LUKE FRASER. Freight: fresh disappointment for our Prime Minister

Pity Prime Minister Turnbull – an intelligent man, trying to secure productive reform of this sector, yet met with fresh disappointment at each turn.    Turnbull has made a number of moves in the transport space to suggest he has seen through a lot of second-rate advice and now wants something better: a more efficient freight sector, for one thing.

His latest disappointment is the report of the National Inquiry into Freight and Supply Chains – tabled last week[i], following a year-long public inquiry.

This report could have been the catalyst for genuine reform in freight, yet it doesn’t go close.

Freight is important to our economic wellbeing.  The freight industry is an unforgiving one, full of very hard-working, innovative people who possess profound business acumen.

But the roads and railways these people drive on, the regulations they work to and much besides remain entirely controlled by unreformed public sector agencies, instead of proper economic regulators who could harness the industry’s acumen to oversee sensible market investments in many important freight places nationwide, while also protecting the public and environmental interest from the adverse impacts of freight operations.

In their turn, the controlling transport bureaucracies are at the mercy of the political pork-barrel, where freight investments rate low in the political calculus compared to shiny new motorways, new public transport networks and the like.

What a grand job this unreformed freight bureaucracy and their successive ministers have been doing: real Australian freight rates, which dropped dramatically following the Hawke-Keating era microeconomic reforms, have remained stagnant ever since[ii].

As they say in footy, the scoreboard doesn’t lie.

Most of the latest report’s recommendations concern the need for more coordination, more planning and more embrace of future technological opportunities. The report assumes a non-reform, status quo future where the bureaucracy, not a well-regulated freight investment sector, controls every aspect of what gets built, where and when, with taxpayer dollars.

The report’s road pricing recommendations are completely ill-informed: they assume that every dollar collected from fuel and registration taxes is not already going back to road spending.  The reality, as regular Pearls and Irritations readers will know[iii], is that several billions each year over and above our road taxes are already being thrown at roads to cover very high spending, for uncertain effect.   Education, health, welfare and defence spending have been subsidising our roads by billions since 2007:  there are no secret road tax ‘leftovers’ to claw back from Treasury in order to spend on more freight projects.

Apart from one very fine recommendation – to ensure the lowest-cost freight mode was secured when road and rail investments were considered[iv], the report in large part just recommends more of the same – transport agencies with bigger budgets and new freight and supply chain directorates, monitoring and collecting more and more data on every aspect of what are fundamentally entirely-commercial supply chains of seaports, airports, key trucking arteries, rail lines and junction points.  These places would benefit far more from proper economic regulation and access to strategic, market-led investments, balanced by the regulator in the interests of the community and environment. In that scenario, the transport agencies would continue to play a strategy role on behalf of long-term planning and community interest; they would also fill in gaps on parts of the network of no interest to commercial investors.  This leaves the most important freight places open to more, better and swifter investments, with a better distributional effect: less taxpayer dollars, more user-pays.

Evidently the latest report is to form the basis of a 20-year government plan for freight, so we can assume that Hawke-Keating-style reform of this sector won’t be happening anytime soon; economists can presume current Australian freight rates will remain stagnant for another two decades. If you are a freight operator lucky enough to benefit from political freight pork-barrelling right now, enjoy the free lunch.  If instead you are an operator – or an entire region – denuded of smart, forward-looking infrastructure, tough luck – the government has no plans for you. You need a better lobbyist.

This is all a certain recipe for continued low sector productivity growth, continued gaming of the system by the infrastructure club and rising equity problems across our communities.

New South Wales Ports

In 2013 New South Wales’ three main seaports – Botany (Sydney), Kembla (Wollongong) and Newcastle – handled over $110 billion dollars in combined annual trade[v].  Five years later, these places remain a policy and planning-free zone if ever there was one.  The report did not see fit to mention these places, notwithstanding so much has happened here of late:

  • Botany and Kembla were long-term leased to super funds in 2013 for record prices;
  • As part of the divestment process, the NSW Government put in place secret anti-competitive restrictions on the State-owned Port of Newcastle, presumably designed to inflate the Botany and Kembla sale price by penalising any future container trade operations being pursued by Newcastle. In effect, Newcastle would have to pay its rivals a levy were it ever to compete with them in the container trade[vi]; the Commonwealth, which holds the Constitutional head of power over seaports given the trade implications, chose to be silent throughout this shameful episode and has remained silent ever since.
  • Already reeling from this block on its future development choices in  2017 Port of Newcastle was hit with pricing regulation by the Australian Competition and Consumer Commission[vii];
  • Port Kembla has long been assumed to be the logical overflow container port for Sydney, but the rail project which would link south-western Sydney’s burgeoning logistics industry directly with Port Kembla shipping containers, cars and other things remains off the radar, despite much of this railway having been already built in the mid-1980s by Premier Neville Wran. This project holds the dubious distinction of being the only one ever actively rejected by Infrastructure Australia[viii].  Apparently, State ports policy only works for sites containing the word ‘Botany’.

The report does note the importance of Australian port costs being competitive with global benchmarks.  Its main observation is that more data needs to be captured on this front.  Yet every year, the Bureau of Infrastructure, Transport and Regional Economics already records the actual costs of moving a container in or out of each Australian container port, by different classes of vessel.  As a result, we already know that road freight costs – the cost of moving the container off or onto the wharf and into or out of the hinterland of the city in question – usually comprises over half the total cost of moving that container[ix].  We also know that these ‘land-side’ costs can vary wildly from port to port, even as stevedoring, customs and other port costs remain remarkably competitive nationwide.

