LUKE FRASER. Rail manufacturing reform and the political shot clock.

May 15, 2018

One of the things that makes basketball so dynamic is the ‘shot clock’:  once a team takes possession, they have 24 seconds to make a realistic shot – otherwise they turn the ball over to the opponents.  This speeds up the game and discourages defensive play.

In politics there is also a shot clock; a government which hasn’t done much risks being thrown out at the ballot box.  Even so, few governments seem to appreciate how little time they have to effect reform.  In the two decades since the governments which many would argue understood best their brevity of tenure – the Hawke-Keating administrations – another problem has emerged: an advisory deficit in the senior public service, which as many contributors to Pearls have noted, has now grown so deep that new governments can be lulled into thinking that standard bureaucratic processes will get their agenda delivered. 

The meagre microeconomic reforms and sluggish productivity growth since the Hawke-Keating era shows us we cannot assume that the public sector can – or would even want to –  produce meaningful ‘reform on demand’.

New administrations need to enter with a clear plan, but they will profit from a harder-nosed approach to reform. A week ago leader Bill Shorten announced that if elected, his government would institute national reforms to rail manufacturing policy.  Around $100 billion in rail projects are anticipated over the next two decades – the great bulk of which will be in public transport.  Shorten argues that reform would secure far more of this cake for Australian jobs and businesses.  I think he is right.

Rail manufacturing – public transport rail in particular – is a sweet spot for genuine reform: in practical terms, this State-based, public sector-driven industry operates as if Federation never happened: each jurisdiction continues to run its own bespoke rail strategies, equipment design choices and capital programs.

But if Shorten is content to deputise this reform to the usual anaemic bureaucratic approaches, it is a racing certainty that he will see few if any measurable gains by the time the political shot clock runs out.  Under status quo, domestic rail manufacturing businesses and their skilled workers will continue their downward trajectory at the expense of foreign imports.  Expert analysis has already foreshadowed that on this path, the end result could be Australia shifting to a full import model with no local industry whatsoever[i]. Who would invest in that?

Getting this reform effort wrong has broader impacts for Shorten’s aspirations, as he has also announced a $1 billion Manufacturing Future Fund as a new financing vehicle to spur industry growth[ii].

Few informed investors would be brave enough to become involved in an Australian rail manufacturing sector which, at least in public transport, is so fragmented, and which bears such unnecessarily-high costs for investors and operators:

  • Public transport train designs remain inconsistent from State to State: in 2013 there were 36 distinct train designs working across Australia. The United Kingdom – a rail market several times larger than Australia’s – has just seven broad classes of train, with largely common design features to keep costs down[iii].
  • New batch orders of these disparate train fleets are inevitably sub-scale: analysis in 2013 suggested that ordering a batch of just 50 wagons compared to 150 increased the Australian unit cost for producing a wagon by two-thirds.  A 150 wagon scale of orders is probably realistic for Australia, which generally buys more than 300 new wagons in total every year anyway.  Despite this, bespoke State orders remain small, so unit costs stay high.  This arrangement rewards lowest-cost, low-tech overseas manufacturers at the expense of Australian companies.
  • There are many other inadequacies: tenders for work go out to the market without active coordination, forcing industry to spend millions in bid costs chasing every small job; local manufacturers can be forced to ‘tool up’ with specialist equipment to fulfil a single design contract, only to have that equipment rendered worthless by shifting bureaucratic design decisions for the next fleet of vehicles.

The net result is a lumpy, uncertain manufacturing industry which remains less than the sum of its parts.

On top of this, there is the aforementioned agency advisory deficit: earlier this year the New South Wales transport agency ordered $2.3 billion in new Korean trains for Sydney’s regional services.  But the trains as ordered proved 20 centimetres too wide to operate safely under existing network regulations.  This will probably mean tunnels need widening and passenger services will be slowed down as these trains negotiate some tunnels[iv].

It is one thing to be blindly protectionist of a domestic industry which has no realistic competitive prospects. It is quite another for a national government to not bother doing the hard slog of structural reforms so as to give a competitive domestic industry a fair shot at a future.  These things are within the gift of a future national government to achieve for public transport rail manufacturing.  We even know how to achieve it, because our government did the same for the hidebound, State-based freight sector in the late 1980s.

The Hawke-Keating Rail Freight Reforms

Instead of buying into earnest bureaucratic undertakings to ‘collaborate across State lines’ and ‘harmonise’ the hundreds of inconsistencies in moving freight on rail between different States of Australia, in the late 1980s Hawke and Keating and State Premiers took the matter seriously.  It was not even delegated to transport ministers, but kept between Prime Minister and Premiers.  In 1991, the National Rail Corporation was established, with the Prime Minister and some State Premiers as the corporate shareholders.  This wasn’t a Canberra takeover, just a better cooperative model than persisting with nine different faceless transport bureaucracies.  Effort from this point became intrinsically national in its objectives.  Years of fruitless intergovernmental transport meetings, with their merry-go-round commitments to more and more studies and ‘harmonisation task-forces’, was sidestepped altogether.

National rail freight is far from perfect even today for many broader reasons, but a hard-edged approach to structural reform at least gives the sector common structure and purpose.

Status quo efforts have been discredited

Will Shorten follow Keating’s play book?  The gains on offer are large. One of the world’s eminent specialists in this field was asked to produce an independent review of the Australian rail sector in 2012:  he concluded that our rail sector’s extent of non-coordination ‘appeared to out-European Union the European Union’ for its lack of any data reporting, standardisation and coordination.  All of this, in his view, was costing Australia hundreds if not billions of dollars every year[v].

Here is the real point for Shorten: that report and its recommendations was never formally followed up by Ministers.  Likewise, in 2009, rail manufacturing had been agreed as a priority reform target by the Council of Australian Governments meeting.  Not a single progress report occurred after that.

A recent Senate committee inquiry into the rail industry recommended reform.  It is a good report, but most of its recommendations – presumably influenced by the status quo – seem to assume that keeping the current agency structures is not at issue – that everybody will just need to work together better in future.  Proceeding from this assumption, the report goes into a lot of prescriptive detail about what States need to keep in mind when procuring new fleets.

We know where this ends.

The shot clock will be ticking on a new Australian government from day one.   As in basketball, at times you just need to drive hard to the basket, rather than negotiate with the defenders.

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 2016 Luke assisted in the AMWU’s submission to the Senate’s Inquiry into the State of the Rail Industry.  This included dynamic modelling of the benefits of the sector under realistic national reform conditions and plausible productivity gains; this research found considerable benefits on offer.  The dynamic modelling was co-produced by the ex-head of Deloitte Australia modelling and ex-head of economic modelling for Concept Economics.






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