Train Wreck at Kiwirail

Behind the job losses at Hillside and Woburn…

by Gordon Campbell

There is a plaque by one of the entrances to the Hillside railway workshops in Dunedin, and it bears the names of the 23 Hillside workers who died in the Great War, and the 25 Hillside workers who died on active service during World War II. It is a small, poignant reminder of how much the railways have been part of their local communities, and contributed to the nation. So, with that history in mind, no one should really have been surprised at how the community in Dunedin – from trade unions to mayor Dave Cull and his city council to the local chambers of commerce – have rallied to Hillside’s defence.

In recent months, another battle has been taking place at Hillside, against a different kind of foreign threat. Some 44 jobs were lost there in July, leaving only some 130 workers on the huge site. Over the next weeks, 25-26 further jobs are also expected to go – by redundancy and/or by sinking lid attrition – at the Woburn workshop in the Hutt Valley. The immediate cause of this round of job losses? Primarily, they have been driven by Kiwirail’s controversial decision to outsource two very large manufacturing contracts to foreign suppliers. Namely : (a) the 3,000 new rail wagons for the rail network and (b) the circa $500 million contract to build and maintain 38 electric three-car units (EMUs) for the Auckland rail system.

Arguably, more could have been done to enable New Zealanders to bid successfully for the bulk of this work – which, in turn, depends on whether the local workforce could have fulfilled the contracts on time, at a reasonable price, and to a good or better standard. Ultimately, Kiwirail management and its political masters bet against the ability of the Hillside work force to rise to those challenges.

The decision to go offshore says a lot – most of it bad – about the likely future of manufacturing and skilled trades in this country. All over the developed world, other countries are re-investing in their railways. By rejecting the option of investing in the necessary new plant at Hillside and upskilling its work force, Kiwirail is effectively closing the door and turning off the lights on Hillside’s ability to design and manufacture large scale equipment runs – locos and rolling stock – in New Zealand. The direction is clear. In tandem with the cutbacks at Woburn and Hillside, Kiwirail is also cutting at least 10 jobs from its professional services division in Wellington, which is the unit that drives the company’s capacity for design, and management of the SOE’s intellectual property.

Kiwirail has its own firmly held arguments for going down the outsourcing road, as Kiwirail CEO Jim Quinn explains later in this article. Only a limited pool of money is available to Kiwirail for it to undo the neglect and under-investment that occurred during New Zealand rail’s lost years under private ownership. As a result, Hillside and Woburn now face uncertain futures – essentially, they seem destined to be merely the repair, maintenance and refurbishment shops for equipment built offshore, while doing a few niche local manufacturing jobs on the side. Since both workshops have been cut back perilously close to the critical mass required to keep them viable, they are at risk in the medium term of being shut down altogether. Currently, Hillside has a reasonably healthy order book until around May next year. Beyond that, lies the great unknown.

All up, some 500-600 skilled workers are employed at the Woburn and Hillside workshops. In mid-August, Quinn of Kiwirail confirmed to me, Woburn will learn how many jobs it will lose. In late September, he added, the winning contractor for the EMUs in Auckland will be announced between the last two contenders, the Spanish firm CAF (Construcciones y Auxiliar de Ferrocarriles) and South Korea’s Hyundai Rotem, which built the new Matangi locomotives in Wellington.

It is a finely poised decision in that Hyundai Rotem are the known quantity from their work in Wellington, and could presumably offer some economies of scale. Yet given CAF’s relative enthusiasm for local content, wouldn’t Kiwirail – by choosing them – serve to take some of the political heat out of the outsourcing issue ? “Most certainly it would,” says Wayne Butson, General Secretary of the Rail and Maritime Transport Union ( RMTU) which has made no secret of its preference for the CAF bid. “CAF’s track record worldwide, is local involvement. At their new plants in Mexico and Brazil …there are three or four local executives in there but by far the majority of workers are local labour. CAF is a workers’ co-operative. That’s their modus operandi.”

Rotem do not seem appear quite so keen on local content. Queensland, Butson points out, recently put out a contract for 600 passenger cars and Rotem and CAF were both tenderers on that job. “[But] when Queensland announced there was an absolute cast iron local content requirement of 50 % of the passenger cars. Rotem withdrew from the bid process.” This question of local content (and local jobs) has been a fraught one from the outset with the EMU contract, a job that Kiwirail prevented Hillside from even putting a bid on the table.

By early last year, the decision to exclude Hillside from the EMU tendering process culminated in a critical report by the economic forecasting group BERL, commissioned by the RMTU and Dunedin City Council. In its report available here BERL found that doing the EMU work in New Zealand would cost some $375 million ( this figure includes the cost of getting the plant and machinery up to speed) of which 31% , or $115 million, would still have to be accessed from foreign suppliers :

The key question is whether or not it makes sense, from a business case point of view, for New Zealand to do as much as it can of the production here i.e. the other $260 million.”

