070414 good instincts issuu by Xmarx Design Melbourne

Good Instincts Why grower concerns over failing Australian grain transport infrastructure are wholly accurate How serial public policy failure lets down growers, investors and the national economy The credible national grain infrastructure reform framework needed from governments

A Juturna Infrastructure market briefing paper - April 2014

About the author

Luke Fraser BA (Hons) UniMelb, M Mgt UNSW Business School, MAICD is the principal and founder of Juturna, a specialist freight infrastructure market reform and investment advisory retained by Infrastructure Australia and the leading proponent of commercial road freight investments. Mr Fraser served for several years as executive director of Australia’s peak rural freight industry body, the Australian Livestock and Rural Transporters Association, as a council member of the Australian Trucking Association and briefly as a chief of staff in the Howard government. He is a regular contributor to Infrastructure Australia’s Ports Expert Reference Group and was a committee member of the 2008-09 New South Wales Grain Freight Review. Mr Fraser is currently a board member of the Council of Australian Governments Road Reform Project, representing industry. He is also the policy author for the Australian Rural Roads Group. Juturna’s recent work includes commercial road access investment projects in the cotton and grain sectors of north-west New South Wales and southern Queensland, a national road condition reporting pilot scheme for Infrastructure Australia and the Mount Isa Townsville 50 Year Freight Infrastructure Plan. In 2013 Juturna completed an independent review of Tasmania’s entire freight infrastructure sector - its shortcomings, future demand prospects and market reform opportunities – a report which has since had all of its key findings endorsed by the Australian Productivity Commission’s draft report into the same subject.

Comments and questions Mr Luke Fraser Principal M +61 437 146 274 E luke@juturna.com.au W www.juturna.com.au Disclaimer

The views expressed in this paper are those of the author alone and do not necessarily represent those of his clients or other affiliations. All reasonable attempts have been made to ensure the accuracy of the information contained in this report, but Juturna reserves absolute discretion in updating or amending this document.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

About this briefing...

2013â&#x20AC;&#x2122;s failed multi-billion dollar attempt by global food giant Archer Daniels Midland (ADM) to take over the Australian grain handling business Graincorp (the sale was blocked by the Australian government) synthesised the concerns of many Australian grain growers, who produce some of the highest quality and least-subsidised grains in the world, but who must watch as outdated freight infrastructure arrangements add spiralling costs and questionable competition arrangements to their grain, once it leaves the farm gate. Such concerns are magnified when placed in the context of Australiaâ&#x20AC;&#x2122;s declining on-farm productivity levels and the rise of competitor nation farm and freight infrastructure productivity as a trade advantage. In 2014, even obvious strategic issues facing grain freight remain unexamined by the agencies responsible for road rail and port assets. No serious national planning of the task takes place. This failure to act on improving freight â&#x20AC;&#x201C; which represents perhaps around 30% of the total production costs of grain1 - cripples grower competitiveness. For example, the unquestioned ongoing subsidy of costly and entirely disconnected pre-Federation branch line railways across the east coast serves only to push the transport costs of grain up, by atomising tonnages across too many compromised east coast sea ports, instead of working strategically towards a mainline rail network which serves fewer ports offering greater scale, mix and competition efficiencies for growers. Such challenges demand government policy leadership if markets are to make investment and operational changes for the better. Yet no such leadership is in evidence.

This is the landscape that confronts investors in Australian grain, as well as growers. With that in mind, moving on productively from the damaging Graincorp sale ban of 2013 – ‘reopening Australian agriculture for business’ - requires development of a credible and internally-consistent policy framework for leasteconomic-cost road, rail and port infrastructure in support of Australia’s east coast grains industry – a national framework to guide stable asset investments and in turn bring growers and patient capital investors alike more reliable and profitable returns.

inefficiencies for another major asset investment cycle – the world’s best and least-subsidised grains consigned to further decades of freight infrastructure stagnation.

It is in government’s power to provide such a framework. Doing so would defuse much tension between grower and investor by addressing the common cause of many of their problems.

This briefing uses the failed takeover bid of Graincorp by ADM as a prism through which to examine this phenomenon. It leaves aside the bona fides or otherwise of that bid to consider why the freight infrastructure matters evinced such divisive and passionate views. It examines the most significant road, rail and port policy failures in some depth and closes by advocating adventurous national transport sector reform that would complement the general optimism of Australia’s grain growers.

Without the sense of purpose and plan that national policy leadership would bring, a great irony will remain in the grains sector: the market cost of capital is at historic lows. Global and domestic investors alike have never been more interested in making large capital investments in Australian agriculture, yet freight infrastructure financing – particularly for equity – is increasingly seen as ‘just too hard’. Such a value proposition is something that the many disconnected and ramshackle local, state and federal government road, rail and port plans of today – if they can genuinely be called ‘plans’ at all – cannot deliver to the market. The bleak alternative to genuine national policy reform is for investors to continue trying to make their own unguided investment decisions on the same outdated, broken and inefficient grain infrastructure patterns and systems that exist today. This would condemn the grain sector to retain all of its present

Genuine infrastructure reform in grain freight offers much wider benefits to the nation: A grain reform framework would help to identify and solve important structural challenges to road, rail and port infrastructure. Australia’s freight task is moving steadily towards a trillion tonne kilometres of product annually2; national, valuecreating solutions need to start somewhere.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

State of play: Australia’s agribusiness sector not open for business? The course of Australia’s grains sector has not run smooth of late: in November 2013 the federal government rejected a proposed $3.4 billion dollar takeover of the nation’s largest listed agribusiness, the east coast grain handler Graincorp Limited, by US-based multinational food company Archer Daniels Midland. The Australian government’s wellreported argument was that the sale would be ‘contrary to the national interest’. For more than a year after a first bid was tabled by ADM, government inquiry into the sale evinced much genuine grower discontent; the Australian treasurer himself noted in his eventual decision to bar that sale that: ‘Many industry participants, particularly growers in eastern Australia, have expressed concern that the proposed acquisition could reduce competition and impede growers ability to access the grain storage, logistics and distribution network’3. Other parties spoke of the importance of ADM bringing significant new investment to Australia’s ageing, capital-starved east coast grain supply infrastructure: it had not been refreshed in decades and in any event it had never been planned and engineered to support modern deregulated trading realities.

Still others speculated that growershareholders in Graincorp had been resigned to suffer transport infrastructure inadequacies whilst much of the infrastructure was theirs to own, but uncertainty over the prospect of what a new owner might do to address such problems would prove more compelling motivation than the windfall that a sale to ADM might bring. In the period since the ADM bid for Graincorp was rejected, no view has been advanced on how the industry might move ahead post-sale ban in a way that would offer a value proposition to grower and investor alike. Graincorp itself has signalled that failure to secure new capital investment is a major risk to sector productivity4. The lack of any thorough and published government vision for reform of these arrangements will make prospective capital investors in this sector increase their risk premia on new investments, given the risks that the policy vacuum represents; it will also reaffirm grower cynicism that smart market-led revitalisation of the grain supply chain is a very distant prospect.

The Graincorp – ADM saga: Never mind the result – ask why the dog barked.

There are many different themes tied up in the ADM-Graincorp takeover saga: resentment over the transition away from monopoly wheat marketing, information access concerns, future marketing challenges and quality control are all among them. This briefing only seeks to deal with transport infrastructure concerns. The most important question to ask in this regard is also the simplest: why did the proposed takeover so anger many Australian growers? Was it emotional overreaction? Was the Graincorp takeover controversy a ‘cut and dried’ case of protectionists versus free marketeers, as some have portrayed it? Grain investors, politicians and government policy makers should take the raw emotion around this issue as an important cue, as real and significant ‘post-farm gate’ transport productivity challenges do lie at the heart of the instinctive concerns of many growers and investors, who have been completely abandoned through decades of policy failure and neglect in this field. Or to put it a little more colourfully, if the farm dog who rarely barks suddenly cannot stop barking, it is usually well worth the master going to see what the problem might be…

Good instincts: Australia’s east coast grain supply chain is unfit for purpose and has no framework for improvement Grower instincts about the inadequacies of Australia’s east coast grain freight infrastructure are unfortunately all too accurate. The road, rail and port assets that underpin the world’s most productive and least subsidised grain sector are, in many cases both in the physical and policy sense, completely unfit for the highvalue, world-leading and deregulated grain export purpose which they are presumed to serve. Unfortunately, when such views have been voiced in the past, they have too often been accompanied by an overtly protectionist philosophy. This appears to have led many economists, policy makers and regulators to dismiss such concerns out of hand. Yet when stripped back and examined on their public policy merits, grower observations about the problems deserve attention: they point unerringly to abiding structural inadequacies in Australia’s modern grain transport task that have remained without any productive government attention for decades.

