Final juturna tasmania interim report to flct by Xmarx Design Melbourne

Tasmanian freight infrastructure systems: Interim Report

For the Tasmanian Freight and Logistics Coordination Team 15 August 2013

NB: This analysis is intended to be read in conjuction with the attached baseline forecast paper for the Tasmanian economy to 2049-50.

Disclaimer This report has been prepared by Juturna Consulting for the Tasmanian Freight and Logistics Coordination Team per Department of Infrastructure Energy and Resources. The information in this report has been prepared by Juturna Consulting from open source material and from stakeholder consultation. All reasonable attempts have been made to ensure the accuracy of the information contained in this report, but Juturna Consulting reserves absolute discretion in updating or amending this document.

Comments and questions Mr Luke Fraser Principal, Juturna Consulting Pty Ltd P 0437 146 274 E juturnaconsulting@gmail.com W www.juturna.com.au Design by BRAND ENGINEERING

www.xmarx.com.au

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Background This update brief has been prepared in the context of a revised baseline forecasts being developed for the Tasmanian economy. The brief also incorporates helpful feedback offered by the most recent meeting of the Tasmanian Freight and Logistics Coordination Team (FLCT) This forecast revision has attended to questions regarding consistency and plausibility of aspects of the earlier baseline forecasts. The crucial input assumptions to the model (such as labour productivity and import price assumptions) have been recast. These efforts have benefitted greatly from strong support and assistance from the DIER project office and Tasmanian Treasury’s insights into the state economy. Juturna is appreciative of this support. The revised forecasts therefore represent Juturna’s best indicators aligned with official views of future development of the Tasmanian economy under existing policy scenarios. Some of the revised forecast sector growth might prove contentious and overly pessimistic, given that parts of industry have suggested a more bullish outlook.

Summary

growth than mainland Australia. Lower growth in the state economy, and lower forecast export growth in particular is likely to result in low growth in demand for infrastructure overall and for infrastructure used for freight in particular, with utilisation levels also affected by improvements in productivity. Road transport growth is forecast to occur at approximately 1.8% per annum. At the same time, this lower growth forecast would be consistent with very slow growth conditions for international Tasmanian container trade transhipped via the Port of Melbourne. The demand for this trade at 2049-50 according to this forecast across the relevant sectors is only around 50,000 – only a modest annualised increase from the current transhipped international export level of around 28,000. This baseline forecast should be considered in light of the concurrent examination of the existing supply chain for the FLCT which thus far has suggested that, at least in operational and technical terms, the Tasmanian freight task today is broadly efficient at a technical level for existing tasks with existing assets and in which transhipment in particular, despite some high season challenges, is not experiencing pervasive and significant capacity constraints.

What the Tasmanian freight market, government and the community have said

What the revised forecast suggests The accompanying forecast tables and discussion to this paper offer more detail, but in general terms, the simulation suggests: • Overall state economic growth of approximately 1.7% per annum compared to national average growth of 2.4% per annum

Also relevant is the considerable qualitative analysis generated by Juturna, in the form of close to 100 interviews from interested parties who were asked for their views on the freight task, and whether in their view there were logical and discernible improvements on offer. A summary of these many views is: • Transhipment is a dominant issue for Tasmanian trade.

• Import growth of approximately 1.8% per annum • Export growth of approximately 1.1% per annum • Southern Tasmania and Hobart regions are seen to grow more rapidly than Mersey-Lyell and Northern Tasmania, reflecting a greater expansion of investment in the southern regions. This forecast in effect reflects the recent historical rate of growth in the Tasmanian economy, with some further downward pressure applied by taking into account the Federal Treasury’s assumption that overall Australian growth rates will be slowed in the years ahead by the economic effects of an ageing population. This forecast sees Tasmania continuing to experience lower