Maximising the local content on this circa $260 million residue of the EMU project, BERL found, would develop and maintain skills in New Zealand, create access for this country to the expanding global market in rail renewal, deliver technology spillovers to other industries, and create an ongoing supply of skilled maintenance jobs. By making the EMUs here, BERL estimated, there would be an average of 1,270 full-time equivalent (FTEs) high skill jobs created in New Zealand over a period of 45 months under one timetable scenario, or 770 FTEs over an (arguably more realistic) build timeframe of 69 months.

In the process, doing the EMU build would add as much as $250 million to our total GDP. For that reason, BERL’s research indicated that overseas manufacturers would need to produce the rolling stock at between 29% and 62% less than the price of manufacture in New Zealand, if they were to offset the likely benefits to New Zealand’s GDP of building the trains here.

Finally, BERL warned against sacrificing quality for the allure of an initial low price tender price. While conceding that New Zealand could conceivably get the trains built cheaper elsewhere, the report points out that almost all rolling stock purchases being made by other developed countries were sticking with companies that have established quality and safety records. Translation : not from China.

It may be possible for Asian sources to supply at prices close to these. However, the quality and expected life could be less than those from Europe and North America, and we suspect from New Zealand. It is possible also that total operating costs could thus be higher. It therefore makes business sense to produce the trains here, not only from a national perspective, but also from a commercial (ie, Kiwirail) perspective.

“The idea that we could get the trains built cheaper elsewhere may be true, but almost all rolling stock purchases being made elsewhere are sticking with companies that have established quality and safety records.”

The main thrust of the BERL report findings still stand. (The criticisms to date by the government and Kiwirail have quibbled over the accuracy of two or three car unit costs and the lack of a risk cost assessment.) By early May, Transport Minister Steven Joyce was seeking to brush the looming prospect of job losses at Hillside aside with this assurance on TVNZ’s Close-Up programme, May 2, 2010 :

‘There will be lots of work for these guys, there’s no doubt about that, because they do a lot of things well and there’s a big rolling stock replenishment and replacement exercise that’s coming down the pipeline.”

Unfortunately….six months later, this job too, went overseas. In December 2010, Kiwirail awarded Joyce’s “ big rolling stock replenish and replacement exercise” ( ie, the 3,000 wagon contract) to the Chinese company, CNR.

Kiwirail’s penchant for doing business with China – perhaps a byproduct of the NZ/China Free Trade Agreement – appears to run deep. For a company that claims to be risk averse when it comes to backing the abilities of its own skilled staff, Kiwirail was willing to be the very first developed country to buy locomotives built in China, when it ordered an initial 20 DL locomotives from a division of China’s CNR Corporation. It has recently placed an order for more DLs. As mentioned, China will also be supplying the 3,000 flat top wagons. Even when it came to the EMU contract, giving China an opportunity to get into the frame appears to have been a factor in the decidedly unusual way that the tender process was conducted.

A brief review of the timetable for the EMU tender is instructive in this respect. Just over a year ago – on 17 July 2010 – Kiwirail announced four companies were on the shortlist for the EMU contract, none of them Chinese. The same month, both Prime Minister John Key and Transport Minister Steven Joyce visited China. On 3rd September Kiwirail re-opened the tendering process, and announced a new shortlist of ten companies, several of which were Chinese. By December 2010, Australia’s Bombardier transportation had withdrawn from the EMU tendering process, with its managing director reportedly saying : “Your decision to extend the shortlist raises questions on the level of confidence that Bombardier can have in the process.”

As it transpires, China is no longer in the running to build the EMUs for Auckland. Yet Butson (pictured left) remains sceptical about the illusory cost savings being sought : both on the wagons, and with respect to the DL locomotives, whose alleged failings have been detailed here, and here. Clearly, Butson has a vested stake in local content and local jobs for his members. Even so, some aspects of Kiwirail policy entail a gamble that the low prices being offered by China will not culminate in a low quality product. For now, New Zealand seems alone in that estimation. “We were the first 1st world country to buy locomotives off China,” Butson says, “no-one else will.” Moreover, repairs carried out recently on two wagons supplied by CNR during the Toll era, indicated a need for remedial action that went beyond the damage they had sustained during a derailment. Butson again :

Both of them are down in Hillside, being repaired. Every weld on those wagons is having to be ground out and re-welded. Because when they put the crack testing over them, the welds were crap….There are major issues around the DL Chinese locos – they can’t operate at proper speed on the main line otherwise they start bouncing, there are speed restrictions galore. And the Chinese wagons …all the brake gear is good for only about two years. Then it will all have to be replaced. Our current rolling stock has been out there for 50 years. The long term cost could be horrendous for the country.