The nature of the problem – no sense of purpose for grain infrastructure Successive governments – specifically, their road, rail and port policy makers - have failed to offer any sense of a system for grain freight. Most responsibility has fallen to the states rather than to Australia’s national government; these governments have done next to nothing to coordinate their road, rail and port planning and investment approaches for a stepwise improvement of the grains sector. This in turn has retarded the operational efficiency and reduced the profitability and scale of private sector investments that can be made. Even had ADM’s bid for Graincorp proved successful, the new owners would be greeted with an investment landscape resistant to truly productive investment across the supply chain:

Roads East coast Australian end-destinations for grain shift markedly in response to global prices and fluctuations in harvest quality. Such factors can shift tonnages between feedlots, domestic mills and export ports at very short notice. High productivity road freight is therefore an essential ingredient for such a dynamic trade. Yet despite Australia leading the world in trucktrailer productivity, many roads are too poor to carry these modern vehicles, while fresh public finance to upgrade politically-unloved rural networks is not in evidence. Market-led, user-pays investments in roads to feedlots, mills and railheads are not permitted by the nation’s monopoly provider road agencies, despite this already being permitted in the mining sector, and proven in many case studies by Infrastructure Australia5. This means bigger more productive trucks are not permitted to make their own efficient investments to service key sites. In addition, the failure of wider road reform efforts to directly price the key interstate highways that compete with major grain-friendly rail projects such as Inland Rail means such national rail aspirations will remain non-commercial, while trucks will not recover the full cost on and of their capital on these major highways. These are first order national inefficiencies in the freight network with implications beyond grain.

Rail One hundred and thirteen years after the Federation of Australia’s British colonies, the rail system for grain remains the same pre-Federation system of different gauge railways made up of many disconnected and maintenance-intensive branch lines across three Australian states – Victoria (broad gauge), New South Wales (standard gauge) and Queensland (narrow gauge). These rail lines are ‘hard-wired’ to disperse their grains to many different east coast ports – the railways follow the old colonial paths of settlement (the Brisbane River Valley; the Hunter River Valley; the Sydney catchment; the Illawarra; Port Phillip). In effect these grain

rail networks amount to ‘short line railways’ – modest in size, lightly-engineered and capable of carrying only modest train lengths. This still occurs today rather than grain rail freights being part of a more productive, multi-freight intensive east coast mainline- such as the big transcontinental rail networks seen in the US and Canada.

occur and some grain train operations clash with higher-priority urban passenger train timetables. As a low-value commodity, grain suffers in these places more than most products. Few ports offer growers any competition in their terminal infrastructure: the tonnages are too meagre, the expansion costs to high, the land availability uncertain.

Rail economics suggests that ‘short line’ rail only works profitably with high freight densities and few (preferably one) origin and destination points. For that reason, maintaining a series of fundamentally disconnected railways where grain is usually the only freight available – and only intermittently, depending on where rain falls - is in theory economically disastrous for the viability of these networks and for the efficiency of grain carried on them. Confirmation of this thesis can be seen in train operators’ unwillingness to invest in new dedicated grain locomotives and rolling stock for grain tasks.

This situation occurs rather than sending greater consignments of grain to fewer ports, in places where the economic prospects for competitive terminals and bigger stockpile development are better, where congestion is lighter and competing land use and rail and road traffics are less evident. This is the fault of laissez faire government port planning, which has failed to give any signals to patient investors about which ports offer the best opportunity for long-haul rail to ports, and market awareness of which ports offer land planning and costs are more sympathetic to competitive, large-scale bulk operations in decades to come.

Rail’s inefficiencies for grain are also very much the result of almost a decade of road reform inertia, which has yet to establish like-for-like highway and railway freight charges in those specific places where road and rail compete directly with each other for grain and other traffics - meaning much east coast grain traffic remains on roads rather than potentially moving to a more cost-effective mainline inland rail solution.

Ports As already alluded to, one direct consequence of Australia not attending to its pre-Federation grain rail footprint has been that most east coast grain still moves in relatively small scale consignments to what appears to be too many east coast ports, which are the historical termina of each of these disconnected railways. While this might have made sense in colonial times, most of these east coast grain ports now find themselves cornered in the middle of Australia’s largest capital cities or in expanding regional centres: the high values of such locations bring strong alternative use planning pressures, high port site development and expansion costs and compromised rail and road access through higher urban road congestion; rail curfews can

There are other misguided interventions by government – such as continual road freight upgrades to highways that compete directly with the Inland Rail project – which serve to retard development of a national framework for grain freight still further.

Stagnation needs to be recognised How do national competition policy objectives impact on the grain freight task and what is the long-term structural path to align this sector with a competition-reformed Australian economy, so that it delivers more to growers, investors and the nation? Not a single review of grain infrastructure since the reform of Australia’s economy through the 1990s has asked this question, yet it lies at the heart of most modern grain freight operational inefficiencies, investment barriers and competition concerns. By far the greatest challenge in grain freight is the lack of appetite amongst road, rail and port bureaucracies for a true ‘least-cost’ framework for the sector. Instead, atomised public sector plans – the status quo – continue to deliver poor and disconnected spending patterns in different places; a failure to deal with core financing and

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

planning challenges only reinforces underlying and inherited inefficiencies. Too often, Australia’s many-layered transport bureaucracies have hidden behind claims that these matters are too complex to deal with in a single framework, or that simple and robust principles would oversimplify extremely complex issues. A serial tendency to over-complicate and resist strategic reform is a sure sign of bureaucracies in need of renewal.

2014: still no government plan for value Today, the move to a dynamic, 365-day a year trading reality has placed far more obvious new stresses on the infrastructure and its operational, planning, investment and competition inadequacies. But on all the evidence, as neither state nor federal governments know what problem they are trying to solve in grain logistics, the observed case is that they tend to either do small and isolated things; or most often do the wrong thing, by reinforcing the legacy arrangements.

Why the problem has greater impact today The grain market structure of earlier times probably helped to mask the depth of public sector grain planning failures: ‘single desk’ monopoly grain marketing and the more gentle, scaled-up logistics arrangements that went with it – such as quarterly grain marketing movements from a single grain ‘stack’ – made freight more manageable on traditional lines. Also, from the 1960s onwards, grain’s underlying road, rail and port assets were mostly at the beginning or middle of their investment cycle. Such factors have sheltered governments from inherent failures in cross-border planning and investment for grains.

The absence of policy clarity and market guidance in these matters left the ADM-Graincorp saga without a much needed ‘landing strip’ of systemwide structural reforms in grain infrastructure and operations that all parties could aim towards – investors, growers and governments alike. In 2014 continued lack of progress on that front will further damage Australia’s reputation amongst patient capital investors, at the very time when such capital has never been cheaper or more willing to invest in Australian agriculture, and during a phase when existing grain infrastructure has reached the end of its useful life-cycle and major new investments are overdue.

The 1990s: infrastructure policy objectives changed, but grain infrastructure never adapted

Some viewed the Graincorp takeover as marking ‘battle lines’ between vulnerable grower and ravenous investor. Yet both parties have much in common: they both seek a value proposition in grain logistics and find little on offer. Both parties are right to question why the nation’s bureaucracies and regulators have been so demonstrably negligent in not outlining a vision for how more efficient grain transport is to come about on Australia’s east coast and how the sector’s transport infrastructure is to be aligned with the nation’s post-competition reform economy.

Much existing grain freight infrastructure was put in place at a time when Australia held quite different economic policy objectives. In decades past, most of the infrastructure was state-owned. Public good and the maintenance of historical patterns of (white) settlement were the principal economic policy objectives of the day, not economic efficiency. The economy-wide competition policy reforms that dragged Australia out of economic stagnation in the early 1990s made economic efficiency the new guiding priority of infrastructure planning and provision, but grain infrastructure was never considered as a ‘system’ in this latter context. As a consequence, much of the transport bureaucracy directly responsible for these networks – particularly road agencies and state port authorities – were never restructured to reflect the new realities. Grain has suffered from these oversights ever since.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Stalling on-farm productivity and competitor advances: why Australia’s grain freight efficiency matters more now Australian farmers see a great gap between the quality of their own operations – which lead the world in efficiency and lack of state subsidy – and ‘post-farm gate’ transport inefficiencies, which often improve extremely slowly, if at all. This

situation is being exacerbated by a measurable slowing in Australia’s on-farm productivity: as the grower finds growth harder to come by on farm, the costs beyond the farm gate loom larger on the bottom line.

