Gordon Campbell on KiwiRail’s outsourcing bungle with the Chinese

So the brake pads on every single one of the 500 freight wagons delivered to KiwiRail by its favoured Chinese supplier have had to be replaced. When fully loaded, they evidently couldn’t stop in a safe period of time. Wow. What was in the contracts that the Chinese manufacturers couldn’t read, or couldn’t comply with – or more likely, did they simply not care? Though the costs involved with upgrading all the wagons (with a brake block that has higher friction) will be borne by the Chinese, the incident demonstrates the perils of outsourcing, and the inability of its local enthusiasts to prevent New Zealand from being taken to the cleaners.

I mean, how easy is it for foreign bidders to win a contract from state agencies in New Zealand – whether they be in Defence, or Transport or Health or in IT? Simple. Bid unrealistically low for the contract, get the suckers on the line and then deliver them the bad news – and the true cost of the contract – a bit later on, once they’ve taken the bait and can’t afford to back out. Nor that they’d really want to, anyway. After all, the Kiwi bureaucrats running our SOEs will have already pocketed their bonuses for apparently getting the work done, cheaply.

The only losers will be the New Zealand workers who have been ruled out of the process in the first round – for bidding something closer to the genuine price of the deal. If they’re the skilled staff at Hillside workshops in Dunedin, they’ll have probably lost their jobs as a result, with ongoing social and economic cost to their community. But that’s one of those long term effects that’s not a concern of anyone immediately involved in signing the contracts. And the Minister can always say that hey, it was an operational decision. That’s the beauty of outsourcing. Once you’ve set the financial parameters, no one can be held responsible.

Still, you can’t say KiwiRail hadn’t been told about the risks they were running. Last year, this Werewolf article cited a 2010 report by BERL analysts warning against sacrificing quality for the allure of an initial low price tender. While conceding that New Zealand could conceivably get the trains built cheaper elsewhere, the BERL report pointed out that almost all other developed countries were purchasing their rolling stock from companies with 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 (i.e. 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.

In Britain, they’re having another look at the whole logic of outsourcing.

Four out of five government departments are trapped in their outsourcing deals, stifling efforts to slash budgets. That is the damning verdict of an advanced analysis of government contracts, conducted by deal price measurement firm ProBenchmark.

Most of the contracts cannot be realistically re-let, with up to 80 percent of buyers having no preference for changing supplier. The main problems are the complexity of the arrangements and the costs of cancelling deals.

So…given the costs of us canceling, what’s to stop the Chinese from continuing to do shoddy work for KiwiRail? Nothing. The political relationship between New Zealand and China is of such importance that no bureaucrat would want to complain too loudly. For the Chinese, the costs involved with the wagon upgrade are just an add-on to a contract they can use to secure other work elsewhere in the world – since New Zealand was mug enough to be the first developed world transport system to sign up to Chinese-built major rail equipment. Last year, in the Werewolf article, I asked KiwiRail CEO Jim Quinn about the ongoing repair and maintenance issues from the Chinese contracts:

By taking the low tender from China 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 Hillside and Woburn [won’t] 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 stepping up and fixing their mistakes. A “rubber brush 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 DL locos] but they’ve been fixed.”

Locos fixed, Brake pads fixed. The only things not readily fixable are the lives affected by the Hillside redundancies. Then as now, KiwiRail continues to be risk averse when it comes to investing in its own skilled staff, but seems more than willing to take a punt on unproven work from the Chinese when it comes to quality.

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.”

Indeed. Trouble is, though, we can’t afford to send this particular pudding back to the chefs in Shanghai. And the option of choosing good old home cooking instead is consistently being denied.