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• Transhipment service levels are very good but prices are too high and perceived by many to be noncompetitive with mainland supply chain equivalents which could be somewhat higher in cost than some other transhipment services observed overseas, although strict comparisons are challenging. • This is a level of freight disadvantage many consider unique to Tasmania • Some shippers have advised that the range of service levels available is not ideal: there is no direct international container shipping service; there is no cut-price, low-frequency transhipment service for commodities that are not time-sensitive; there is

no international direct airfreight service to and from Tasmania and domestic airfreight services are limited; transhipment from outlying islands is costly. However time-sensitive shippers mostly express satisfaction with their service • Operationally the Tasmanian freight supply chain as it stands appears to be technically efficient (as per Aurecon findings) • There is a related view from several parties that the state of the freight task ‘is what it is’ and possibly little more can be done other than provision of more subsidies to recognise the ineradicable disadvantage of doing business in or with Tasmania • Parochial interests are seen by some to play too much of a role in infrastructure decisions affecting freight • There is some concern by major volume sectors such as mining and agriculture about the ability of the state’s freight infrastructure and operational arrangements to meet the full potential of the future freight task effectively • Many shippers interviewed consider their businesses to be already ‘at top of cost curve’ and in some cases in danger of relocating from the island • There is nevertheless a general enthusiasm exhibited for Tasmania’s potential, if some issues beyond the technical efficiency of existing flows can be resolved; shippers and their customers are looking to reforms that will produce these economic efficiencies for the state

A conundrum The challenge is what to make of this conundrum: why does the Tasmanian economy grow more slowly than the mainland, and how much might the trajectory of the Tasmanian economy change if efficiency beyond technical matters for existing tasks is maximised? On one hand, this consultancy has seen evidence of a considerable natural wealth in commodities, particularly in mining, agriculture, horticulture, aquaculture, fishing and forestry – all goods which potentially have strong export demand in the next few decades – in some instances, such as large scale irrigation, efforts are being made to grow the quantum of these commodities noticeably. The Tasmanian treasury itself has noted

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that as a trade-exposed island, Tasmania’s export industries should experience greater opportunity in future to service a 500 million-strong Asian middle class that is now the engine room of the world economy.1 At the same time, the island is dependent on mainland and foreign investment, with a much smaller internal economy than the mainland. From one perspective these could be considered advantages, or at least spurs to seeking a more dominant export-focus in an economy that is attractive to long term and patient financial and physical investment from ‘outside’. However this is not the picture offered in these base line forecasts, which assume the trading sector is growing more slowly than the economy - ie. the trading part of Tasmania’s economy is proportionally shrinking. It might also be noted that such low growth rates may also point to significant labour market issues, especially regarding limited opportunities for new, younger entrants.

Moving beyond ‘business as usual’ This consultancy considers that this baseline forecast is not an inevitability. Better outcomes might be plausible, and indeed are considered achievable by some industry players based on our interview feedback. There seems to be cautious enthusiasm amongst many Tasmanian freight actors interviewed that the state has the wherewithal to do better, and should aspire to do so. What is clear is that a path to a stronger Tasmanian economy - at least insofar as it might be achieved or influenced by infrastructure used for freight- lies in examining what levers are available to provide greater long-term certainty for outside investors in trade-exposed sectors, and how and under what circumstances changes to the settings of these levers might move Tasmania more into line with observed best practice elsewhere. A core group of these matters should be tested and examined in more detail. The availability of this revised baseline forecast allows this consultancy to begin some simulation work in that respect, but broader efforts are required.

First point of analysis: what are the key freight differences between the mainland and Tasmania? The consultancy’s work to date has focussed on island-specific freight issues. But the low revised growth forecasts - and particularly the divergence of these growth levels from the mainland - suggest to this consultancy a need to address a bigger question:

The mainland and Tasmania are forecast to grow at quite different rates. There will of course be any number of reasons for this. This report is limited to considering freight infrastructure. So beyond the fact that Tasmania is an island and not connected by land to the rest of Australia (ie the ’tyranny of distance’), it seems relevant to establish the main points of difference between the mainland and Tasmania in freight infrastructure terms.