Australia: gold standard in farming efficiency Australian agriculture is recognised globally for its lack of subsidy:

OECD Total Agricultural Support Estimate 2012

4.00

3.50

% of national GDP

3.00

2.50

2.00

1.50

1.00

Indonesia

China

Turkey

Korea

kazakhstan

Japan

Iceland

Switzerland

USA

Norway

OECD

Russia

Ukraine

Mexico

Canada

Brazil

Isreal

Chile

New Zealand

South Africa

Australia

0.00

Source: OECD agriculture producer support estimates 2012

Productivity growth in Australian agriculture between 1975 and 1999 was up to 4 times higher than the rest of the Australian economy for this period, and the Australian farm sector’s

productivity growth grew at twice the rate of a selection of OECD countries over roughly the same period6 This occurred even as the terms of trade for Australian agriculture declined:

Broadacre total factor productivity and the agricultural terms of trade 200

Index

150

100

0 1977-78

1987-88

1997-98

Terms of trade

Total factor productivity

2007-08

Source: Nossal, K. and Sheng, Y. (2010), Productivity growth: Trends, drivers and opportunites for broadacre and dairy industries, Australian Commodities, March Quarter 10.1: 216-230. But for a variety of reasons (still not fully understood, but including more drought years, an ongoing reduction in rural industry research and development since the 1970s and the end

of economy-wide national competition reforms in the 1990s) the rate of Australiaâ&#x20AC;&#x2122;s on-farm productivity growth is slowing:

Trend change in TFP for the broadacre agriculture industry, 1952-53 to 2006-07 350 2.3%

-1.7%

300 2.2%

TFP Index

250 200 150 100 50 0

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Financial year ended Note: Light blue columns show drought years

Indeed, other research suggests on-farm productivity in Australian might well have been slowing from as early as 19947. Whatever the result, there is at least a consensus that, just as for the rest of the Australian economy,

overall agriculture productivity growth appears to have been negative for too much of the time since after 2000 for anyoneâ&#x20AC;&#x2122;s liking8. Revitalising strong on-farm productivity growth will be difficult at best: the Australian Bureau of

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Agricultural Research Economics and Sciences (ABARES) has argued that: Returning to (historically higher on-farm) growth rates may be more challenging in the future, and may increasingly depend on new sources of productivity growth’9.

In the meantime: Australia’s neighbours learn fast Other countries are pursuing their own on-farm productivity growth off far lower bases, often by adopting Australia’s world-leading practices. The scope for the growth of on-farm productivity in these developing economies remains vast, and should be of real concern to Australian agricultural policy makers: in Indonesia, for example, it has been estimated that shifting to higher-value crops and adopting more modern production methods could help that nation’s cropping sector expand to 310 million tonnes by 2030; it has been further estimated that up to 130 million of these crops could be exports10.

Similarly, the USA is endeavouring to turn greater attention to transport infrastructure post-farm gate: the US food sector has been found to use more infrastructure per dollar of domestic consumption than other industries in the United States14; this suggests that the efficiency gains from shrewd post-farm-gate transport spending should be amongst the most productive that a government could make. In recent times, the US government has allocated many millions nationwide to dredge key ports to be ready for the bigger Post-Panamax ship draughts and beams that will become the efficient shipping standard once the Panama Canal is widened by 2014-5 - doubling the capacity of the canal. The awakening of on-farm productivity elsewhere should be a signal to Australia – already the world’s most productive grower – that new sources of productivity growth must be found ‘off-farm’, and fast.

Clear problem, much talk, no policy action In another indication of huge growth potential off a low base, only around 4% of Africa’s agricultural footprint is at present irrigated – leaving enormous scope for significant crop productivity gains11. More generally, one estimate sees the world having nominal access to a further 450 million hectares of lands suitable for medium to high-value cultivation12. While pursuing ongoing productivity gains onfarm remains wise counsel for Australia, policy attention is beginning to turn to what happens to farm products when they leave the farm gate, as this promises to be a more fertile new source of significant productivity growth, other things being equal. In 2009, a Chinese study of 30 provinces found that of transport, electricity, telecommunications and irrigation infrastructure as well as training and education, it was transport infrastructure – most notably roads – that would induce the most substantial impact on farm technical efficiency’13. No doubt the Chinese government will orient its future planning more strongly to this end as it pursues food security and seeks to continue alleviating rural poverty through farm productivity.

Structural and system responses from government have, on evidence to date, been entirely lacking. The Australian Senate’s Rural and Regional Affairs and Transport References Committee conducted an inquiry into the ADM takeover of Graincorp in 2013. It received many strong grower views in this regard. The New South Wales Farmers Association told that inquiry: ‘…our members need to see improvements in competition. We cannot be locked into the suboptimal bottleneck infrastructure that we have’. These improvements are not yet reflected or even aspired to anywhere in infrastructure planning and investment policy: this suggests that Australian agricultural, transport and infrastructure agencies have not grasped the importance of post-farm gate logistics, or if they have, they do not know how to implement a better solution. There remains no government planning in this sector worth the title.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Policy failures: grain and roads

1 Grain road freight is shackled from being more efficient and responsive: no commercial road investment and access for private gain on public roads has been permitted the grain sector â&#x20AC;&#x201C; despite this being enjoyed in Australiaâ&#x20AC;&#x2122;s mining sector for the past decade

2 No road asset reporting and no agreed national standards for road provision stifles road spending efficiency: there is no national condition reporting of Australian roads, so government has no means of identifying more efficient spending candidates, nor can grain investors develop business cases for their own preferred commercial freight upgrades

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

1 Grain road freight is shackled from being more efficient and responsive: no commercial road investment and access for private gain on public roads has been permitted the grain sector – despite this being enjoyed in Australia’s mining sector for the past decade

Were one to ask Graincorp or anyone else in the Australian grains sector to describe a transport system for grains which they could influence through their own efforts, roads would be left out of the answer. Australia’s roads remain public monopolies – the last entirely unreconstructed economic infrastructure monopolies in the Federation. There is no ability, outside a handful of urban toll roads and the mining sector, for the market to influence and invest in more productive Australian road outcomes. The wholly taxpayer-funded road infrastructure on which the modern grains journey begins – from paddocks and major storage sites to railheads, mills and ports – remains far outstripped by the efficiency of Australia’s modern road freight vehicles, which lead the world in productivity and innovation. Grain-haul vehicles could be more productive still on many routes, but most roads are not in a condition to allow better access. Little taxpayer funding exists for such upgrades: vote-rich urban, peri-urban and inter-capital highway spending dominates a politicised roads budget. As a result of being solely reliant on taxpayer funding and run by monopoly public sector agencies, Australia’s key grain networks generate less post-farm gate productivity than they otherwise might. Local and state governments make all decisions on vehicle access. These governments have too little funds, so there is never much incentive to grant access to larger, heavier trucks, which would degrade roads more quickly15.

Commercial road access and investment rights: written into Australian competition law, then ignored completely The Australian commercial access to infrastructure regime, in part IIIA of the Competition and Consumer Act 2010 – a key part of Australia’s competition reforms - includes Australia’s roads expressly as an infrastructure asset that is legally open to commercial investment and better vehicle access. This should mean farmers, truck operators or financiers would be allowed to pay for the cost of road upgrades to allow much higher-productivity vehicles to access the road in question; under this arrangement, anyone willing to pay the levy can gain access to the more efficient freight, but other road users – while they can still access the public road – cannot get access to the higher productivity vehicle. If it makes sense to invest for commercial gains, people will do so. This same approach is the basis for commercial rail access in Australia.

Mining enjoys commercial access and investment to roads, so why not agribusiness? Not only are roads mentioned expressly in national open access legislation16, but parts of Australia’s mining sector have been enjoying even simpler road access and investment arrangements for over a decade: typically, this involves mines paying the local or state government a negotiated extra cost in order to access public roads with larger heavy vehicles under safe and sustainable conditions. Miners thereby gain productivity gains with bigger vehicles, provided they pay for the cost of the associated road upgrade17. In other words, none of this is new. Yet grain traffic is not given this opportunity.

Rail efficiency also suffers when no commercial road investment is allowed… Could some road freight tasks become over 50% cheaper with user pays freight investments? Infrastructure Australia case studies in northwest NSW with grain carriers, farmers and local road engineers show that commercial upgrades to cash-starved grain roads to allow longer trailer combinations would bring a net road freight productivity gain to growers of over 60%18. The resulting road upgrades – made under user-pays arrangements – upgraded priority grain arteries so that product is not delayed for months by wet roads; in this way, significant grower holding costs are avoided. Those choosing to pay a freight surcharge receive cheaper freight on a larger vehicle. The rest of the community benefits from a better road. Despite this promise (and the fact that these measures are already in place in parts of the mining sector), such investment mechanisms have only recently been ruled out entirely as productive parts of a road reform landscape by the formal national road reform process and – remarkably – by Australia’s Productivity Commission19.

The absence of this crucial commercial investment facility means that higher productivity vehicles servicing the key rail mainline in more efficient ‘hub and spoke’ arrangement remain far from reality for Australia’s grain task – something that further undermines the commercial viability of rail. …but on-farm storage suffers most of all The absence of commercial road investment mechanisms also limits the aspirations of onfarm storage cooperatives of any scale – these are a fast-growing phenomenon since the deregulation of the wheat market. ANZ bank has observed correctly that: ‘Australia should look to increase competition in the supply chain to facilitate the presence of additional land transport operators, traders and handlers and encourage on-farm storage’20 But this aspiration – a means of farmers retaining more profitability for their risk and effort – cannot really occur without smart commercial investments of scale being permitted in the road freight network that services major on-farm storages. The lack of commercial investment models in roads is leaving post-single desk cooperatives and other privateers high and dry. It is important to recognise that any investor in the network – large or small - will face all these barriers to reshaping a more dynamic road network. This needs to change.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

One other major challenge to doing better in roads is the lack of even cursory cost and condition reports on the road network itself, or measurement from year to year of how it is or isn’t improving for funds spent. In simple terms, Australia’s road agencies and local governments spend over $19 billion from year to year on roads21 , without bothering to measure to common standards or service levels, as for many other assets. This failure to require asset condition reports falls particularly hard on rural roads which service the grains sector, and which cannot receive system-wide planning attention without such condition reports. At the same time, rural local governments cannot debt-fund their road requirements but do not have access to sufficient own-source revenue streams (parking, property development revenues) which might help improve their degraded networks. In their lack of asset reporting and commercial investment structures, roads remain the ‘odd man out’ in Australia’s economic infrastructure.