Jim Quinn was something of a surprise appointment as the new CEO of Kiwirail in 2009. He came to the job as the former head of Express Couriers Limited, a joint venture between New Zealand Post and DHL. So…what does he think is going to happen at Hillside next year, if some major new orders aren’t clinched?

“We are working on several things,” Quinn replies. “We’ve announced that we’re looking at a process of looking at a partner option for our passenger business. Part of the reason for that is to get a partner in there who can afford to invest, because one of the things that would help them the business – but also help Hillside – is to build more of the AK cars that we’ve got going on to the Transcoastal and Transalpine route in the North Island, as well.

So will that be a continuation of the Transcenic carriages being worked on at Hillside now? “Yes. The carriages we’re building at the moment are for the two South Island journeys. They’ll be released late this year, early next year.” And the AK work may follow on from that? “That’s right. One of the things that’s come out of this is that our capability is more suited to those smaller runs, boutique runs. So the business at the moment is finishing the AK cars, they’re [also] starting some work on some specialist work on wagons we need for the network team to use for sleepers, and all of those things. Those sort of jobs are what the workshops have survived on for years. So its not unknown for business to have only committed orders out that far [ahead.] Clearly if there is no work, we have a different issue.”

Is there a commitment to keeping Hillside open as a manufacturing hub? “Its been a small manufacturing hub. Largely small run boutique work for a long, long time.” Does he envisage Hillside functioning in future mainly as just a repair and maintenance workshop? Not exactly. “Firstly, the daily and weekly maintenance of the rolling stock is not done at either [Woburn or Hillside] Its done in smaller shops all around the land. The big workshops have traditionally done the bigger jobs. Refurbishments, those sorts of things. So there will be more of that, regardless of where we source our rolling stock from.”

As for Hillside ever again being a build centre for New Zealand designed and built locos and rolling stock….”Well, I think we’ve made it clear that at the moment, we are just not competitive for locomotives. We haven’t built locomotives here for a very long time….” But when taken together with the downsizing of the professional services team, can people reasonably conclude that Hillside in particular is no longer to be retained as a build centre for major contracts?

Quinn chooses to step back, and answer that question in more general terms. “We’ve looked at the EMUs. Firstly before I came to Kiwirail there were the Matangi locomotives [for use in Wellington and built by Hyundai Rotem of South Korea] And the decision was made, correctly, to build those offshore.” As for the EMUs…” We had never built electric trains here. We have no knowledge of how to build those, the detail of those. They’re quite sophisticated…That’s not to say we couldn’t – don’t get me wrong. Are we able to learn? Are we able to construct those things? Yes. Our technical ability? There’s no doubt we have some. But we have never built them before. And we’re not set up to build them. So there would have been a major investment required.”

Hasn’t Quinn cited that investment as being of the order of $8 million ? “Oh, that was to invest in some of the parts. We think we would have been around 100% more expensive for those [EMUs.] And since we’d never built them before, there was a downside risk if we in some way, got them wrong,.Its hard to price a job you’ve never built. We are as confident as we can possibly be that [Hillside] was never going to be competitive, price wise. But more than that, Auckland needs these trains. Like, quickly. It needs trains on the track in 2013. The sort of [foreign] manufacturers we are looking at, they build these things all the time. They have plant solely focussed on that. They’ve got plant gear, major automation around the process. They do it, day in, day out. And they spit hundreds of these things out a year. And given that there won’t be another order for a very long time, investing in that specific plant would have been somewhat illogical.”

But there’s a huge investment going on in Australia in their rail system. If Kiwirail invested in machinery and skills upgrading – and with CER as a helping hand – how come Quinn wasn’t already clinching more of that work for Hillside and Woburn ? “ Because we’re simply not credible. We don’t have the scale. We don’t have the investment in plant and machinery…We simply don’t have the capability to be competitive in that field.”

In the medium term, it sounds like Catch 22. We can’t invest because we’re not competitive, and we’re not competitive because we haven’t invested. Was Quinn surprised at the breadth of local opposition in Dunedin to the job losses at Hillside? “ I was surprised in the sense that I think people have forgotten that Hillside factory has had a bubble of work in the last four or five years where its built the SASD cars for Auckland, and the AK cars. To do those, we’d lifted the staff levels…All this recent change has done is bring the staff levels back to the levels before those orders came in, because we don’t have another order like those. Up and down [in staff numbers] has been a perpetual part of what we do.,”

What does surprise Quinn is that people in Dunedin would be looking at local volume manufacture of very technical things, such as EMUs. But what about the 3,000 wagons being sourced from China ? “Okay, and less technical things in the wagon case. But the place where we’re getting the wagons made turns out 12,000 wagons a year. [CNR] are able to do things because of the investment in plant that they have made, that we are simply unable to do. That’s not a criticism of our work force. It’s a fact of life….”

