Rail's strength is in moving large volumes of freight long distances and moving large volumes of people.

Yes, and it also offloads a lot of load on the road for both freight and people moving.

We don't have the population in NZ for passenger rail to make economic sense.

I beg to differ. Auckland could need a proper rail and tram system, just look at how bad traffic is for the (comparatively) small city. What do you recon the blocked traffic is costing society? And what do you think solving it by expanding the road networks will cost? You have to take those things into consideration when you evaluate wether it makes economic sense or not.

Even in Wellington rail has to be heavily subsidised and only works for those passengers who live and near stations on the same train line.

But you can't say that it does not make economic sense, even if it has to be subsidised.

It works well for things like large volumes of freight from Auckland to Wellington

If one were to invest in the railroad, it could actually provide a good service for transporting people around in New Zealand. Its too bad that its been built down here in NZ. A high speed railroad between the largest cities would reduce traffic and could in many cases be just as time effective as flying by plane.

Can you identify three countries where rail operates without large government subsidies?

I am not going to look that up, because I realise that subsidies does not mean that it does not make economical sense. But I would be willing to bet that there is not a lot of subsidies on the railroads in the US, to take one.