The unreformed road agency sector – a cautionary tale? Through the poor outcomes seen daily on their rural and regional roads, Australians have a chance to glimpse what might have happened to the rest of their telecommunications, water, energy and railways assets had competition reforms not taken place in the 1990s to encourage private investment in these assets: many roads are in poor condition and getting worse; nobody in industry or the community has an ability to influence the road spending pattern, short of exhaustive and expensive lobbying; roads are not maintained to any clear and agreed standards, leaving rural and remote roads in particular to languish as the construction cost of expensive big highways increases at rates far above CPI; around $19 billion in taxpayer funds per year is now allocated to roads on a flimsy basis, in which political influence on spending patterns remains strong; no asset condition reports are sought or kept nationally for the condition of Australia’s roads, much less made public, making analysis of government spending performance and the development of measurable road standards impossible.

Infrastructure Australia’s recent judgement on this state of affairs is damning: ‘Even supporters of the system find it increasingly difficult to defend. Unlike almost all other infrastructure and government services, road spending comes with no expectation of efficiency. There is not any evidence to show that we are making the best decisions. This is unlike any other critical function in the country. In education, there are literacy tests, in defence, performance reviews, in rail, on-time running. In roads there is purely a photo-op of a fresh piece of bitumen. Somehow it has been deemed appropriate to spend $19 billion on something, but never feel the need to measure the results’22 This lack of transparency about what roads are worth and how much it would cost to upgrade them to accept more efficient freights in key places also makes it impossible for grain growers, consignors and financiers to start considering the cost-benefit of making their own targeted investments in key parts of the road network for grains.

Practical solutions are at hand… To prove that it could be done, in January 2014, Infrastructure Australia published a full condition audit of almost 2% of Australia’s road network, produced by the key grain and cotton growing local governments of north-west New South Wales and southern Queensland. Despite bureaucratic scepticism, these local councils produced condition reports on every kilometre of their roads in less than three months, to Australian and international road asset management standards, at no additional cost to their budgets. Such information – which could be reproduced nationwide on a regular basis and could also be linked to funding based on the achievement of basic road standards - is therefore readily available, but not yet used by governments to drive any road spending and planning efficiency.

In the meantime, farmers must rely on a diminishing pool of taxpayer funds to pursue their road upgrades. In turn, Australian rail investors cannot accelerate high-productivity commercial road freight connections to their railheads to reduce rail costs. In the years ahead, grain growers also face the prospect of higher and higher road user charges being required just to keep pace with the $19 billion-plus annual spending arrangements. Infrastructure Australia has argued that road reform is the most significant infrastructure reform in Australia because this asset class is the worst managed in the country23, but there is little evidence this has been grasped by those responsible. Certainly, as was the case with all other pre-reform monopoly government utilities, road agencies have shown little interest in genuinely reforming themselves. Not surprisingly, roads are the part of the grain freight task that is the most dominated by the public sector, which controls all planning and funding, yet where productive policy is least in evidence. A credible grains policy framework for roads that involves more efficient spending and potential commercial investment is a matter that government alone can lead on.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Policy failures: grain and rail

1 There is no stated national planning and investment objective for what grain on rail should deliver: east coast grain rail remains a series of degraded and disconnected 19th century branch line operations which are hard-wired to disperse grains into too many ports. This ‘system’ is ignored by rail investors for its sub-economic nature and subsidised by taxpayers as a proxy. Ongoing government and market investment in such arrangements are likely to reinforce national inefficiencies in grain movements and directly undermine the prospect of mainline rail-to-port solutions, like those seen in Canadian grain logistics.

2 The east coast grain rail ‘system’ continues to push most grain the ‘wrong way’ in terms of a least-cost freight path: that is, the majority of grain tonnage is railed to the busiest and often most expensive city ports, where grains are not the dominant freight and compete unfavourably with coal and passenger rail, urban congestion, operational restrictions and higher terminal and rail development costs, instead of railing north or south to bulk ports with better future prospects for scale, mix and competitive efficiencies in grain.

3 No government planning priority on the relative future amenity of different ports to mainline east coast rail operations only reinforces inefficient grain movement patterns on old branch lines: governments are failing to send the investment market any clear development signals about scaled port investments that will support a least-cost mainline rail solution.

4 Continued government funding of major heavy vehicle upgrades to highways that run parallel to mainline rail, combined with a lack of reference pricing for full cost recovery from heavy vehicles on these specific intercapital east coast routes, continues to sterilise a market for commercial mainline rail investments that would benefit grains, such as the Inland Rail project.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Australia’s rail sector has been through significant market reforms in the past two decades. The planning and investment arrangements for rail today are out of all recognition from the monopoly public sector rail providers of previous decades. Operational productivity has risen markedly since these reforms. Yet in the past twenty years, there has yet to be a national framework agreed and implemented for rail as it relates to the grains sector. Instead, growers and investors have continued to experience underdeveloped and ageing legacy branch line infrastructure without questioning whether there are not better solutions for the long term. In effect, Australia’s grain on rail network amounts to a series of disparate and outdated branch lines, on different rail gauges, which all service different local ports – much as they did before Australia’s colonies federated in 1901. The failure to think long-term and collegiately - as a Federation - has been exacerbated by old parochialisms: it is state governments rather than the Australian government which have most control over east coast grain freight infrastructure: ‘Overall, no coherent vision or policy yet exists for rail at either Commonwealth or State level – either in its own right, or as an integral component of wider policies covering freight transport and logistics…Regional lines in Australia, in particular grain lines, have suffered

from the policy vacuum and from a generally ‘hands-off’ attitude by state governments’24.

Inaction has bred grower and investor frustration, but not productive answers Grain growers and consignors live this failure of infrastructure planning on a daily basis. Investors in the supply chain receive little to no returns for their freight investments, while growers see little efficiency in the status quo. In the absence of government being frank about the long term challenges and realities of grain freight infrastructure, as discussed above, many growers look nostalgically to a better past: in 2006 many Victorian growers saw the answer as government takeover of the grain branch lines: ‘It is clear that the government’s vision for the performance of the privatised track owner in maintaining the asset or making it available for third party operators has not been fulfilled. The simplest resolution to this long standing issue would appear to be the re-acquisition of the track by the government’25. Such solutions would have the taxpayers of Australia subsidise the grain sector’s fundamentally non-commercial, disconnected 19th century rail assets. This is indeed more or less the current approach to such lines in most states: the New South Wales Independent Pricing and Regulatory Tribunal’s 2012 report into that state’s grain railways found that:

‘The (NSW) grain line network is old, and many parts of it have fallen below a standard considered fit for the purpose of transporting grain. Currently, the government funds over 95% of ongoing maintenance costs… at current levels of usage and access prices, rail users contribute less to maintenance costs than the value of benefits they gain privately from using the network’26. Presumably, these matters are well understood by the public sector, yet no bureaucracy has yet felt compelled to speculate on a better alternative.

In theory: what would ‘better’ look like? A more efficient, system-wide approach to east coast railing of export grain – one that helps grain ports and grain rail to become more viable together - is not hard to describe in theory. Following well-established economic principles of ‘least-cost financial and economic pathways’ for grain would involve: bringing the grain from farms and initial storage points to a core mainline as reliably and inexpensively as possible; taking that grain on a (north-south) mainline that does not lose significant efficiency by competing for scarce space with (eastbound) coal, passenger and other rail traffic congestion; and

To understand the real prospects of branch lines, look at the locos… Where governments cannot speak clearly about their intentions for branch lines, markets will. One only need examine the commercial locomotive and rolling stock fleets that service much of eastern Australia’s grain task to see what faith the market places in the viability of this part of the supply chain: the aged Class 48 locomotives that service the New South Wales grain branch lines (locomotives first built in the 1950s) were undoubtedly depreciated to a nominal value long ago by their present owners; very little new expenditure is apparent on such locomotives and few new wagons exist for the grain task: today’s east coast grain wagons are often pensioned-off and ‘rebirthed’ coal hoppers. In this way, the rail freight market itself is offering very clear signals to Australia’s east coast governments about the viability of the current east coast grain branch line network. Yet on all the evidence, these market signals are being ignored by the public sector.

railing these (north-south) tonnages to fewer ports for far more efficient operations – places where expanded grain stockpiling, access and operations are least challenged and where more terminal competition can be encouraged due to the larger scale of operations.