Mindful of all this, and of the ongoing gap in public perception – would Quinn be willing to sit down now and put a spreadsheet in front of Dunedin mayor Dave Cull and the RMTU, and provide a line item demonstration of the 25% cost difference that he claims to exist between the Hillside and CNR bids for the wagons ? Mayor Cull after all, told the recent Hillside protest rally :

We know that these wagons can probably be built overseas for somewhat lower cost than they can be built here.
What we don’t know is how much less or at what quality.
And what hasn’t been done is to hold up whatever the extra cost of building them here is, and weighing that against the benefits of doing the work here in Hillside, the benefit to Dunedin and the benefit to NZ.
 What hasn’t been appreciated is the future value of keeping resources, skills and jobs in our city and in our country
 It is easy to know the cost of things without appreciating their value.
So the government is apparently expecting Kiwirail to consider ONLY the cost only the price. That is essentially ignoring and even denigrating all those other economic and community benefits that would flow from the work staying here. Just the tax on the wages earned here at Hillside would probably exceed the difference between the cost overseas, and that here.

No, Quinn isn’t willing to do that. “The RMTU have our information. I’ve already talked to Dave. Look, at the end of the day, I know where the gap is. People are struggling to understand it. I understand that.” Even if everyone agreed that 25 % was what the gap on the wagons would be – and personally, Quinn thinks the real gap was even higher – the other factor is this : “We don’t have any extra cash. Lets assume that someone gave me that cash, but [the gap] turned out to be even more [than 25%]. I wouldn’t have any more money. So I’ve got the risk. Things like this can go wrong.”

Indeed they can. With anybody, either here or overseas. Have for instance, the DL locos made in China been delivered on time and without any significant performance issues ? “I agree,” Quinn says, “ delays can occur with anybody. That’s right. But when another manufacturer causes a delay, I don’t pay more. If we get a project wrong as a manufacturer, we have to keep funding that until its fixed.” Currently, as he sets out on his task to rebuild railways, his appetite for risk is very low. Delay needn’t cost him money, but over-runs in cost do. “Lets be clear though – we have no more or less risk of delay that you can certainly prove, whether they are manufactured here or somewhere else.” On the delivery time issue then at least, Hillside is on a level playing field with China.

Fine. So were the DLs from China delivered on time? “The first ones were late for a range of reasons – some were the manufacturers [reasons] some ours.” Kiwirail’s contribution to the delays came down largely to design issues, he says. “We’ve got the second order under way and with, as I’d expect, no design problems. And they’re functioning extremely well.” (The RMTU begs to differ. See here. ) “And the wagons are being delivered ahead of time.”

Finally, and leaving aside the economic nationalism arguments….By taking the low tender from China, I suggest, the concern is that we may be buying ourselves repair, maintenance and quality problems downstream. ‘We have mitigated our risk as much as you can,’ Quinn says. And it won’t be the case that Hillside and Woburn get roped in to fix any subsequent quality shortfall ? “No, we expect our manufacturers to stand behind the warranty.” By the way, Quinn adds, so far the Chinese have been steeping up and fixing their mistakes. A “rubber bush thing” that went wrong on one of the Chinese wagons just after he took up his job at Kiwirail, he says, was put right. “Will we have issues with the locomotives? Yes we will. Commissioning new trains takes time to iron out the bumps….We’ve had some small problems [with the DLs] but they’ve been fixed.”

Mindful of Kiwirail being so allegedly risk averse, and also of the need to re-assure the public on the quality issue – could Quinn name any other first world country re-investing in rail that is getting its locos built in China? Not off the top of his head, he says. “There is no doubt we were the first to do it, to put an order in with the Chinese for locos. That’s true. However, as I’ve said, we’ve done that open-eyed. We’ve mitigated our risks as strongly as we can. And the proof will be in the pudding.”

Even at the best of times, Dunedin South doesn’t have a lot to come and go on. The Hillside workshop is the suburb’s centrepiece, a hulking factory that seems to run forever in an unbroken line down Hillside Road. The day I spoke to two Hillside worker delegates – Dave Kearns and Les Ingram – was the same day the workforce was learning who among them had been picked out for redundancy. Kearns and Ingram had been interviewed for redundancy themselves, and sat in on as many as 20 other interviews as support for their workmates.

The redundancy process has spared the management tier entirely – a decision that can only increase the corporate loading overheads in any future contract bids that Hillside puts on the table. Nor did there seem to be any special weighting given in the interviews to the technical skill of the individuals whose jobs were on the line. Not surprising, perhaps. In both the EMU and wagon contract tendering, Kiwirail management had hardly displayed a strong vote of confidence in the skills of their work force to do the job. In the redundancy context, did the delegates feel the skills held by the work force were given proper weight ?