Mainland and Tasmanian freight sector differences: There appear to be at least 4 factors in play. In no particular order:

Mainland freight infrastructure has to varying degrees been subject to competition reforms since the 1990s, which have allowed for market-led planning and private capital investment in some key freight assets like ports and rail; this process has been accelerating of late with some major seaport and rail asset sales concluded and flagged, particularly in New South Wales and Queensland. This approach is consistent with recent Council of Australian Government and Federal Tax Review agreements and recommendations that major freight infrastructure, being host to predominantly commercial activities, should wherever possible be funded by the market. This has also led all states and territories except Tasmania to cease competing with the open market for the provision of commercial freight services through state-run freight providers (Tasmania retains state-owned corporations in commercial rail and seafreight);

2 3

Mainland Australian freight supply chains have shown a movement towards consolidation into fewer locations for scale and service efficiencies, which Tasmania has not pursued significantly;

The Tasmanian freight sector attracts a general subsidy for its domestic operations. There are many other forms of subsidy for freight infrastructure across the nation, but these subsidies are typically based on - and their continuation is usually predicated on - the achievement of agreed economic outcomes; examples are in grain harvest management schemes and indeed in some grain branch lines, which are funded under Community Service Obligation principles. Subsidy arrangements elsewhere in Australia are in one form or another generally measured and monitored for technical

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efficiency, which the Tasmanian freight subsidies are not. The latter appear to be based and maintained only on the notion of disadvantage; and

Unlike other states and territories, Tasmania has no option but to use shipping to move perhaps 98 per cent of its volume of freight to and from the island. In the case of outlying communities and economies such as Flinders and King Islands, this involves multiple transhipments – first to Tasmania, then to the mainland. Australia maintains coastal shipping legislation (previously the Navigation Act, more recently the Coastal Shipping Act). There are licensing requirements around such legislation. This consultancy makes no claims as to the inherent efficiency or otherwise of this legislation, or how poorly or otherwise the benefits of such legislation might be taken advantage of by coastal shipping, but it is self-evident that for an island state, any inherent inefficiencies or poor implementation of shipping legislation is going to have a much more significant and perhaps ineradicable effect on Tasmanian freight efficiency than would be the case in other parts of the Federation, where said inefficiencies can more or less easily be circumvented by switching the freight task away from shipping to road and rail alternatives.

Potential levers for reform In light of these matters and in the context of lower growth forecasts - and with a view to determining a series of recommendations for a final report on what matters will most profit from action or further research, the following issues and areas of Tasmanian freight infrastructure and operations are offered for comment as the most likely ‘potential levers’ for further investigation in seeking to leverage the state’s growth to higher levels. They incorporate some of the feedback generated at the most recent FLCT meeting.

Potential lever? It could be worth considering some of the limitations of traditional approaches to freight infrastructure provision in light of low growth forecasts. What sort of ‘freight systems’ strategies should the FLCT be mosted with in light of the revised forecasts? Some feedback received from the FLCT to date suggests the expectation of this consultancy was for modelling to provide

an indication of the most efficient increases in the capacity of different parts of Tasmanian freight infrastructure, such as the calculation of corridor throughputs and trigger points for the next additional layer of freight investment, across the current freight infrastructure map of the state. This is the type of approach used nationally for the Auslink/Nation Building program. It is known as a ‘predict and provide’ model.

spends on road, rail and ports occur are likely to occur only at the pace at which they are experienced today, or they might even become spaced further apart over time, as slower growth in freight volume slows real demand for the next iteration of discrete pieces of freight infrastructure (ie if growth is low, the next rail or road or port upgrade to the existing stock of assets can afford to be put off for longer).

Infrastructure Australia’s reports to COAG and on ports and freight have proposed much greater sophistication than this for freight related infrastructure. For example, that any first cut of ‘capacity ‘needs’ within a long term plan be assessed with respect to benchmark performance indicators, which assume increases in asset productivity. They also propose customer involvement, and in some cases identification of infrastructure capacity increases, in line with national competition principles along the theme of ‘user pays-user says’. Among the implications is that while traditional technical asset measures may be important to efficiency, efficiency in the sustainable development context includes notions of allocative and dynamic or ‘x’ efficiency, as well as ‘productive’ efficiency. This is a significant challenge to the ‘predict and provide’ model, especially where calculations are made within a distorted market framework eg. uncertainties about the accuracy of relative pricing or property rights.

• Under a slow growth economy, it is unlikely that there would be greater funds available for investment in freight infrastructure, particularly in Tasmania’s exclusively public funding model for freight infrastructure.

The feedback on this front should now be examined in light of the slower economic forecasts that have been developed. Is there more or less of a basis for seeking this sort of iterative freight infrastructure assessment in light of lower growth?