The required discussion revolves around why a comprehensive and efficient open access commercial grain supply chain can’t be planned and delivered. Capital markets seem to have noticed this problem: ANZ noted in 2012 that: ‘Significant underinvestment in some areas of infrastructure, particularly in Australia’s east coast railways for grain, also needs urgent attention as they have become major growth constraints’27. However, the efficient answer for rail is unlikely to be blind investment across an existing rail network that is of questionable value to the 21st century grains task. A first step lies in appreciating what an efficient grain commodity rail system might look like, drawing on the best international examples.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

The Canada comparison

When compared to the grain haul rail systems employed by other modern global grain exporters, such as Canada, the shortcomings of Australian government decision-making in postfarm gate infrastructure become obvious. The east coast Australian grains task hardly exhibits many economy of scale features â&#x20AC;&#x201C; east coast grain today is moved to 13 different ports (ie excluding Western Australia and Tasmania ports28), overwhelmingly across separate rail corridors already congested with coal and passenger trains. Even though Canada and Australia often export a comparable tonnage of grains, Canada gains greater export efficiency by bringing the overwhelming majority of export grain from its central grain growing regions via a transcontinental mainline railway; it rails the majority

of this grain in long trains to just a few large scale ports on its east and west coasts. Canadaâ&#x20AC;&#x2122;s grain on rail task is itself not without its own capacity, competition and efficiency challenges29, but one challenge it does appear to have solved is inherent scale in its rail and port grain operations. The charts opposite show the market shares of Canadian and Australian grain ports. The big shares enjoyed by the major mainline Canadian rail destinations such as the port of Vancouver help serious heavy rail companies to service fewer places with bigger tonnages, more profitably.

Vancouver

53%

Port Cartier 1.75%

Prince Rupert 17%

Churchill

1.75%

Quebec

Sorel

Baie Comeau 5%

Goderich

Trois Rivieres 4%

Sarnia

Montreal

Halifax

0.85%

Prescott

0.15%

Thunder Bay 2.5%

Canada grain export million tonnes by port 2011-12 Source: Canadian Grain Commission 2011-12 (*excl. Prairie and Ontario Elevators); By contrast, the market share of Australian ports paints a sad picture for would-be rail and port investors: there is no obvious port of scale to pursue greater tonnages at less cost:

Fremantle

12%

Esperance

Melbourne

10%

Newcastle

Kembla

Sydney

Adelaide

Giles

Geraldton

Portland

Lincoln

Wallaroo

Geelong

Thevenard

Brisbane

Mackay

Albany

Gladstone

Australia grain export million tonnes by port 2011-12 Source: Ports Australia data FY 11-12 supplemented with Port of Geelong data (excl. Tasmanian ports) Although it operates on different regulatory and ownership models in other senses, Canadaâ&#x20AC;&#x2122;s rail and port arrangements for grain can help to shed light on the sub-scale nature of Australiaâ&#x20AC;&#x2122;s rail and port sector when it comes to east coast grain movements.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Inland Rail: a ‘scaled-up’ freight solution for grains’ future?

An alternative arrangement for Australia’s east coast rail for grains - and for many other freights - would be to replicate the sort of productive Class-1 rail network to larger-scaled export ports which Canada enjoys. To drive scale economies at port and freight densities on rail, the Inland Rail would most likely need to run to fewer, larger ports – thereby retaining some competitive tension, but offering greater rail tonnages to give port owners encouragement to make investments of greater efficient scale and mix. This sort of systems approach for efficient mainline grain logistics is a long way from the present situation – a fact that many in the grain sector appreciate, to their cost.

The perennial ‘bridesmaid project’ The Inland Rail has been shelved and rerouted by successive federal bureaucracies. At times even the concept itself – a common gauge mainline railway linking eastern seaboard states and thereby the nation - has been at risk: as late as 1999, the Queensland transport agency entered serious discussions with the federal transport department to build a narrow gauge Queensland rail extension to link Narrabri in New South Wales with the Port of Brisbane using Queensland’s obsolete narrow gauge track. Fortunately this proposal was finally rejected, but the incident nearly unravelled 100 years of effort to resolve Australia’s break of gauge problems, and served to underline how little store is actually placed in Inland Rail by the nation’s bureaucracies. Since this time, the Inland Rail has languished as successive governments have diverted limited rail funds to the east-coast port rail networks – in very many cases these ports are direct competitors for Inland Rail freights. In the meantime, multi-billion dollar heavy vehicle spending on direct competitor highways to the Inland Rail – the Pacific, Hume and Newell Highways – continues apace, making Inland Rail an ever-less competitive investment proposition.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

All east coast grains ports – Brisbane, Newcastle, Botany, Kembla and Melbourne – are challenging destinations for grain railing. This is because each of these ports have railways which are always very busy with other traffic, such as minerals (such as coal at Newcastle – the world’s largest coal export port) and/or passenger trains (Botany, Kembla and Melbourne). Such ‘highcompetition’ ports further disadvantage grains by being in major cities, which brings significant urban congestion (Melbourne, Sydney and Brisbane) – all of which leads to higher operating costs at these ports. The higher value of port real estate in major cities (Melbourne, Brisbane, Sydney) exacerbates the situation for grain; in some cases, the higher unit value of other port trades, such as containers, means stockpile space for grains can be very limited. Together, these factors make the spasmodic railing of grain eastwards a difficult and costly process. In almost all cases, grain’s persistence in travelling to high-value, space-constrained eastern ports has meant mostly sole operator terminal arrangements, with no competitive tension in such places to assist growers and a corresponding pressure placed on third parties to enter complex, costly and overly-litigious access regimes.

The fact that almost 10 million tonnes of grain travelled through these busy urban east coast ports in 2011-1230 is a triumph of logistics over very challenging circumstances. Perhaps it is also a triumph over long-run common sense. Notwithstanding the significant sunk investments on the east coast by many freight forwarders, for as long as Australia’s east coast grain industry persists in dispersing its harvest tonnage to too many high-competition ports on largely separate rail routes, instead of investing in a long-distance mainline railway to fewer dry bulk ports of more scale, efficiency, competition and development potential, the status quo inefficiencies in rail look set to remain. Given relative advances in the on-farm productivity of emerging grain export nations, the costs to Australian farmers and investors of persisting with such grain export arrangements look set to become much more significant as time progresses. This situation - or at least its symptoms - appears to be understood to Graincorp too: it told the Productivity Commission in 2009 that: What has impacted on the efficiency of the supply chain more than anything is the availability of rail capability across the east coast’31.

Ports remain a ‘poor cousin’ in grain system planning: for the first 110 years since Federation, Australia did not even possess a coordinated process for ensuring that key ports were protected from competing land uses and given economic development certainty for the longer term: only in 2011 did Australia’s governments agree to a National Ports Strategy; even now in 2014, these matters remain in their infancy in many jurisdictions: most state planning arrangements still tacitly promote the long-term accretion of commodity handling in Australia’s most congested and expensive ports.

Such government failures impact lowervalue freight tasks like grain exports most of all: commercial rail investors are offered no planning and land use insights at state and local government levels for prospective corridors that might - in the long run - offer less congested grain movements that would reduce the cost of railing grains. Without better national planning, the sort of efficient long-haul rail corridors to large scale grain port terminals seen in Canada probably remain only a dream in Australia. For the same reasons, nationally-significant grain logistics initiatives such as the Inland Rail remain very high-risk commercial investment projects.

Better land-side commercial access to ports: all too hard? One important agreement which Australia’s political leaders signed up to with the National Ports Strategy – namely, that all jurisdictions would trial commercial road and rail access models to their main ports – was quickly abandoned altogether by risk-averse transport agencies.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

4 Continued government funding of major heavy vehicle upgrades to highways that run parallel to mainline rail, combined with a lack of reference pricing for full cost recovery from heavy vehicles on these specific inter-capital east coast routes, continues to sterilise a market for commercial mainline rail investments that would benefit grains, such as the Inland Rail project.

The promise of Inland Rail - a commercial mainline railway linking the east coast - becomes a more distant proposition with each new heavy vehicle investment that road agencies make on those trucking routes that compete directly with rail. Such upgrades are priority programs for road agencies. This sort of practice is antithetical to any credible economic policy for a least-cost financial and economic system of grain movements. In that sense, it is probably the most compelling proof that Australia’s transport bureaucracies have no plan for efficient freight whatsoever.

The Newell Highway: the road that stops the Inland Rail? The Newell Highway stretches the length of central-western New South Wales between the small towns of Boggabri in the north, on the Queensland border, and Tocumwal in the south, on the Victorian border. The Newell is one of Australia’s busier interstate linehaul trucking routes, including agricultural commodities. In this sense the Newell is a more or less direct substitute - and a fatal patronage risk - to any commercial Inland Rail investment.

For as long as government agencies continue to build heavy vehicle upgrades on roads that run parallel to or otherwise compete directly with rail freight, Australia is unlikely to see commercial investment in inland mainline rail and the value of its below rail assets will be marked down accordingly.

There can be no question that the Newell Highway is a vital asset for the connectedness of rural communities, local freight needs and tourists in caravans, but should it form the core east coast commodity movement system at the expense of Inland Rail?