Such data, as well as data concerning the increasingly punitive container ‘infrastructure tariffs’ which are levied at our major ports by stevedores, state governments and toll road operators,  already provides all the data that a willing transport agency would need to determine where  it might make the most sense to place future container operations in New South Wales.  If lowest-cost freight to customers was truly the agency objective, this analysis could be published for customer and investor scrutiny.  That would be very helpful.

These same port competitiveness issues and statistics were raised explicitly with the Prime Minister and Premiers by Infrastructure Australia in 2009 as part of the Council of Australian Government’s agreement to the National Ports Strategy.  At that time, transport agencies agreed to conduct trials to improve port road connections using market-led investment structures.

No such trials ever occurred and no updates to Ministers were ever offered.

Why should taxpayers send more money to these agencies to collect more freight data, when evidently nobody bothers to act on the data they already collect?

Give the Prime Minister a chance! A genuine reform path

The template for reform that might stimulate a more productive economy is no secret.  Some elementary questions would have pointed our political leaders to the right answer:

  • In water or energy, if the market wants something – a new pipeline or more power generation – it can pay for a regulated commercial investment in that outcome. Yet in transport, the industry can only lobby politicians and hope the political winds are favourable. Freight is a completely commercial activity, so why can’t the freight market itself invest in better infrastructure?
  • Why can’t a willing investor sit down with a transport agency, gain access to all the necessary data and – assuming it meets commercial investment thresholds – make such an investment and then charge users on an open-access, user-pays basis, altogether in line with the Australian Competition and Consumer Act?
  • What prevents economic regulators from overseeing such investments to ensure that a) the interests of community safety, amenity and the environment are fully protected and b) that all freight companies using this asset are charged fair commercial rates and not price-gouged or prevented from access?

To the extent that the market was making such freight investments with its own money, such infrastructure upgrades could be assumed to be rational.

This would also overcome the illiquidity trap for freight: because it ranks so low on the political priority list, freight projects compete for quite scarce taxpayer dollars.  Freight projects that do go ahead are often sub-scale and must be drip-fed over multiple budget cycles – big and transformative public sector freight projects are rare.

By contrast, the market has virtually unlimited access to low-interest funds and a healthy appetite for investing in big, unlisted Australian infrastructure like roads, rail and ports[x], provided the investment structures are supported by governments.

‘Turkeys don’t vote for Thanksgiving’

Like the public sector resistance to competition reforms observed in the 1980s and 1990s, regulated market investment in freight is viewed as a threat by some in the transport agencies.  Many are content to be fellow travellers with ‘reform’, until doing so threatens their own empires.   Privately, some others would willingly see their agencies reformed for the better, but this remains a minority view.  This latest report confirms that the Commonwealth agency view is that it just needs a lot more taxpayer money and much more data to do justice to freight.

The Commonwealth also reserves the right to ‘pick winners’ in its spending approach, without any recourse to comparative investment cases.  The 2018 Commonwealth budget included $400 million in freight railway duplications into Port Botany.  This project has no published business case.  Recently-published independent analysis of this project suggests it may be a considerable waste of money[xi].  In the same budget, neither Port Kembla nor Port of Newcastle received any support at all.

It isn’t all gloom.  Quite recently, Port of Newcastle published a convincing technical report analysing its claims to establish a commercial shipping container trade, based in part on that port’s superior land-side efficiencies[xii]. Clearly, Newcastle wants to command its own destiny and service its regional economy in new ways with a more progressive approach.

Here’s to Newcastle pouring the concrete on their new container terminal before the ‘underfunded’ transport agencies have finished drafting their next National Freight Strategy!

Luke Fraser is the founder and principal of a transport policy and investment advisory. In 2012 he was appointed to the board of the Prime Minister and Premiers Road Reform Project. From the late 1990s he spent over a decade in Canberra in several APS executive, Commonwealth government chief of staff and industry CEO roles across the transport and Defence sectors.

In 2017 Luke’s firm was commissioned by a prominent national industry group to produce a submission to the National Freight and Supply Chain Inquiry.  For clarity, views expressed in the post above are entirely the author’s own. 

 

[i] https://infrastructure.gov.au/transport/freight/freight-supply-chain-priorities/files/Inquiry_Report.pdf

[ii] https://infrastructure.gov.au/transport/freight/freight-supply-chain-priorities/files/Inquiry_Report.pdf see the table on page 25.

[iii] https://johnmenadue.com/john-austen-the-roads-club-is-having-a-great-spend/

[iv] See recommendation 1.12.  The report might have gone further and asked for full cost-recovery charges to be derived for the Inland Rail service versus linehaul trucking on the highways which would compete with Inland Rail, being the Pacific, Newell and Hume. Merely publishing these comparative charges would give markets a very useful indication of what they should be investing in for the long term – trucking or rail – on this most important east coast freight task.  This matter was covered in a more detailed Pearls post in 2015: https://johnmenadue.com/luke-fraser-rail-and-roads-a-reform-blueprint-to-match-turnbulls-boldness-and-innovation/

[v] https://bitre.gov.au/publications/2015/files/is_067.pdf

[vi] https://www.theherald.com.au/story/4059508/port-war-botany-protected-against-newcastle-competition/

[vii] https://www.theherald.com.au/story/4859403/pricing-blow-for-port-of-newcastle/

[viii] https://www.thejadebeagle.com/the-dog-that-didnt-bark.html

[ix] See the port-by-port interface cost reports at https://bitre.gov.au/publications/2017/files/water_060.pdf

[x] http://www.industrysuperaustralia.com/assets/Submission/231223-ISA-Public-Infrastructure-Inquiry-Submission.pdf

[xi] https://theconversation.com/port-botany-doesnt-need-another-expensive-rail-project-here-is-the-evidence-54246

[xii] https://www2.deloitte.com/content/dam/Deloitte/au/Documents/Economics/deloitte-au-economics-port-newcastle-nsw%20container-port-policy-010318.pdf

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