Closure of the entire KiwiRail freight network was an option if the company didn't get more public funding earlier this year. Photo / Andrew Bonallack
Closure of the entire KiwiRail freight network was an option if the company didn't get more public funding earlier this year. Photo / Andrew Bonallack

Closure of the entire KiwiRail freight network was an option if the company didn't get more public funding earlier this year.

Bill English, Simon Bridges and Todd McClay presented a paper to Cabinet earlier this year arguing for continued financial support of KiwiRail, but outlined big challenges KiwiRail faced.

The finance, transport and state-owned enterprises ministers said a nine-month KiwiRail review showed the rail business faced two main options.

One was to retain most of the network and cut back unprofitable services on the network fringes.

The second option was to "close most or all of the freight network" with the option of retaining the upper North Island section only.

The northern section, Auckland to Hamilton to Tauranga, carried the biggest freight volumes and covered most of the network's costs.

Passenger rail services in Auckland and Wellington were never in doubt.

Today, a spokesman for Finance Minister Bill English said the Government was "committed to a national rail network, but ongoing subsidies of around $200 million a year are unsustainable".

He said at this year's budget, the Government set aside $400 million for KiwiRail over the next two years.

"The funding provided at the Budget gives the KiwiRail board a two-year window to identify savings and reduce the level of ongoing Crown funding required," he added.

The Ministry of Transport, under Mr Bridges, was at odds with Treasury over some funding options.

"The ministry does not support the Treasury view that one-year funding be provided to KiwiRail whilst a public process is undertaken.

"The ministry's view is that a minimum of three years' funding be provided," the newly-released Cabinet paper stated.

Treasury said if a partial or total closure of freight services did not go ahead, it would support a three-year funding commitment for KiwiRail.

This commitment would be made on the expectation KiwiRail boosted productivity and efficiency over those three years to reduce Crown funding.

"Treasury believes there is a net economic cost of continuing to fund rail at the levels required. The net social cost is estimated at between $55 million and $170 million per annum based on a national cost benefit analysis," the paper said.

Treasury said the rail business was costing taxpayers a fortune.

"Reasonable and achievable assumptions have been applied by KiwiRail in assessing its future prospects, which have resulted in a much greater and ongoing financial burden for the Crown than what has previously been presented ... in the event that the business declines, rather than achieves the growth it expects to, the financial burden to the Crown could be higher than what KiwiRail is forecasting."

But the ministers said KiwiRail understood its own business better after the nine-month review.

The Cabinet paper acknowledged KiwiRail faced some tough challenges in recent years.

"Although it is normal for businesses to have to deal with negative external problems, the magnitude and extent of those which affected KiwiRail have arguably been greater than expected."

The paper said these troubles included the Canterbury earthquakes, Pike River mine explosion, Solid Energy's financial difficulties, extreme weather events and the Aratere ferry being out of service earlier this year.

Despite this, the paper said KiwiRail had "achieved a great deal" since 2010, growing both customer numbers and freight volumes, improving reliability and the performance of its services, upgrading infrastructure and rolling stock assets, and improving its safety record.

The document showed KiwiRail's earnings had barely grown in five years.

Disappointing commodity prices for dairy products, coal and lumber had also thwarted KiwiRail's profitability.

The amount of money KiwiRail estimated it needed over the next five years was censored in the document.

In five budgets from 2010 to 2014, the Crown provided $1.067 billion towards KiwiRail's "Turnaround Plan" at an average of $213m per year. This amount excluded funding for passenger rail network upgrades and extensions in Auckland and Wellington.

The Cabinet paper, from late March, said the KiwiRail freight network was "inter-connected" from a money-earning perspective.

"Rail's revenue and cost structures result in high operating leverage, meaning that fixed costs are spread across the network and do not materially vary with changes in volumes being transported."