How would continuing ‘predict and provide’ affect freight outcomes under low growth scenarios? In general terms, the interim report suggested that a ‘predict and provide’ approach to gradual upgrades and expansion of existing freight infrastructure patterns, based on historical freight volumes and predicted future volumes - was not always the most reliable way to help change the current pattern of overall freight efficiency and could lead to reinforcing some inefficiencies. This appears to be particularly so in light of lower economic growth. The traditional ‘predict and provide’ systems approach – also known as a ‘coping’ approach - would seem to exhibit three main effects in a slower growth economy: • New investment justifications for the existing spread of freight assets would in all likelihood remain weak or become weaker ‘Trigger points’ for extra infrastructure capacity or efficiency

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A Tasmanian economy that is not experiencing more significant growth will also not generate more significant additional taxpayer revenues, meaning it is likely that no greater sum of funds, in real terms, would be available to spend on this infrastructure into the future in any event – this outcome is somewhat more pronounced in Tasmania than in other states, as taxpayer funds are traditionally the only source of funding for almost all of Tasmania’s freight infrastructure: unlike mainland states, which have undertaken varying levels of investment reform in their ports and rail in particular, the Tasmanian government (ie DIER, Tasports, Tasrail and TT) either directly or indirectly owns, controls and funds all of the major freight infrastructure in the state. A reduction in revenue combined with the generally observable phenomenon that Australian governments are unwilling to consider taking on significant debt to fund infrastructure and show a preference to limit the debt levels that corporatized government bodies (such as Tasports and Tasrail) take on - might be expected to lead to further rationing of infrastructure investment across the current freight infrastructure asset base (rather than rationalising the freight infrastructure itself – a potentially more dynamic efficiency solution discussed later in this brief). • There would not be much incentive to change the current pattern of expensive (and to some degree duplicated) freight assets and their layouts The current profile of key freight assets sees three northern state-owned ports managing most of the state’s interstate and international trade flows. Heavy vehicle freight corridors are maintained to all 3 of these ports, and rail also maintains capabilities to service these multiple freight nodes. These multiple freight infrastructure assets are

costly to maintain. A continuation of a traffic forecast-led ‘predict and provide’ approach to these matters would most likely see this multiple port, multiple assets arrangement stay in place, but a lack of greater growth will continue to place pressure on scarce taxpayer funds for this infrastructure. This brief goes on to examine the cost pressures that this places on the Tasmanian taxpayer, with specific reference to rail infrastructure’s dilemma under this approach. It should also be noted by the FLCT that the government already delivers this iterative sort of infrastructure funding approach, and has done for decades, by examining past freight volumes and projecting forward growth in these corridors and places: each year considerable assessment goes into the production of such business cases for different parts of the existing asset base.

Potential lever?

derived from a focus on existing operations and patterns of the existing freight task, which are asserted to be broadly efficient at a technical and operational level.

Are there not wider issues to consider? Broader issues are the ones that were raised most consistently in interviews: a high price for service, a lack of service options. This area seems to be the best use of the FLCT’s time. It has been noted that ‘the task of top management is to understand the direction and velocity of value migration3’. In the case of freight, perhaps a new approach to Tasmanian freight infrastructure facing low economic growth is needed – one which searches for different approaches to unlocking new freight efficiencies and trade growth, rather than simply adding new layers to current patterns of technically and operationally efficient infrastructure.

Potential lever?

Is there much difference between continuing with ‘coping’ strategies for the state’s transport infrastructure and ‘development’ strategies that could offer dynamic efficiencies?

Should the current public ownership, control and funding model for almost all of Tasmania’s freight infrastructure come into sharper focus in an economic setting of lower growth? Would private infrastructure investment be a worthwhile supplement to state funding efforts? How could this occur?

A recent Australian study related to landside supply chains for ports raised the question of an alternative approach to this ‘trigger point’ or ‘coping’ strategy for freight infrastructure planning and investment:

State governments are short of capital. Debt instruments are of course available to all governments, but as discussed above, nationwide there is a strong demonstrated preference for states and their corporations to avoid higher borrowing levels.