“No, I don’t,” Kearns replies. “On paper it looks like the technical part of our skills has been given one tenth of the total weighting. This is not to take away from the other competencies around safety and teamwork etc. But in my view, one tenth is not enough to sum up the technical skills required here. At the interviews, I asked what the weighting would be, and it sounded like this was still undecided, by the Kiwirail [management] team.” The general feeling, Kearns adds, was that the whole interview process had been something of a sham, and that the selection process – preceded in some cases by shoulder taps and private re-assurances – had been largely pre-determined.

Kearns, 44, is a pattern maker, and he started work at Hillside in 1985 as an apprentice. He briefly described to me the skills his job calls for. “Pattern making takes it from an engineering drawing to a wooden model of a casting that you want. That wooden model is used to make an impression in sand, and then the wooden model is removed, and the cavity is filled with molten metal [within the Hillside foundry] and that then becomes the casting…” Hillside, makes patterns and castings for railways components mainly – but also has other customers like the Tiwai aluminium smelter. It also makes a range of Dunedin City Council street ware.

Okay. So what makes the difference between someone who can do an average job of pattern making, and someone who excels at it? “ One of the things you need is accuracy. Dimensional accuracy is a key requirement. There’s the initial task of turning a two dimensional drawing on a piece of paper into a three dimensional object. But pattern making gets more complex than that, because it has split lines and has to be moldable. And you have to be able to draw the object out of the sand without an undercut causing a breakage. So you get into hollowness, and cores…and balance.“

There are limited options in Dunedin for this specialised work. More options exist in the North Island, and even more opportunities exist in Australia, as it renews its rail networks. “ What’s really galling to me…I can understand on some level where redundancies are made because there’s no work. The boss physically can’t create work. What really gets me here is that we have got 8-10 years of work that we could and should be doing [ie, the wagons contract] and we’ve put a compelling case forward for it. And we’re still getting made redundant. And we’re seeing this thing, literally, get exported. That’s what I can’t, and won’t get over.”

At the age of 58, Les Ingram (grey hair left) has even fewer options. If and when he happens to lose his job, Ingram has been considering moving into subsistence agriculture (selling free range eggs and vegetables ) with maybe a job at Bunnings or Mitre 10 to help support that lifestyle.

Like many before and since, Ingram did his apprenticeship at Hillside in 1971. By 1975, he had taken his engineering skills on to freezing works, hospitals, universities, fertiliser works and wool scouring plants before returning to Hillside again in 2005. Wherever he worked, he says, there was always a New Zealand government trained tradesman on the site. In places, they were the sole skills base. “Now that’s my big fear. Where is my grandson’s generation going to get their skills from?. Look at other businesses. Where are the dairy factories going to get their engineers from in 25 years? That stuff has had a benefit for NZ Inc. “

Is Hillside losing its critical mass – given that for instance the foundry staff at Hillside are being almost halved, down to about 26 or less? Back in the 1980s, Ingram says, he understands that Hillside got down to fewer staff than it has now. “So there is some hope. The unfortunate part is there is a group of people who have decided to go – older people with huge knowledge who have said enough’s enough. There have also been a group of very good young tradesmen who have left, and who have left in the months leading up to this – who have just seen the writing on the wall, and gone to Australia, That’s the future. So to answer the question – can we still do stuff here? Yes. But we’re severely restricted.”

Unbidden, Ingram raises his concerns about the quality of the Chinese-made rail gear. “We’ve got a Chinese wagon in there. We’re repairing it now. Its had collision damage. But they’re going further than that – they’re doing repairs to the welds. They certainly not Hillside-quality welds. Yeah, I think these Chinese wagons will spend a lot of time at Hillside. That’s one of the 200 that was bought by the port of Tauranga through Toll, when Toll owned what is now Kiwirail. Same manufacturer as the new ones : CNR. “

Clearly, it rankles that after years and decades of keeping the old, clapped out gear on the rails, many in the New Zealand workshops are being laid off now – just as the new gear appears on the horizon. “We’ve got Jim Quinn’s much vaunted DL locomotives now, that are supposedly saving the fleet. There’s six of them on trial in the North Island. They’re not yet on regular trains. Yet the actual availability graph that Kiwirail is putting out shows that locomotive availability has improved. That’s not because of the new locos. It is because of people like me, working on 40 year old locomotives and keeping them on the track. That’s actually not a success story, Jim. That’s the result of people like me, who are going to lose their jobs. Those [DL] locos are over a year late. So much for Hillside and Hutt not being able to do [the job] on time ! And when they do arrive, they have endless problems.”

