics option (lower operating and maintenance costs), because it heavily discounts future costs. The better business case of 21 December 2016 did not state either the rate used or its basis, despite the recommendation by WorleyParsons. Treasury’s recommendation for a NPV calculation for long durations is 6%, not 8.9%.

(Example 3) WP said: “It does appear however that the Board paper is biased towards the DL option at a number of levels.

Our comment: Based on our scrutiny of the unredacted business case, the bias still appears to exist in the final better business case.

c) KiwiRail Internal Review of Financial Modelling in 2015

In the December 2016 better business case, the diesel option was calculated to have a NPV cost range of $204m to $236m (lower and upper bounds, compared to the electric option, which had a range of $242m to $310m.

However, a leaked (early 2017) KiwiRail internal review critiqued the financial modelling that informed the Board paper at the end of 2015. It said that the financial modelling under-represented the cost of the diesel option and over-represented the cost of the electric option. Based on the corrected model, that review assessed the cost of the electric option as $230m cheaper than the diesel option. The final better business case appears to have ignored that internal review.

3. Dual-Mode Locomotive Option

In our opinion piece for The Dominion Post (published 21 March) headed “KiwiRail’s missing option for NI trunk line”, we observed that KiwiRail did not consider the option of dual-mode electric-diesel locomotives – a serious omission. This option would solve the concerns about delays in switching locomotives at Te Rapa and Palmerston North.The benefits of shorter journey times, with a mode share shift from road freight to rail freight, would still have been achieved. The retrograde step of increasing greenhouse gas emissions, by using diesel rather than electric locomotives over the electrified section of NIMT, would be avoided. Although dual-mode electric-diesel locomotives have higher capital costs, they have lower operating and maintenance costs, leading to lower ‘whole of life’ costs.

The Minister of State Owned Enterprises, in response to a written question from Megan Woods, MP (24 May 2017), said: “KiwiRail advises me that it did consider dual-mode locomotives as a possible option to be considered in the business case. However, KiwiRail’s assessment was that dual-mode locomotives would be too heavy and too long for New Zealand’s rail infrastructure and KiwiRail set aside this option quite early in the process as being physically impractical in New Zealand”.

We advised the Minister that developments in the design and manufacture of dual-mode locomotives over the last two years make KiwiRail’s assessment out of date. The Swiss locomotive manufacturer Stadler confirmed in writing (14 June) that recent designs of dual-mode locomotives have an axle weight of 16 tonnes (within the acceptable axle weight limit of 18 tonnes), and they would be suitable on the curves of the NIMT route. We suggested that KiwiRail review their earlier decision, recognising that these locomotive design developments are in their commercial interests, and because reduction of greenhouse gas emissions is in the national interest.

4. Climate Change Impacts

KiwiRail’s decision will increase New Zealand’s greenhouse gas emissions – despite New Zealand’s commitment to a reduction in greeenhouse gas emissions of 30 per cent below 2005 levels by 2030, under the 2015 Paris Agreement on Climate Change. We do not accept KiwiRail’s argument that the decision is justified because “more reliable and efficient services” will achieve a mode-share shift from road to rail freight. The same reliability, efficiency, reduction in travel time, and corresponding mode-share shift would be achieved by new electric locomotives or dual-mode locomotives travelling between Auckland and Wellington.

In New Zealand, 80% of electricity production is from renewable resources such as hydro or wind power, with a target of 90% renewables by 2025. Consequently, only a small proportion of electricity supply required for an electric locomotive fleet depends on burnng fossil fuels.

KiwiRail will burn an extra eight million litres of diesel per year using diesel locomotives on the electrified section of the NIMT. While we are being encouraged to shift to electric cars, KiwiRail is reverting to diesel rail.

Professor Ralph Sims of Massey University said “the rail network would generate 12,000 tones of carbon dioxide per year by de-electrifying – more than cancelling out the 9,000 tones saved by using 3000 electric cars”.

5. Towards Full Electrification of the NIMT

The KiwiRail decision involves retaining the electrified infrastructure required for electric trains on the NIMT, and keeping the lines energised, at an estimated cost ot $2m – 3m per year. This funding could be at risk from future budget cuts, which could jeopardise any future opportunity to electrify the whole NIMT.

