Scoop Election 08: edited by Gordon Campbell

Gordon Campbell on KiwiRail’s outsourcing bungle with the Chinese

July 20th, 2012

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.


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    1. 4 Responses to “Gordon Campbell on KiwiRail’s outsourcing bungle with the Chinese”

    2. By Kat on Jul 20, 2012 | Reply

      Look, National were always going to take this route. This is what corporates do, outsource. We have a corporate style executive running the country and people are just numbers to be moved around for political gain. National has no real interest in the wellbeing of workers or anyone else that does not subscribe to the ‘money first’ Neo-liberal ideology.

      The question is when will voters in New Zealand wake up to the situation? How long before the Kiwi worker is no more than a distant memory from some past culture that put people before profit? How many more National governments promising ‘a brighter future’ can this little country stand?

    3. By psycho sparky on Jul 20, 2012 | Reply

      Word reached me that the reason the Matangi units for the Wellington suburban network are so very very late being deployed was that they were built for 1500V AC and not 1500V DC as used in Wellington. Rumour was that the first one to raise a pantograph exploded rather spectacularly, so they tried a second, and that the error was not with the supplier.

      As for the lunacy of replacing trains with buses every night and weekend so one gang can work on the line. They have no communication with the buses, and less with the passengers. With the amount spent on hiring buses they could have bought brand new buses and equipped them with radio telephones connected to train control. Guys: if you are going to shut down the line, throw every crew you have at it while it’s closed. And you’d be better off with one intelligent person running Train Control rather than six morons, even if they are wearing flouro vests.

      Then there is railway “security”. Paraparaumu station has a security guard there nearly all the time, yet bugger all customer service. Why not open the kiosk at all hours rather than hire a grumpy goon, who can’t do anything positive, to scare the customers away. Worse yet the goon cannot monitor the dozens of security cameras all over the joint. The new underpass is about 12 metres long and has six cameras in it. The evil eye is upon the customer. Feels good eh.

      It’s not uncommon to find twenty outsourced flouro clad security guards at Wellington station of an evening, and no customer service.

      Someone really needs to take all these various rail “companies” in hand and teach them that you can’t employ three people with IQs of less than 50 and expect the same result as could be expected from an average person. Sadly the old maxim that the culture of an organisation filters down from the top seems to be true.

      Chances of the Minister, or even the entire Cabinet, being able to do this are pretty slim, for pretty much the same reason.

      Idiocracy is us.

    4. By Elly on Jul 20, 2012 | Reply

      I think you flatter John Key and co.,
      This is a cabinet that understands ‘the gamble’
      – carpet baggers.
      So it is with rail, assess sales, teaching – and jobs for the people, people – no it’s US, the deserving 1% and them – that is us.

    5. By Mike on Jul 25, 2012 | Reply

      Hell, my wife is Chinese and she thinks we are bonkers buying cheap rubbish from China rather than buying better quality stuff at a higher price, or even better, making it ourselves.

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