Despite all this, I suggest, the railways have been through this kind of thing before. Eastown workshops in Wanganui closed down, and yet the sun still rises in Wanganui East. Arguably, isn’t the Hillside situation being somewhat overblown? “What I’d say to that,” Kearns replies, “and no disrespect to you for asking the question, but I’d say that is a cop out. Instead of looking at it that way, look at what we could and should be doing. Which would actually be to expand the staff here, and be standing here working for the next ten years, building all our own wagon replacements. Every time I see a passenger carriage or a container wagon on the tracks I’m saying to my son and to my daughter – we built that. Not me personally, it was my mates who built it. What more can you say? “

Life will go on. Management, the RMTU and the 130 workers left onsite work force at Hillside will have to somehow find ways to co-operate. John Kerr is the highly capable RMTU organiser at Hillside, and has been the driving force behind the city-wide campaign to save jobs at the plant. In this skilled trades area… can you really it play like a concertina, and expand and contract the work force on a monthly or quarterly basis?

“No you can’t,” Kerr says. “And I think one of the concerns we’ve got is that the delegates are of the view that this is the vision of [Hillside manager] Andy Bisset. That you can turn labour on and off like that. But this isn’t like the Christmas post rush – and people will go and work for someone else, where they have got some security.” The union, he adds, does have its members’ confidence and support. “We could have brought and delivered change that would have increased efficiency, and reduced lead times and all the rest of it. Whether we could do that now – we don’t know, after the debacle of the last week or so.”

Does Kerr believe that Kiwirail has recognised and respected the union’s offer of co-operation on – for instance – the so called “lean manufacturing” efficiency measures now on the table at Hillside ? “ No,”“ Kerr replies. and sums up the current state of play in these terms :

I had an approach from Graeme Boomer, the industrial relations manager to say we should get together in a couple of weeks to start to work through some of that stuff.. But the concern I’ve got is that we feel like we’ve had a bit of a slapping. It was a big risk for us, when we said ‘We will work with you to deliver lean manufacturing’ and we knew that would involve change. We wouldn’t compromise wages and conditions, but we would work with [management] around change, to make the place efficient. In doing that we had a level of expectation that the proposal for redundancies would have been diluted somewhat, and we would have saved a few jobs. We were always realistic. We knew we wouldn’t save many of the jobs, but we thought we would have saved some. And that would be part of the quid pro quo….We feel that we just got slapped in the face, and there was no change. And now, how can we go to the troops, and say we’ve got to get behind management ? Because the relationship between the membership at the grassroots and management is now at rock bottom. If they’d played the political game – and given us a little bit, both sides could have claimed victory. We could have said we saved some jobs. They could have said we’ve listened, we’ve been reasonable. And you’ve then got a platform that you can work from, and build the relationship.”

In both major and minor ways however, Kiwirail has displayed an uncanny ability to get things wrong. For instance : Richard Hubbard, 38, one of the mechanical engineers laid off, received a letter advising him of his sacking and addressed to him correctly at the top of the letter, but the letter then began “ Dear Peter….”

On the same day that the Hillside workers found out the bad news abut who had been made redundant, Phil Goff held a public meeting in the housie evening rooms just across Hillside Road, and used the occasion to announce Labour’s government procurement policy. Goff was in front of a relatively small group, and on friendly turf. Given the day’s dire news – and a 5.45pm start time on a cold, rainy night – it was somewhat surprising that several Hillside workers still turned up to hear him, rather than heading home to be with their families. Even so, a few gremlins managed to creep into proceedings. Labour MP Clare Curran, who has done sterling work for 18 months in rallying support across Dunedin for the Hillside cause – chose to introduce Goff by describing the redundancies as marking a “ reasonably sad” day for Hillside. Reasonably sad?

Goff, by that standard, did reasonably well. He made well-received statements about local content and local jobs, and his criticisms of the Key government’s ‘narrow, cost accounting approach’ to economic planning and decision-making also went down well. Rattling off jolly lines though, like “We made some mistakes in the 1980s, but unlike National we’ve learned from our mistakes” sounded jarringly glib. And this crowd – on this night – may not have been the ideal time for Goff to express his excitement about how the new economy is opening up terrific new job prospects for people who design and build video games.

All the more reason then, for genuine relief when Goff finally climbed into one of his questioners afterwards with the sharp comment of “Bullshit ! ” when asked whether the key issue really, was whether Labour would restore the right to strike beyond outside the current narrow context of collective bargaining. Finally, he seemed to be connecting spontaneously with his audience. While not blind to the Labour leader’s flaws, the audience clearly accepted him – with a mixture of enthusiasm and fatalism – as the only political game in town likely to improve their lot. To this crowd, the policy combo of the capital gains tax, removing GST removal from fruit and vegetables and the restoration of the top tax rate was a package that they obviously and honestly took to heart.