KiwiRail estimate it would cost more than $1 billion to complete the electrification of the whole NIMT, and more than $4 billion to electrify the entire North Island network. An OIA release shows that these are extremely rough order costs. Our preliminary analysis is that the costs would be much less. A more rigorous analysis of fully electrifying the NIMT is warranted, to inform future consideration.

In Cabinet papers released under the OIA, Treasury reported that it had raised a number of questions and had asked for additional material from KiwiRail, which had not been provided in time for consideration in their report.

The options of a new electronic control system for the electric fleet, new electric locomotives or dual-mode locomotives would all potentially be part of a transition to a fully electrified NIMT. A first step could be electrification from Papakura to Te Rapa. This would also allow the extension of the EMU commuter service from Auckland to Hamilton.

6. Conclusion

The KiwiRail Board appears to have approved the diesel locomotive option from the 2016 better business case for five key reasons. We challenge each of them here:

1. Lower overall cost – not accepted by the KiwiRail internal review of November 2015, which said that the total cost of the new electric locomotive option is $230m cheaper than the new diesel option.

2. Reduced delays at Te Rapa and Palmerston North – the redacted sections of the business case record trials which showed on average a 5-minute delay for locomotive change at each terminal, rather than the 40 minutes scheduled. This is negated by the 10 – 20 minute speed advantage of electric locomotives over the electrified route.

3. Standardisation of fleet – yet KiwRail already has different diesel locomotives in the South Island. Air New Zealand matches the aircraft to the operational task to optimise their operation, using large, wide-body aircraft such as the Boeing 777 on long-haul flights; narrow-body Airbus A320 on domestic and short-haul international flights; and turbo-props to service regional markets. When using electric locomotives, KiwiRail currently operates a similar business model to Air NZ. The steep topography in the central North Island section of NIMT is covered by powerful electrics and the flatter country is served by the less powerful diesels..

4. Faster implementation time for DL locos – WorleyParsons’ 2015 peer review points to significantly less time than 4 years for completion of the electric locomotives’ upgrade programme, referring to a KiwiRail document that states 2.5 – 3 years for 17 electric locomotives. For a lesser number of electric locomotives, this period would be substantially reduced.

5. Greater reliability and efficiency – contradicted by WorleyParsons’ peer review: “The overall performance of the DL project has been, by any rational industry measure, extraordinarily poor”. Although KiwiRail has taken measures with the Chinese manufacturer to improve reliability, the redacted section of the better business case says “Mean Distance Between Failures (MDBF) rates for the DL locomotives are still lower than expected”.

7. Recommendation

We recommend that the KiwiRail Board reconsider its decision to replace electric locomotives with new diesels on the electrified section of NIMT. Upgrade of the electronic control system of the electric fleet would be the most cost-effective solution. If that is not acceptable, we recommend that the Board resolve to purchase new electric locomotives or dual-mode electric-diesel locomotives.

Dr Roger Blakeley is a former Secretary for the Environment. Bob Norman is a former Commissioner of Works. Alex Gray is a professional civil engineer and Senior Project Manager. Keith Flinders is an Electrical Services Consultant. Their article was first published on the Greater Auckland blog.

 

13 comments:

  1. Stop Trexit, 20. September 2017, 10:15

    Dr Roger Blakeley must use his elected position at GWRC to request a similar reconsideration of trolley bus retention and investment which would not only save CO2 emissions but would have positive health benefits for residents, businesses and pedestrians of Wellington city.

     
  2. Conn G, 20. September 2017, 10:57

    A repeated historical pattern in NZ: poor and disastrous planning with regards to infrastructure. We already have the overhead electrification – expand it and make it work. These cheap shortsighted bureaucratic decision makers need to be named and shamed as they never work in the long term best interests of NZ. They like to take the money though.

     
  3. Casey, 20. September 2017, 12:18

    Roger Blakeley, Sue Kedgley, and Daran Ponter are the only current GWRC councillors who have advocated for the retention of the trolley buses. The other 10, including chair Chis Laidlaw, want rid of the system no matter what the health and environmental costs are. One councilor wants the trolley buses gone on the basis that the overhead lines look ugly.

    Wellington City is being held hostage to the 8 councillors from the region who have got their new $500 million electric train system, whilst we suffer more air pollution that will get worse. From 1 November, sixty nine year old ex Auckland fume-belching diesel buses will complete the replacement of the trolley buses. Many are already in service.