‘Do we not need to be more insightful in the search for effective development strategies? The critical need is not for coping strategies but for strategies that are based on nothing less than the search for new business designs and business models that will deliver superior value’.2

In this context, the private capital investments in the Tasmanian freight task which might (subject to testing) drive greater efficiencies and promote higher state economic growth are not necessarily available to the economy. Beyond even the funding aspect, government dominates public policy for Tasmania’s freight, which is a commercial activity. It owns the state’s roads, rails and ports and decides on their future development.

The potential of developmental or transformative strategies in Tasmanian freight infrastructure is to offer reforms that will understand where the most latent value lies in the state’s freight infrastructure and to apply strategies that unlock that latent value most reliably. ‘Value’ is likely to relate to: • Lower cost • Greater competition; and • More service choices From the concurrent examination of the existing supply chain for the FLCT report, it seems clear that there is little extra value to be

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At the same time, interviews have suggested that some shippers see value in considering private investments in particular pieces of infrastructure that might unlock better freight outcomes for their operations. Interview feedback from industry has raised this possibility in relation to the Risden wharf facilities which are next to the Nyrstar production plant, while this issue has also been raised in relation to potential long-term market investment in the Triabunna port facility on the east coast, which is surrounded by a significant growth of nominally harvestable forests. However at least an initial investigation of current port plans suggests neither

of these market-generated investment propositions seem to form a part of broader port planning by the state. Similarly, although not government owned and funded, feedback from airport interests in the state suggests there is value in extending runway length to accommodate direct international freight and passenger services. The demand for this on current forecasts might be expected to be lower than this consultancy’s initial forecasts would have suggested, but a transformative infrastructure decision like this could be expected to offer dynamic efficiencies that might start to shift airfreight growth upwards from ‘business as usual’ levels. An alternative approach to the current state funding and planning model is to deregulate (that is, promote less regulation, not none at all) to allow industry initiative and private funds more say in shaping the state supply chain and optimising the use of current capacity and investments in future capacity. This approach has been undertaken in other parts of Australia to varying degrees, over the past two decades. The Productivity Commission found4 in general terms that the competition reforms of the 1990s added 2.5% to gross national product in the decade following these reforms. Naturally, if this more market-driven application of capital to freight infrastructure is to supplement state funds, this approach must be carefully managed to promote effective competition or regulate key monopolised arrangements fairly. Significant testing and simulation could be expected to inform a final decision, but benefits are in evidence through this approach as applied elsewhere.

Potential lever? Is a lack of a clear freight planning hierarchy for Tasmanian freight infrastructure having negative effects on road and rail decisions in particular? National freight infrastructure policy5 suggests there is a hierarchy of decisions affecting freight infrastructure efficiency, starting with seaports (being the longest-lived and hardest to move infrastructure assets), and proceeding backwards in the supply chain to road and rail and distribution centre infrastructure and operational efficiency matters. This hierarchy does not seem to be well reflected in planning decisions around Tasmanian freight infrastructure at present, but recognising this hierarchy in freight infrastructure planning might bring benefits. Tasrail’s present challenges seem to be a particularly clear example of this phenomenon.

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Tasrail is an example of major state freight infrastructure where success is conditioned by other decisions higher up in the Tasmanian supply chain policy hierarchy – if this hierarchy itself is not recognised this can retard Tasrail’s contribution to the freight task and its viability overall. It is acknowledged in rail economics that the density and size of smaller rail operations has a strong influence on viability. Tasmania’s railway conforms to the United States definition of a ‘short line’: US rail classifications in part relate to revenue; the Tasrail network is not comparable to a large US ‘Class 1’ railway (ie a railway with an annual operating revenue of above $250m). Tasrail (annual operating revenue circa $30m) is likely to be somewhere between a US ‘Class 2’ and ‘Class 3’ railway (and probably closer to a US Class 3, which have annual operating revenues of up to $20 million). These non-class 1 railways are known as ‘short lines’. There is a strong and long-accepted body of railway economics to suggest that perhaps the most important single factor for the success of short lines is the density, or tonnes hauled per kilometre, of these lines: the more density, the greater viability of the line. Fixed costs in rail are high and it is important railroads have significant traffic to overcome big fixed costs6. ‘short line operators should focus their attention on increasing traffic volume instead of increasing the size of the network’.7 The obverse of this statement is that some network rationalisation down from the current size of network might also improve traffic densities for short lines. Tasrail has inherited a 632 km network that travels to multiple seaports (Burnie, Devonport, Bell Bay and Hobart) to two major hinterland spurs (Fingal on the east coast and Melba Flats on the west coast) and to an intermodal logistics hub (Brighton, outside Hobart). Freight volumes on the network are still very low at around 2 – 3 million tonnes per annum. All railways have density functions: this describes the tonnage relative to the length of network and has a strong accepted relationship to commercial profitability of any railway. The Bureau of Transport and Regional Economics in Canberra publishes these densities8. Tasrail is reported to have a net tonne-kilometre (ntk) density of 0.2. By comparison, most mainland linehaul networks have a density over ten times this level. Even the New South Wales grain branch line network - which is the subject of regular formal reviews as to its lack of viability and potential for rationalisation – has average densities of between 0.2 ntk and 0.6 ntk.

