New Zealand: Privatisation in sorry mess

Labour’s free market policies to blame for rail and electricity woes.

Nearly two decades after the beginning of New Zealand’s great experiment with privatisation and the free market, the country’s rail and electricity infrastructure is in a sorry mess. The recent winter power crisis and the near collapse of Tranz Rail have shown once again the complete inability of the market to run these essential services. Yet the response of the Labour-led government has been not to push for a return to public ownership, but rather to reward all this corporate mismanagement and inefficiency with more handouts and lavish subsidies.

In the case of the electricity industry, the problem has been caused by the fact that there is simply no economic incentive for the electricity generators – including the three state owned enterprises (SOEs) Genesis, Meridian and Mercury, plus Contact, whose main shareholder is the Californian company Edison Mission Energy – to maintain reserve geothermal plant or fuel capacity which could be used to supplement the South Island hydro lakes once they drop below a certain level. This is because as a result of reforms first introduced by the Fourth Labour Government in 1987 and continued under the Tory National government, the generation assets of the old Electricity Department are no longer organised as part of an integrated, self-balancing network. Rather they are used as autonomous profit centres competing for market share. Decisions affecting electricity generation, transmission and supply are made on a purely financial basis. So we had a situation where shortly before the latest power crisis Contact Energy sold off its geothermal plant at Stratford in Taranaki while Genesis cut back its coal stockpile at Huntly, the largest station on the national grid.

Workers expected to pay

Now Labour has recently announced the setting up of a new Electricity Commission which – among other things – will be charged with entering into contracts with the various electricity generators to keep a part of their generation capacity in reserve for the “dry” years when there is not enough rain to fill the hydro lakes. This will be paid for by a new levy of 0.5c per kilowatt-hour on all electricity used (amounting to a 4% increase for most residential users). Put simply, workers are being expected to pay the electricity generators to do what – if it were not for the completely insane logic of the free market system – they should have been doing all along.

The ability of market forces to get in the way of planning and the rational allocation of resources is also shown by the example of the former government monopoly Tranz Rail. Over the next 12 years it is estimated that Tranz Rail will require $700 million worth of investment simply to replace its ageing fleet – already running on the so-called “red line” limit – with new diesel locomotives. Yet this problem would probably never have come about if it were not for the corporatisation of New Zealand Railways. Under the Fourth Labour Government, with Richard Prebble as Minister of Railways, the transport system became the profit-driven SOE NZ Rail. Faced with a downturn in rail traffic as a result of the opening up of road competition for long-distance haulage by the previous Muldoon National government, Prebble proceeded to scrap more than 100 diesel locomotives which in many cases were only halfway through their efficient life.

Not just large numbers of locomotives but also nearly 20,000 workers were cast on the scrap heap as a result of the transformation of NZ Railways from a public service to a corporate model. Following privatisation in 1993 the government SOE NZ Rail passed into the hands of private investors and was renamed Tranz Rail.

By 2001 the rail operator was in real trouble. Years of cost cutting and a lack of investment in track maintenance led to frequent train derailments, most notably on the Wellington Tranz Metro commuter network. Apart from looking after its core freight operation, Tranz Rail showed no interest in maintaining, let alone expanding, passenger services. The more profitable lines, such as the South Island Tranz Alpine and Auckland Tranz Metro were sold off. Those that were marginal or running at a small loss (such as the Southerner linking Christchurch, Dunedin and Invercargill) were closed down.

Now Labour is proposing to pay $200 million to fix up the rail track, which will become part of a new state-owned company TrackCo. However under the terms of the deal (which had yet to be given shareholders’ approval at the time of going to press) the rest of Tranz Rail will be acquired by a new private investor, Australian company Toll Holdings Ltd – which will then be granted exclusive access to the rail track without having to pay the government a cent for five years. After the five years an access fee will be levied on a purely cost recovery basis – conditional only on freight volume remaining at 70% of present levels and Toll investing $100 million in new rolling stock. There will be no guarantee of retaining any existing rail passenger services.

Labour’s corporate models

So why does Labour want to spend hundreds of millions of dollars fixing up Tranz Rail only to allow another private investor to come along and take over?

The reason for this is the same as the reason behind Labour’s plans to bail out the electricity industry. It relates back to the state sector reforms introduced by the Fourth Labour Government back in 1987 which transformed public services like the railways and electricity into SOEs run on a corporate model.

As a result of the global economic downturn at the beginning of the 1970s the ruling class went on the offensive to claw back the concessions that had been won by social democracy during the years of the post-war economic boom. In New Zealand, the crisis was particularly severe due to the reliance on primary agricultural commodities for foreign export earnings and the protected nature of secondary industry. With the collapse of lamb and wool prices, the subsidies on which both the primary agricultural and weak manufacturing sector depended were no longer sustainable and the overseas banks and financial institutions who controlled much of the New Zealand economy looked to transfer their money elsewhere.

The government was faced with a stark choice. Either intervene to bring the commanding heights of the economy, including all the major banks and monopolies, under public ownership, or allow the productive sector of the New Zealand economy to be ravaged by speculative financial capital. Under the National government of Robert Muldoon, which represented a conservative coalition of farmers and local manufacturing interests, the political will simply did not exist to take decisive action. The representatives of finance capital now transferred their allegiance to the alternative political vehicle of Labour (confident in the absence of a strong socialist current in the party).

The whole purpose of the state sector reforms was not – as has often been mistakenly supposed – to pay off debt or eliminate waste and inefficiency – but rather to create a market where none had existed before. This could also serve as an outlet for profitable investment, with the additional advantage that the state could not afford such essential services as rail and electricity to fail or go to the wall.

The reluctance of the current Labour government to reverse these reforms has to be seen as the final damning proof of its transformation from a party representing the interests of the working class to one that – for all its compassionate liberal sentiment – is at the end of the day nothing more than the representative of big business and global capital.

From the August/September edition of The Socialist, paper of the Socialist Party, CWI in Australia

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August 2003