As for the Labour procurement policy itself…what the RMTU later pointed out in a press release was that – unlike similar policies in other countries, including the US and South Africa – the policy contained no minimum local content numbers, or percentages. This despite Goff’s assurance to the Dunedin South gathering that local content provisions with regard to manufacturing contracts would not contravene WTO rules, or be in violation of the China/NZ Free Trade Agreement that Goff had helped to negotiate.

Wouldn’t they? Later, I asked Goff’s office to spell out the China FTA exemption clauses to which Goff had been referring. Given the perception that free trade agreements usually preclude local content provisions, Labour’s response is worth citing in detail, at the risk of boring some readers to tears. (Sorry about that. Come back in three paragraphs.)

For starters, Labour’s spokesperson indicated, there are “express and implied exclusions for government procurement” in the China FTA. Arguably, government procurement is expressly excluded from chapter 9 on trade in services, and from chapter 10 on investment, through articles 105 and 137 respectively. That chapter 9, trade in Services exclusion is especially relevant, the Labour spokesperson pointed out, because it is the only chapter that offers “Most-Favoured Nation Treatment” to either country, via article 107. Government procurement is not mentioned at all in the chapter 3, trade in goods section which – arguably – means an express exclusion is not required. (Sceptics might counter-argue that if its not expressly excluded, its presumed to be in, not out.)

At the wider WTO level, government procurement still seems to be a work in progress. Apparently, China has not yet completed negotiations on its accession to the WTO Agreement on Government Procurement, and MFAT has chosen to wait until after that process is completed before addressing government procurement in the context of an FTA. Moreover, New Zealand currently has only observer status to the WTO Agreement on Government Procurement, but is not itself a party to it. “In our view,” Goff’s spokesperson concluded, “ observing the WTO’s principles of non-discrimination and transparency do not prevent New Zealand from selecting tenderers that fulfil our strategic economic interests.”

That sounds reasonably convincing. After all, if the US can get away with imposing 100% local content quotas for some of its government contracts, the New Zealand government could hardly be pinged by some trade panel in Geneva if it chose to seek a far lower local content ingredient, or had national socio-economic justifications for buying local. The real risk will be if MFAT negotiators agree in future – behind closed doors – to sign away our current safeguards, for some imaginary trade and diplomatic advantage.

Meanwhile, back in something closer to the real world, it is still striking that the Labour government procurement policy does not contain any local content numbers. There are no mandatory percentages say, for local suppliers, local labour, or locally designed and made componentry. Labour MP David Parker – who put together the policy – told me that this was partly because reliable data on the status quo doesn’t exist in New Zealand.

So you wouldn’t know whether you were undershooting or overshooting? “Correct.” In all their projections around capital gains tax and around the revenue, Parker says, Labour had been at pains to be prudent. “And we couldn’t pick a prudent number here.” Other means exist though, he believes, to get to the same outcome. “ I find it astounding that everyone in NZ could agree it was appropriate to have local content in our big contracts to build [the ANZAC] frigates, but the same logic is denied by the government when it comes to major rail contracts. I can’t imagine countries like China or South Korea or even Australia really saying that their rail engineering expertise would be lost, for want of a government contract to build trains.”

Instead of local content ratios, Parker favours requiring a government department – or an SOE owned by the government – to formally assess and factor in the wider benefits to the country of local production. Without such a requirement, he indicates, the status quo will continue to encourage the CEOs of the likes of Kiwirail to pursue short term gain and lowest bids in the awarding of contracts. “Price is obviously relevant. And since government departments always have a limited budget, paying more for one thing will always limit their ability to do the second. That’s true in respect of the government department but it might not be true of the government as a whole, given there are benefits from GST being paid, income tax being paid and welfare benefits being avoided.” Thus, the need for government to ensure that the wider assessment is made compulsory. “By this means, I think you get to a similar outcome [as a local content quota.]”

The rationale seems compelling : “ It seems to me obvious that there are some things that are currently going to overseas entities that ought to be going to New Zealand entities. Its not always a matter of price. Sometimes, government departments will want to minimize risk to themselves, and minimize the risk of embarrassment to themselves – and I suppose, to the government – by writing specifications that can only be met by the largest multinationals. They might minimize the risk, but it sometimes increases the cost. And sometimes, it certainly closes out the New Zealand content.”

Among Kiwirail’s top management, there does appear to be a fixed perception that Hillside is capable only of repair and maintenance work, and/or very small scale manufacturing runs. Parker : “That’s a very narrow and negative vision of the capability of New Zealand manufacturing.” While Quinn of Kiwirail is fond off citing the example of cars no longer being built here, there are even counter-indications on that score. Fonterra’s milk tankers, Parker points out, are made in New Zealand, from the chassis on up. “Because the content is reliable, and the price is competitive.”