Even more importantly, governments have not established full cost recovery truck access charges for the highways which compete with Inland Rail, so as to make the genuine economic price of road and rail on these routes clearer to all investors and freight customers.

This is the question which, self-evidently, transport agencies and governments have not asked. Even in 2014, the New South Wales transport agency has plans which would see further heavy vehicle upgrades occurring on the Newell Highway at Inland Rail’s expense. More ironically still, a March 2014 Inland Rail forum opened by Australia’s transport minister in Moree, a grain-growing centre on the Newell Highway, included a federal government update on Newell Highway truck bypass developments. That is, town bypasses to make the interstate road freight task more efficient at Inland Rail’s expense were announced at an Inland Rail symposium.

Such examples underline the troubling lack of understanding amongst government transport policy makers to the nature of systemwide freight infrastructure planning and its commercial development imperatives. Such policy ignorance in turn builds snares for politicians, who are unfairly blamed by the public for problems which should be resolved by better policy, but which aren’t.

Cheaper freight needs clearer freight pricing Under a strict competitive neutrality approach to maximise the efficiency of road and rail freight to growers and investors, the Newell Highway would be given a specific access truck charge by governments; this would ensure that heavy road freight on the Newell pays an appropriate element of capital and operating cost for maintaining this road freight network; such a charge would very likely encourage investors in an Inland Rail development. In return for direct highway charges heavy vehicles should receive guaranteed service levels and better truck access. But this remains a distant prospect – no access charges for specific highways have as yet been developed; this is despite the formal national road reform process now entering its eighth year of deliberations. In the meantime, the next best step towards a viable Inland Rail network – if that is indeed a genuine objective of governments – would be to make hard decisions about the future of the Newell Highway as an increasingly amenable heavy road freight corridor, rather than as simply a well-maintained regional highway for local freight and passenger vehicle connectedness. The unpalatable economic reality is perhaps that Australia cannot have both productive inland road freight highway and productive inland rail freight railway. It is certainly a reality understood by any prospective commercial investors in Class 1 heavy railways, who recognise the enormous risk posed by relentless freight upgrades on the Newell to any viable Inland Rail investment.

Policy failures: grain and ports

1 No long-term government land use and planning signals for the most prospective grain port expansions significantly reduces the chances of seeing investment in large-scale grain ports with access to competitive terminals.

2 Australia’s ports remain only a primitive offering to the investment market, with significant but hidden downside risks to land-side access and investment.

3 Lack of terminal competition for grains - in part a symptom of grains being sent to the ‘wrong’ ports - forces port access seekers back to dealing with Australia’s overly litigious open access system.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

The policy failings that still beset Australiaâ&#x20AC;&#x2122;s ports â&#x20AC;&#x201C; the dominant physical assets in the supply chain - still represent another major hurdle to greater farming profitability and to higher road and rail investor returns for grain trade. In this, ports, the state agencies still responsible for many of them and regulatory and economic reform advisers such as the Productivity Commission, the National Competition Council and the Australian Competition and Consumer Commission have presided over almost two decades of failing to do anything credible to drive better port planning and investment outcomes for either farmers or infrastructure investors. In simple terms, the pursuit of greater scale in ports requires sympathetic government planning in order to attract patient capital investment of scale. Long planning envelopes from government can provide certainty and a clear program of land release around key sites can encourage investments â&#x20AC;&#x201C; including by competing terminal operators, to promote access competition at grain ports of scale. In most cases for east coast

grain terminals, this has not occurred. In the case of many east coast ports such as Sydney and Melbourne, port land is expensive, and therefore often not very affordable for grain logistics uses in any event; in other cases, clear land release plans for port-related land use have been absent. This makes life especially hard for low-value commodities such as grain.

Port Metro Vancouver: how grain freight scale, mix and competition efficiencies can follow when governments offer leadership in port planning. Port Metro Vancouver on Canada’s west coast is Canada’s largest grains export port. Sensible long-term government planning combined with natural advantages has built scale and mix efficiencies for the bulk trade at this port and this has encouraged terminal competition and future investment certainty – thereby lessening access regulation headaches. In the years ahead the efficiency brought about by these planning efforts is likely to see Vancouver compete increasingly not only for Canadian grains, but for much US grain exports as well. The high-value mainline rail and port relationship for Vancouver is symbiotic: the port’s successive expansions arrangements breed competition and scale of service: there are now 6 different grain loading terminals available to growers at Vancouver (Alliance Grain; Viterra; Cargill; Neptune Bulk Terminals; Pacific Elevators; Richardson International32). In turn, the economies of scale and mix on offer for grain at this port and certainty around port development capacity make it profitable for no less than 3 major railways to come to the port (Burlington Northern Santa Fe; Canadian Pacific; Canadian

National). Train lengths have increased steadily in recent years. In contrast, Australia’s east coast grain ports can rarely accommodate grain train lengths over 650 metres. Australia has no comparable ‘port of scale’ for its east coast grain exports: there is not yet any planning and land use signal from any government in Australia that would encourage a Vancouver-style outcome. This greatly lessens the likelihood of commercial investors risking a major investment in an Inland Rail development across eastern Australia. Even basic facts about Australia’s ports are not readily available to would-be investors: no national government report identifies ports by value of goods moved33; no national report identifies the shipping depths of all commercial ports and any restrictions on further depth development. In government terms, ports remain a matter for their owners, rather than assets which benefit from long-term land use and development planning. Investors and growers alike suffer from this neglect.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

2 Australia’s ports remain only a primitive offering to the investment market, with significant but hidden downside risks to land-side access and investment.

Over the two decades since Australia embarked on competition reform of its economy, ports – despite being one of the most thoroughly commercial asset classes - have largely escaped genuine reform. Some ports have been sold to private operators, yet new owner/operators have been offered no certainty of access and investment into the roads or rail lines which service the port, or for the future maintenance of competitive shipping channel depths beyond the wharves. Ports in Australia therefore continue to be sold primitively, as isolated assets, despite the fact that many of the big cost pressures they face lie outside of the owner/operator’s control34. The Productivity Commission – Australia’s economic reform adviser - has failed to signal that ports are a problem; an extremely meek review of port operational arrangements in the 1990s35 did nothing to consider access issues, or the prospect of port investors having the ability to make complementary investments upstream

and downstream of the wharves. Australia’s primary economic regulator, the Australian Competition and Consumer Commission – has been similarly silent on the control, planning and expansion barriers facing ports that wish to achieve greater scale and cross supply chain efficiencies, although a recent ACCC media statement about container ports did at least advocate the need for further reform in ports36.

Australian ports don’t make much money, so why isn’t reform a priority? On the evidence of their recent low returns on equity by international standards, port efficiency should also be of real concern to investors and farmers alike. Quite recent statistics suggests that Australia’s ports are overall a poor investment proposition:

Australian ports versus the world – could preventing whole of freight supply chain investment be harming individual port asset performance in Australia?

Average Australian ports (1)

Average global comparator ports (2)

Average all ports

Total debt/shareholder’s equity

58.9%

166.4%

109.1%

Total debt/total assets

21.2%

25.6%

23.3%

Return on assets

2.1%

5.2%

3.5%

EBIT return on assets

5.0%

7.5%

6.2%

Return on equity

3.6%

9.2%

6.2%

Interest coverage ratio

7.30

7.31

7.30

Debt coverage

0.60

1.45

1.00

Revenue/total assets

0.20

0.23

0.21

Current ratio

2.59

2.00

2.32

Quick ratio

2.19

1.53

1.88

(1) Australian ports analysed were: Melbourne, Port Kembla, Newcastle, Townsville, Fremantle, Bunbury, Tasports, Port Hedland (NB: 5 of these 8 ports include grain export facilities) (2) International ports analysed for comparative purposes were: Singapore, DP World ports, Lyttelton, Auckland, Sydney, Toronto, Vancouver Source: Infrastructure Australia/Deloitte Review of Port Balance Sheet Capacity Draft Report (2012) p. 11

These returns should serve as a spur to consider alternative investment models that would allow owners or renters of ports to invest in and control more of their upstream and downstream productivity and investment risk. Parts of the whole problem are glimpsed on a regular basis, but seemingly, nobody joins the dots: the Victorian Switchpoint: Review of Rail Infrastructure (‘The Fischer Review’) identified the grain logistics problem clearly enough: ‘The changes occurring in the grain industry through new super-sites and closure or reduced use of smaller, limited service storage silos

are part of a trend towards rationalisation of the grain handling system. This has a critical influence over the shape of the sustainable intrastate rail network as rail services to ports are concentrated on fewer sites for increased rail efficiencies and greater economies of scale at the grain terminals’37. No government since has asked how this insight might be extended to a national port, rail and road review of the sector’s transport infrastructure. Grain freight’s history is one of opportunities for clear thinking ignored, repeatedly.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Access regimes for Australian ports – allowing third parties access to key facilities on fair and open commercial terms – remains an area of competition law where access disputes can only be resolved through extremely costly and time consuming litigation. In the case of the now famous Pilbara rail access dispute between mining companies, the litigation is going into its eighth year, having cost millions of dollars in legal fees to all parties without yet producing a definitive result. The overly litigious nature of Australia’s port access regime should be of concern to farmers and investors alike. No less a figure than a lead architect of Australia’s access regimes paints a bleak picture of current arrangements: ‘To me the (access) regime is set up in a way… that there is no doubt that the system facilitates the delay and frustration and difficulties that deal with it... the Americans are absolutely appalled at the time-wasting that goes on in Australian courts and I’m told by many, many Americans that they won’t bring deals to Australia to be assessed in the competition area because we just take too bloody long – excuse the expression’38. The simpler alternative to messy access regime reform is to inject competitive tension at ports, by encouraging development of competing grain terminals where grain is the dominant freight or where land values and land release can encourage multiple operators; in this

way, the grain supply chain can set itself up around competitive ports of scale and mix efficiencies. This will be challenging of course, as it foreshadows port losers as well as winners, but if governments, investors and producers have lowering the cost of grain freight as their main goal, competitive terminals forms a logical part of any comprehensive grain infrastructure framework.