As the many seaports in Tasmania have themselves not first been subject to sufficient rationalisation (for Tasrail’s purposes at least), Tasrail is still in effect locked in to maintaining services to probably at least 3 ports, on the basis that any one of these destinations could experience freight growth in the future (interviews suggest that the Hobart rail connection is unlikely to be continued in favour of Brighton intermodal hub). This is a problem for Tasrail and for the overall efficiency of Tasmanian freight, in an economy where growth in volume in any event is officially forecast to be slow. There is certainly an imperative for rail to rationalise to meet modern conditions. Maintaining so many rail destinations is costly – taxpayers have contributed $180 million in Tasrail network improvements across these different aspects of the Tasrail network since 2009. Some network rationalisation might allow Tasrail to improve its tonne-kilometre freight densities, but this is only likely to occur if port rationalisation first gives Tasrail a sight of potential rail rationalisation and concentration. This has not yet happened, in effect taking network rationalisation off the table as an efficiency strategy for Tasrail. This consultancy has not had the time or resources to investigate Tasrail’s options in any depth, but the question of a lack of a clear freight planning hierarchy in Tasmania and its effects on Tasrail in particular is worthy of further consideration. It is probably helpful to recognise that Tasmania is not alone in this dilemma. The United States faces similar challenges: ‘(United States) Rail Infrastructure was largely designed and constructed before 1925. In many areas, the network is designed to serve customers who no longer exist or who no longer use rail; in other areas, the rail does not well serve the traffic that does exist. Rationalisation in this sense does not mean merely reduction; it means alignment of the geography of the network with the geography of the modern market’.9 It is impossible for Tasrail to realign to a more modern network if the core physical feature of that modern freight network – the seaports –have not themselves first been rationalised to a modern market geography through an overarching plan and hierarchy. Tasrail is captive to an approach to freight planning which does not seem to recognise any such hierarchy. Some rail economists have argued that profitability for short lines is often low and that, in part because the alternative is heavier road freights and more damage to roads, government assistance for many short lines would be necessary for their survival10

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However, it has also been pointed out that ‘if the subsidy costs more than the expenses associated without having the railroad remain in service, the subsidy would be a bad investment’.11 This issue goes beyond freight: it impacts on the political and investment impressions of Tasmania overall. Building and maintaining railways that are almost devoid of train movements is a political risk and can harm confidence in the viability of genuine rail business cases in the future, where more investment is perhaps commercially viable. In Tasmania, this consultancy’s initial interviews with rail experts and the mining sector suggest that the Melba Flats line might be a significant commercial minerals network in the future, where axle weight upgrades for multi-user minerals traffic are achievable primarily through potentially cost-effective bridge upgrades, but the overall investment climate for this will not be assisted by poor decisions on the wider network that might be the result of a lack of a sensible freight asset planning hierarchy. Tasrail’s viability and success is itself a significant freight challenge facing the state and its costs do represent opportunity costs for other state expenditures, but as can be seen from the well-understood economics of the issue, some of the survival and success options for Tasrail might rest on a clearer sense of a hierarchy of plans around freight infrastructure for the state.