Frasers in the Hutt Valley assemble fire engines, and manufacture componentry for those fire engines. The company got its first break from the South Australian government, not from any New Zealand government assistance. “It shows that there are niches in [manufacturing] where we can compete,” Parker concludes. “ I’ve no doubt that – properly managed – the New Zealand rail company can manufacture some of its own rolling stock. Not all of it, but some of it. But at the moment, we’re at risk of losing the capability of building any of it. “

 

“You know what the trouble is, Brucie? We used to make shit in this country, build shit. Now we just put our hand in the next guy’s pocket” – Frank Sobotka, union official, The Wire.

Ultimately, it is politicians, and not the heads of SOEs like Jim Quinn, that get to decide how much any arm of the state gets to spend, and on what. Only a few weeks ago on TVNZ’s Q& A programme, Prime Minister John Key drew a line in the sand about his priorities for the New Zealand economy.

Intellectual property is an issue of concern, and that’s because this is a knowledge-based economy, not a manufacturing-based economy. It creates knowledge,”

Which is fine, as it goes, as a defence of Pharmac. Surprising though for the PM to so thoroughly dismiss a manufacturing sector that – according to the first quarter 2011 Household Labour Force survey – still employs 252,000 people, and comprises 11.4% of the total work force. In the process, Key was making a hard and fast distinction between New Zealand’s knowledge industries on one hand, and manufacturing industries on the other. At almost the exactly same time, the Economist magazine was arguing almost the precise opposite.

Because in the wake of a lengthy debate conducted in its pages, the Economist reached the conclusion that you cannot have a robust modern services economy without having a strong manufacturing base. Reason being, services and manufacturing are not separate options in today’s economy but entwined – or should be. According to the Economist, healthy economies leverage their advantage from one to the other. Even Singapore, which may seem to be a contradiction, is arguably the services wing of the Chinese manufacturing hinterland. Is Hillside the hub of an old manufacturing industry with little or no future – or could and should its plant and machinery be seen as an essential link in the service chain for our modern tourism and urban transport needs?

The Economist frames the initial argument in this fashion :

People may [well] wonder where manufacturing ends and services begin…. Makers of many things, from aircraft engines to cars to telephone networks, will tell you that they do not simply make and sell fancy combinations of metal and plastic: customers want advice, design and maintenance too, as part of the deal. Manufacturing and services are complements, not substitutes.

Ha-Joon Chang, of Cambridge University [notes] that even apparently service-based economies in fact have strong manufacturing foundations. Much of the shift away from manufacturing, he argues, reflects inherently faster productivity growth in that sector; some of the measured productivity growth in services, notably retailing, reflects lower quality and is thus more apparent than real. De-industrialisation and slow manufacturing productivity growth hurt a country’s ability to export, and eventually lead it into balance-of-payments difficulties. As for tradable services, they too, depend in the long run on a strong manufacturing base.

I’ll leave you to follow the link above, and follow the entire Economist debate. The implications for New Zealand of this argument can hardly be overstressed. Since the 1980s, successive governments – with varying degrees of emphasis – have assumed that aspects of manufacturing are ‘sunset” industries that can be left to wither and die, while we buy the equivalent goods and components from offshore, while blithely relying on borrowing to make up any shortfall. Knowledge industries however do not occur in a vacuum – historically in New Zealand, many of the successful ones have grown out of the cross-fertilisation from the state’s investment in manufacturing and r&d, and from the training in skilled trades that this investment has created.

The final sparks from that period of substantial investment are now flickering out, around the country. In that respect, the dumbing down of Hillside may be only a significant footnote in a long decline. Certainly, the current government has never shown much enthusiasm for the railways system that it inherited – and if were not for the dependence of Fonterra and Solid Energy on shifting their essential goods by rail, Kiwirail would probably be already back on the auction block.

Millions and millions of dollars are now going into the refurbishment of rail, to make up the previous 20 years of private sector neglect. Leave aside the national good and what’s the best planning mode for the economy for a moment…at a purely individual level, here’s what seems most unjust about the redundancies at Hillside and Woburn.

Belatedly – and perhaps misguidedly in terms of its point of origin – the new gear is finally arriving. Yet the people who have kept the system running during the years of the robber barons and asset strippers – the people who repaired the 60 and 60 year old bits of equipment and kept them on the rails – seem to have little or no part in the next stage in the history of rail. They maintained the system through the hard years, and might have expected to share in the rewards and benefits of re-investment. And use new gear, for once. Instead, they’re being chain-sawed off at the knees.

In the process, some highly skilled people from Hillside and Woburn will either go into retirement, or to Australia. They will be lost to a rail industry that has no place for them any longer. That doesn’t seem rational – and it doesn’t seem right, either. Maybe there should be a plaque on the wall for them, too.

ENDS