     
  4. Stop Trexit, 20. September 2017, 12:50

    Casey: Well said! It’s time for WEXIT! Wellington to exit the GWRC so it can organise its own bus services for the good of Wellingtonians and planet earth. Just like the good old days before 1990 when Wellington City owned and ran our buses.

     
  5. Ross Clark, 20. September 2017, 22:30

    My take on this is that the Government (Treasury, probably the MoT as well) regard the railway network as a money pit and as a result will put in only the minimum to keep it functioning, if that. This view will almost certainly have been conveyed to the Board.

    Railways in New Zealand suffer from a lot of bad press – the case for the retention of the freight network needs to be made better, in terms of the external environmental benefits, ie keeping more trucks off the roads.

     
  6. Kerry, 21. September 2017, 8:11

    And why is it a money pit? It has been asset-stripped in private hands.

    When I was with the Ministry of Transport they were building up a collection of railway photos for use in reports and whatever. The photographer liked artistic shots along shiny railway tracks, and they clearly showed that the track was awful. In most years since, the rate of track renewal has been very low.

    What would the response be if a state highway was unsafe at speeds above 10 km/hr, as happened on the Cambridge Branch?

     
  7. Neil Douglas, 21. September 2017, 8:30

    Kerry, track ownership and maintenance reverted from private to public (Ontrack) 13 years ago back in 2004.

    Merchant bankers Fay Richwhite followed by rail enthusiast Ed Burkhardt from Wisconsin then Aussie Mr Little and Toll only owned the track from 1993-2004 a total of 11 years.

    So I think it is time to move on from blaming the private sector for the woes of today’s shonky track and overhead.

     
  8. Kerry, 21. September 2017, 16:20

    Neil

    OK, asset-stripped in private and later public hands.

    What state was it in in 1992?

     
  9. Ross Clark, 21. September 2017, 22:58

    Kerry, some points (from someone who was in Tranz Rail for much of its time as a private company):

    * Ed Burkhardt was a real rail enthusiast who had ambitious goals for the railway’s development. Between 1993 and 2000, Tranz Rail invested some $700m in the business, which was twice their profitability in that period. I suspect that some of this investment was catching up on deferred maintenance, but money for this was always pretty tight – not nearly enough coming in through the till, for one thing. They invested heavily in those years, but the investment did not pay for itself.

    * After 2000, it was clear that the business was not financially viable in the longer-term. Hence the failed attempts on Michael Beard’s watch to fix things. Toll came along, thinking they could retrieve the situation, and quickly found that they couldn’t. Although when they sold up, they kept the trucking part of the old Tranz Rail business – significantly, in my view.

    * The road network is seen by the Government and MoT as financially standalone (except for the RONS, and even with a roading hat on, I would not be in particular favour of them), because their funding is “dedicated” (petrol tax, vehicle registration, and road user charges) – in other words, straight from the users. Rail is not nearly in as fortunate a position.

     
  10. Ellie, 22. September 2017, 15:05

    We need a change of Government and Council; with the current rate of sea level rise, I am told that Lyall Bay could be underwater in 25 years! Just to make it personal. And did anyone read the article on plastic pollution ‘on tap’ in the International Guardian this week. A perfect storm of issues.

     
  11. Eric, 22. September 2017, 15:54

    I for one would be intrigued to compare the redacted report with the leaked one. There is a saying that a half truth is a full lie, and if the redactions cannot be justified on the grounds of national security what was the legitimate justification for them?

     
  12. Roger Blakeley, 23. September 2017, 16:17

    I have compared line-by-line the redacted report with the leaked one. Some of the redactions could be justified under OIA 1982 s9(2)(b)(ii) commercial confidentiality. Most of the redactions do not appear justifiable under s9 or other sections of the OIA 1982.

     
  13. Concerned Wellingtonian, 24. September 2017, 8:45

    Another redacted report is the version of the Shelly Bay report which the Ombudsman forced WCC to release after WCC had discussed it in Public-Excluded three months earlier. What are the hidden truths? We deserve to know before a decision is made to proceed with what the Mayor calls a “master-plan.”
    Another point involves the way in which leading politicians connive with officers to put so-called “commercially sensitive” material into reports which should be discussed publicly. Roger Blakeley’s comments on the redactions in the KiwiRail rreport show how important it is to make the facts public and not to fiddle them.

     

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