Luke Fraser. Rail infrastructure failure.

RAIL: FEWER SPENDING CHEERLEADERS, MORE JIMMY CARTER.

In June the Australian Financial Review hosted an Infrastructure Summit of the great and good in Sydney. It heard about the need for much more infrastructure: Australia was ‘well behind’ other countries in such matters. Nobody dwelt on the possibility that in transport at least, Australia might suffer from a tired and patchy regulatory inheritance and an extremely lazy generation of regulatory policy makers.

Thankfully, at least one new project is complete: an Inland Rail. New freight ‘inland ports’ are in place along its 4,000 kilometre length. It out-competes trucks for speed and cost of delivery. In its first decade of operation, it’s expected to drag down freight prices, save almost $6 billion in congestion costs, remove 13 million long-haul trucks from the road, save over 8 billion litres of diesel fuel and reduce carbon emissions by 71 million tonnes. It’s a simple public-private partnership: the operator finances commercial aspects; government chips in based on estimated economic benefits.

The only problem for our infrastructure cheerleaders is this project happened in the United States, not Australia: it’s the $AUD 3.4 billion dollar ‘Crescent Corridor’ – linking Louisiana with New Jersey[i].

It could happen there because US rail is on a market footing. It wasn’t always so. Until 1980, perverse regulations hampered US rail. Here is what President Jimmy Carter said then, when signing into law the Staggers Act of rail reform:

‘By stripping away needless and costly regulation in favor of marketplace forces wherever possible, this act will help assure a strong and healthy future for our Nation’s railroads and the men and women who work for them.

Carter’s efforts didn’t deregulate rail – it remains thoroughly regulated to this day. His administration’s genius lay in recognising and rewarding commercial rail motivations in a cleaner regulatory framework. Amongst other things, Staggers saw loss-making passenger train obligations removed from US freight rail companies. Freight railways were free to decide where to build new productive rail and where to abandon costly ‘basket cases’. Owners were allowed to sell failing rural rail branches to niche operators who could do a better job. After considerable turbulence, all of these measures succeeded. US rail’s share of long-distance interstate transport now stands at around 40 per cent – on Australia’s east coast it is just over 10. Many smaller regional branch lines work efficiently to support the big ‘Class-1’ railways – in Australia these branch lines languish, museum pieces propped up by taxpayers. Since 1980 US rail has made a stunning $AUD 800 billion of new investment into itself. This underlines what happens when regulations encourage the animal economy:

US Freight Railroad Performance Pre and Post-Staggers Act Reforms

https://www.aar.org/Pages/US-Freight-Rail-Performance-Since-Staggers-Act.aspx

Source: Association of American Railroads

Back in Oz, a government-owned entity – Australian Rail Track Corporation (ARTC) still owns the interstate rail system and mostly decides what will be spent, when and where. It preserves an historic network, whether it makes money or not. ARTC in turn relies on meagre taxpayer funding from the transport department: excepting the Keating years, this agency has eschewed serious rail investment in favour of roads: 2014’s 5-year budget saw over $46 billion dollars going to more national highways, city motorways and tollways, while less than a billion flowed to interstate rail.[ii] One of the constants of US rail regulation has been that all railways must be interoperable – a common gauge of track and trains. This promotes scale, competition, flexibility and cheaper prices; 114 years after Federation, Queensland is not yet even on the national standard gauge of rail.

This year the Commonwealth flagged the sale of ARTC. Tellingly, it didn’t prefigure an effort to review the sector’s regulations or provide a stable, market-led road and rail investment environment. What is in prospect is undoubtedly just a rude carve-up: hire a bunch of merchant bank advisors to auction-off government rail assets, then bank the sale price. This is both primitive and highly irresponsible: it will lead variously to rent-seeking and stranded assets if no thought is given to how the newly-privatised market should be structured for maximum long-run national efficiency. In reform terms, it’s the very shallowest part of the pool. Some call it ‘asset recycling’.

Meanwhile, Australia’s own Inland Rail project – a line between Brisbane and Melbourne, west of the Dividing Range – is more Eeyore than Tigger: it languishes unbuilt, a feeding frenzy for consultants and a superannuation plan for administering public servants, who at last count have been voted around $400 million dollars by the Commonwealth. Funds are not earmarked for actually building an operational railway, but mostly just for producing designs, route analysis and ‘preparatory works’ – in the belief that if something is begun, a white knight will surely arrive to finish and operate it. But this project is never likely to become efficient: the regulatory settings are non-commercial, so global commercial rail leaders rightly don’t take it seriously.

For now, such criticisms and alternatives remain academic. Instead of embracing productive reform lessons from elsewhere, our transport bureaucracy’s boilerplate response is to acknowledge any challenge, establish a grand new committee and ask for more money. But what if the agency itself was the problem? Removing the dead hand of agencies on freight solutions and forcing indolent transport regulators to make improvements in the spirit of Carter[iii] should be imperatives for Australia.

The next summit would benefit from locking out the infrastructure cheerleaders – those unfazed by seeing taxpayers blow yet more billions on dumb projects (to be fair, it’s easier to remain unfazed when your company might be landing the contracts).   An alternative would be an adult discussion about how we improve on the specific regulatory settings which are retarding a brighter future for Australian transport consumers and patient capital investors alike.

A future post will address desired Australian land freight reform in more detail: it will attempt to sketch out more productive regulatory settings, funding arrangements, matters of financial and economic viability and their implications for pricing as well as the important matter of a better approach to road pricing for the trucks which (mostly) outcompete Australian rail freight.

Luke Fraser and former Secretary of the Department of Prime Minister and Cabinet Michael Keating AC recently co-authored the transport and infrastructure paper in John Menadue’s Fairness, Opportunity and Security series.

Luke Fraser is founder and principal of Juturna, a public policy consultancy specialised in roads, freight and market investment reforms. He is a former national trucking industry CEO and has authored several reform studies for Infrastructure Australia. He was a member of the 2008 review of NSW grain railways and in 2012 he was appointed to the COAG Road Reform Board.

[i] See http://www.nscorp.com/content/nscorp/en/shipping-options/corridors/crescent-corridor.html or a promotional video at https://www.youtube.com/watch?v=M1m_8jRlIwY

[ii] The National Land Transport Funding Agreement 2014-2019 refers.

[iii] Carter’s 1980 rail reforms were complemented by sweeping market reform of the aviation and trucking sectors (1978 and 1980 respectively).

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