Can’t the market solve these problems without the government? The problem of differing objectives in the sector It might be argued that it is not within the remit of governments to plan for grain ports of national scale and that this can be established by market forces alone. Indeed, some recent grain infrastructure development at east coast ports such as Newcastle is impressive39. The problem appears to lie in what objectives one sets for Australia’s grain freight: different objectives require different depths of leadership and certainty of government. If the prime objective is for one east coast port to out-compete all others in grain freight, then market effort and investment alone might suffice (although the upstream inefficiencies on all of the ageing and disconnected east coast rail corridors would make even this objective ambitious).

If on the other hand the simple goal is to lower transport cost inputs to grain growers, investors and buyers, then a more holistic solution – one which considers the long-term efficiencies in mainline rail for grain, and what this might require in terms of stable and future-

proofed ports, is an area in which Australia’s governments need to be clear and consistent with the grains sector. Governments need not ‘command-plan’ port infrastructure, but they do at least need to offer investors certainty about the long term options.

Can I invest with certainty in the grain supply chain? A checklist of investor access and investment roadblocks by Australian governments: Barrier to trade

Ability to invest in market solution

Port ownership or long-term lease

Patchy, many ports remain GOC

Connecting high-productivity rail investment

Usually unavailable as single investment, even with 3rd party access

Connecting high productivity road investment

No: roads government monopolies - costly/ lengthy ‘trials’ are only option

Connecting high productivity shipping channel investment

No legal right granted as part of port owner/ lessor entitlement, subject to separate government processes, sometimes separate government agency

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Poor excuses: today’s proxies for real grain transport reform:

Failed commercial road freight investment trials: road agencies prove incapable of (and unwilling to deliver) market-led solutions

things are not yet conceded by the public sector, which has full control over the shape and pace of any reforms.

In 2008, Australia’s Prime Minister and Premiers tasked road agencies with trialling commercial approaches to roads, where the farmer or truck operator could nominate road upgrades or access for bigger trucks and receive better freight access in return for a fair additional user fee.

Trucking grain harvest management schemes: the ‘save now, pay later’ strategy

Truck operators and road freight customers nationwide applied. Two road agencies abandoned the trials before they had begun, stating (amongst other things) that the information about the road conditions was too hard to assemble. Only two trials were completed. One was to allow a meat processor to move marginally heavier truck weights from its processing facility in central NSW to its railhead – a distance of just 750 metres. That project took years, not months to establish – at considerable cost to the would-be customer. An independent review of these failed trials found that road agencies did not favour this market-led approach to road freight investment: one road agency commented that ‘if hundreds of vehicles and multiple operators were participants, this system would be a far too onerous administrative burden’ and ‘it would lead to messy, ad hoc networks arising’40. Following precedents in rail and other utilities, a more market-driven commercial freight model demands considerable structural reform of large monopoly road agencies. It also needs to welcome private investment in grain freight solutions, where it makes commercial sense, in order to ‘top-up’ taxpayer spending – yet these

In the absence of real road investment reform, government offers growers additional weights on grain trucks (typically, an extra 5-10% of maximum legal weights). These measures are popular with growers, but such schemes only accelerate road failure without generating any new funds to pay for this. The result is that local governments are forced to levy higher rates in future years to pay for roads that fall apart sooner, or impose future weight limits on prematurely broken roads.

Grain branch line reviews: ‘kicking the can down the road’ Governments regularly deal with the inadequacies of grain branch lines and grower and investor discontent by holding ‘reviews’ of these branch line networks. The NSW Grain Freight Review of 2009 took a typical approach: as noted since by that state’s rail regulator, it recommended that: ‘most of the lines be stabilised at a minimum ‘fit for purpose’ standard through a non-recoverable NSW government grant, contingent on industry investment in other supply chain improvements’. Such reviews suffer from insufficiently broad remits: the 2009 review was another report which in effect left efficient grain on rail in noman’s land: no national plan for a move to shift more rail to a commercial mainline service, such as through Inland Rail, no detailed plan to pursue

serious road freight pricing and abandon costly substitute highway infrastructure upgrades that crowd out a commercial Inland Rail solution. Other reports have advocated for reinvestment in the same old obsolete colonial rail networks while blithely assuming that wider system efficiencies will flow as a matter of course – that somebody else will fix the wider problems. The Switchpoint review of Victorian freight rail (‘The Fischer report’, 2007) advocated for the state’s mostly broad gauge colonial rail to be divided into ‘Platinum’, ‘Gold’, ‘Silver’ and ‘Bronze’ line classes – with all but Bronze class to be given increased taxpayer funding. For the ‘Silver’ lines – being most of Victoria’s remaining operational grain branch lines (ie the equivalent of NSW Class 4 and 5 lines) - the report advocated increased government funding conditional on wider market efficiencies – efficiencies that were a distant prospect then and which have not substantially occurred since: ‘high priority lines to be rehabilitated to original track classification conditional on grain industry collaboration and commitment to improve overall supply chain efficiency to support rail. This should be done by establishment of a sustainable fleet of rolling stock; further centralisation and upgrading of silos and port facilities with longer sidings, fast train loading, fast truck turnaround and extended operating hours’41.

Public-sector-driven planning still dominates the Inland Rail project The Inland Rail is commercial infrastructure of national significance to the efficiency of a future east coast grain network. Yet this project remains locked in a public-sector led process, with government wrongly assuming that they must lead in the funding, planning and development

of how and where the Inland Rail would develop, rather than allowing private investors and growers as well as other prospective freight customers to lead the process. This attitude and approach - leavened by intermittent ‘industry consultation’ - endures in 2014, with a government-dominated Implementation Group being provided with taxpayer funds to decide on such matters, despite acknowledged international best practice being clear that commercial rail projects like the Inland Rail should always be developed as straight commercial investment decisions: ‘The market and technical challenges and (international) policy experience imply that the policy aims for rail freight…are best provided by the private sector. Success in winning market share depends on the sustained commercial focus and agility of a private company to confront and prevail against a highly-decentralised, competitive and entrepreneurial road haulage industry’42.

Continual improvement in government policy outcomes are not in evidence – is it time for a peer review? The Organisation for Economic Cooperation and Development’s International Transport Forum – of which Australia is a member - made the point earlier in 2014 that when it comes to effective transport infrastructure reform: ‘Policy cannot be well-formulated without improved techniques for planning and regulations’43.

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

The OECD made this observation in its peer review of Mexico’s rail freight sector. Perhaps a first step to challenging the status quo would be to invite a similar international peer review to be conducted on Australia’s east-coast grain infrastructure sector? A catalyst for improvement is required if Australia’s continued response to the grain task challenge ahead is merely to subsidise failed and expensive branch lines, reject commercial investment models in better road freight, make taxpayer investments in roads which directly sterilise productive grain mainlines and offer no market-led planning and regulatory certainty to truly national scale rail and port investments for grains.

Reform leadership from growers and investors is vital Market reform will not work well without market leadership. In this sense, a political will for national reforms to post-farm gate infrastructure must be matched by agribusiness and its boardrooms being prepared to look beyond the aspects of their business over which they have direct control, and enter the frustrating field of

public policy reform for the betterment of the sector. Market-based reforms imply winners and losers, but the process of reform is something all in industry and the investment community can influence for the better; without market-led insight, ‘efficient government reform’ remains a contradiction in terms. Other countries seem more willing to recognise this fact: the giant Burlington Northern Santa Fe Railway in North America noted recently that: ‘Transportation professionals need to do a better job of educating politicians, legislators and shippers on transportation networks…they need to help define transportation networks of the future and they need to help define a better process for allocating federal and state transportation money’44. Given the demonstrably poor track record of Australian bureaucracies in leading the effort on these challenges, new alliances across the Australian freight, grower and investment sectors to guide a national framework appear to be a faster route to a better place.

‘Adventure and optimism’

Adventure and optimism are the ingredients in shortest supply in Australia’s grain sector transport infrastructure landscape. Governments and industry must find these qualities quickly and harness them, if anything like a credible and internally-consistent framework for Australian grain transport infrastructure is to emerge. There are many reasons why Australian grain has competitive advantages. One is the neardauntless optimism of the Australian growing community: harnessed to the right government reform framework, much can be achieved with such enthusiasm and goodwill. Growers themselves are well aware of the real challenges ahead: ‘We are confronted with a deteriorating road and rail situation and (hopefully we are) confronting an ever-expanding grain transport task…so yes, the solution is money. The solution is a futuristic view and faith in the grains industry and until there is the political will to back the belief of the farmers, I despair somewhat of the solution, to be quite honest’45.

‘Reopening agriculture for business’ postGraincorp-ADM will require governments to listen to grower and investor concerns alike and confront the one thing that always proves most intransigent in the policy debate: government bureaucracies themselves, which too often see change and structural reinvention as a threat, to be ignored where practicable or strung out in endless government committee processes and complexities, where unavoidable. Is there truly an appetite for the reforms needed? Time will tell. If it is to occur, the grains sector sorely needs all parties to bring a spirit of adventure to their efforts; as one architect of Australia’s world-leading competition reforms has noted: ‘To my way of thinking one of the great problems of our country is that we’re afraid of tackling serious problems properly and adventurously and getting to the heart of an issue’46.

This note of despair is an indictment on successive state and federal Australian governments: they have failed to complement - through good plans and investment reforms what any behavioural economist would recognise immediately as the ‘strong optimism bias’ of grain growers. Good instincts: A Juturna Infrastructure market briefing paper - April 2014

Endnotes

Australian Export Grains Innovation Centre The Cost of Australia’s Bulk Grain Export Supply Chains: An Information Paper (2014)

2. In 2006-07 Australia’s domestic freight task was already estimated at 514 billion tonne/kilometres. See Bureau of Infrastructure, Transport and Regional Economics Research Report 123 Truck Productivity: sources, trends and future prospects (2011) p. xiii 3. Australian Treasury transcript of Treasurer’s media announcement in relation to the proposed ADM takeover 29 November (2013) 4. See comments by the Graincorp chairman reported by ABC Australia March (2014): http:// www.abc.net.au/news/2014-03-09/grainhandler-graincorp-reveals-downsides-of-failedtakeover/5301528 5. See for example Office of the Infrastructure Coordinator Submission to the Productivity Commission into Public Infrastructure (2013) 6. Mullen J and Crean J Productivity growth in Australian agriculture: trends, sources, performance Research report Australian Farm Institute (2007) 7.

Sheng, Y, Mullen J, Zhao S Has growth in productivity in Australian broadacre agriculture slowed? ABARES conference paper 10.1 presented to the 54th conference of the Australian Agricultural and Resource Economics Society Adelaide, ABARES (2010)

8. Mullen J, Tester M, Goddard M, Goss K, Carberry P, Keating B and Bellotti B Assessing the Opportunities for Achieving Future Productivity Growth in Australia Agriculture Research Report of the Australian Farm Institute (2012) Op Cit p.20 9. Deards B, Mobsby D, Thompson N and Dahl A, Australian Grains Outlook for 2013-14 and industry productivity ABARES research paper (2013) p. 18 10. Obermann R, Dobbs R, Budiman A, Thompson F, Rosse M The Archipelago Economy: Unleashing Indonesia’s Potential McKinsey Global Institute (2012) pp. 44-45 11. Pinstrup-Andersen, P Contemporary Food Policy Challenges and Opportunities: A Political Economy Perspective Contributed paper for the 56th Australian Agricultural and Resource Economics Society annual conference, Fremantle WA (2012)

12. Byerlee, D Exploring sustainable solutions for increasing global food supplies: report of a workshop Committee On Food Security for All as a Sustainability Challenge, Science and Technology for Sustainability Program, Policy and Global Affairs, National Research Council of the National Academies, Washington DC The National Academies Press (2011) 13. Li, Z and Liu, X The effects of rural infrastructure development on agricultural production technical efficiency: evidence from the data of the second National Agricultural Census of China Contributed paper for the International Association of Agricultural Economists conference Beijing, China, (2009) 14. Brown, Dennis, Faquir Bagi, Chin Lee, Constance Newman and Richard Ree Pacific Food System Outlook 04-05: United States Pacific Economic Cooperation Council (2005) 15. ‘Road agencies cannot be certain of receiving adequate funding of road expenditure from general revenues. In response, road agencies and local governments often regulate road access by heavy vehicles to contain road maintenance and replacement costs. Such blunt mechanisms have the potential to significantly constrain freight transport productivity’ Productivity Commission Inquiry into Road and Rail Infrastructure Pricing (2006) Final Report p. 347 16. The Australian third-party (commercial) access regime, in part IIIA of the Competition and Consumer Act (2010), provides for the declaration of “services” and (in s 44S and other provisions) for third-party access to declared ‘services’. Such ‘services’ expressly include the use of a road, noting paragraph (b) of the definition of that word in s 44B: ‘service’ means a service provided by means of a facility and includes… the use of an infrastructure facility such as a road or railway line; 17. See discussion of deed-based commercial mine access to and investment in public roads for the South Australian mining sector in Infrastructure Australia COAG Road Freight Incremental Pricing Trials: prospects for a more commercial focus in road reform Juturna (2011) pp.18-19 18. Infrastructure Australia National Road Asset Reporting Pilot Juturna Infrastructure and participating local governments (2014) see Part Five: Commercial road access case studies)

19. See COAG Heavy Vehicle Charging and Investment Reform Project submission to the Productivity Commission Review of the National Access Regime, January (2014). 20. ANZ Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand ANZ INSIGHT Issue 3, October (2012) p. 60 21. Bureau of infrastructure, Transport and Regional Economics Infrastructure Investment Macromonitor Information Sheet 52 p. 4 Public Road Expenditure, Construction and Maintenance 2012-13 and including private road tolls 22. Excerpt from a speech by Australia’s Infrastructure Coordinator, Mr Michael Deegan, delivered in Bingara NSW to launch The Bingara Accord for Rural Roads, Australia Day, 26 January (2014).Full text at: http://www. infrastructureaustralia.gov.au/publications/files/ The_Bingara_Accord_1_Speech.pdf 23. Infrastructure Australia State of Play in Australia’s Economic Infrastructure (2013) 24. John Hearsch Consulting Rail Productivity Information Paper commissioned by the National Transport Commission (2008)

33. The Australian Government’s Waterline statistical report on major Australian ports only measures tonnages and TEU as port throughput metrics. Most of the bulk ports in Australia relevant to grain are not tracked by this report in any event. 34. For more detail on this challenge see The Game Has Changed But Not Yet The Rules Juturna briefing paper N0. 1 (2013) www.juturna.com.au/ publications 35. Industry Commission Port Authority Services and Activities Report No. 31 (1993) 36. http://www.accc.gov.au/media-release/ accc-identifies-reform-priorities-to-supportcompetition-at-australia%E2%80%99s-growingcontainer-ports 37. Victorian Department of Infrastructure Switchpoint: Victorian Rail Freight Network Review (‘The Fischer Review’) (2007) p. 33 38. Productivity Commission Inquiry into Wheat Export Marketing Arrangements (2009) Transcript of public hearings – evidence of Professor Bob Baxt AO p. 115 39. http://www.theland.com.au/news/agriculture/ cropping/general-news/newcastles-new-grainport-offers-opportunities/2689159.aspx

25. Grains Australia Single Vision: Victorian Grain Freight Infrastructure Stakeholder Views Analysis (2006) p. 10

40. GHD COAG Road Reform Review of Incremental Pricing Trials report (2011)

26. Independent Pricing and Regulatory Tribunal Review of Access Pricing on the NSW Grain Line Network (2012)

41. Victorian Department of Infrastructure Switchpoint: Victorian Rail Freight Network Review (‘The Fischer Review’) (2007)

27. ANZ Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand ANZ INSIGHT Issue 3, October 2012 p. 64 ‘Policy discussions vital to lead change’ (2012)

42. Organisation for Economic Cooperation and Development’s International Transport Forum: Peer Review of Railway Freight Development in Mexico February 2014 p. 10 ‘Freight policy principles for rail’

28. Ports Australia statistics for grains exported by port, (2011-12)

43. Ibid p. 26

29. See The Economist Prairie Pile Up 5 March 2014 for a summary of Canada’s latest capacity challenges in confronting a record 2013 harvest: http://www.economist.com/node/21598414/print

44. Vann Cunningham, Assistant Vice-President Economic Development, BNSF Railway, Inland Ports and High Capacity, Asset-Intensive Transportation Networks (presentation) (2012)

30. Ibid

45. Productivity Commission Inquiry into Wheat Export Marketing Arrangements (2009) Transcript of public hearings – evidence of Mr Derek Clauson p. 100

31. Productivity Commission Inquiry into Wheat Export Marketing Arrangements (2009) Transcript of public hearings p. 211 32. Research based on the author’s discussions with Port Metro Vancouver’s administration (2014).

46. Productivity Commission Inquiry into Wheat Export Marketing Arrangements (2009) Transcript of public hearings – evidence of Professor Bob Baxt AO p. 109

Good instincts: A Juturna Infrastructure market briefing paper - April 2014

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