Potential lever? Is the market-testing of a direct international container trade for Tasmania worthwhile given these lower growth forecasts? The loss of a direct international shipping service has drawn significant criticism from many trade-exposed Tasmanian businesses. Revised economic forecasts suggesting more sluggish growth and less export orientation will challenge the viability of such a trade. Nevertheless, perhaps its viability or otherwise should be afforded testing by the shipping market, in light of improved available volume forecasts and broader port infrastructure investment possibilities for the state, rather than by arbitrary decision that such a trade is not commercially viable, or should occur through taxpayer subsidy without first testing the market’s need for such a subsidy. At first glance, forecasts suggesting lower growth and far less of an orientation to exports paint a sober picture for international direct trade prospects. When international trade demand via

Melbourne is examined by sector, the revised forecasts display slow international container growth to only around 50,000 TEUs by 2049-50 from current levels of around 28,000 export TEUs. Intuitively, these results are not especially encouraging for international direct trade. However, it is worth noting several factors: • These projections represent the likely box numbers that would be viable to send or receive internationally via transhipment across Bass Strait and repositioning at the Port of Melbourne. It has been noted by both the concurrent examination of the existing supply chain for the FLCT and in interview feedback to Juturna suggests that the costs of this transhipment for international containers is prohibitive for many shippers. The recent imposition of levies by the Port of Melbourne on a captive Tasmanian freight market might be set to continue exacerbating these costs. • The maintenance of 3 northern Tasmanian seaports (and two transhipment ports) means that Tasmania’s total potential international box trade is fragmented and would not necessarily offer a shipper the aggregation of total potential volumes in one location that might otherwise make a regular service more sustainable. • Feedback to date from several shippers and other parties such as the Australian Maritime College has been that Tasmania’s northern ports are not of a depth to accommodate much of the typical international fleet size that would service this market most viably. This matter was raised by one of the former AAA alliance members as a factor in the failure of that trade, as the ship profiles forced to be used on the Bell Bay service due to the relatively shallow depth of that river port was not of an optimal scale for that company’s shipping operations. • Dealing with international shipping and its needs is a challenge for governments worldwide. This is acknowledged in leading public policy scholarship around freight supply chains: ‘(Global shipping) represents one of the transport realms where public policy is the least effective, unless concerted efforts are made in line with the objectives of the industry’.12 There might be particular reasons to make further efforts here. • There is an emerging view in global shipping that major

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jumps in international container vessel size - seen especially up until the Global Financial Crisis – and a reliance on fewer and fewer port destinations for operations are likely to be less pronounced in future because of a maturing (ie lower growth) business cycle for containerised freight, coming as a result of reduced growth forecasts post global financial crisis. From the end of the second world war until the 1980s, the relationship between economic growth and growth in the value of international trade was stable, with trade growth around 1.5 times economic growth. The 1990s and 2000s saw international trade growth at around 2.5 times international trade13 but the onset of the global financial crisis has reduced international trade growth substantially. In the past, compound growth rate forecasts have tended to exaggerate container trade growth figures14. As a result, there is an emerging trend in not just bigger and bigger vessels, but in shipping seeking out sustainable and profitable niche markets. • At a local level, this view is evidenced in the feedback that has been received to date from several international shipping lines that if the physical infrastructure was available to make visits from typical Asian shipping lines viable, it would be of interest to consider a regular service, although it was noted that the size of the potential trade has been difficult for these shippers to ascertain in the past. In this context, and given the volumes on offer in total, Tasmania’s potential for securing and retaining an efficient international service (probably a north-south pendulum connection service to an Asian ‘hub’ port) cannot be ruled out, despite the lower transhipped international container growth forecasts via Melbourne. Given that this issue continues to be a major source of concern for many interviewed parties, it makes sense to test the demand for this trade in a contestable, market-driven fashion before all energy is diverted to improving the competitiveness of transhipment to and from the island. This is a matter that is best considered by shippers and potentially by private infrastructure investors in the first instance, in possession of all available information about the likely future total trade volumes and demand for exports in particular. These parties might see physical investments in port infrastructure such as channel dredges According to interviews with Tasports, dredging is not planned for the northern ports. This underlines the potential dynamic effects on Tasmanian freight services of permitting market planning and investment initiative to have a view.

Potential lever? Could better statewide trade volume forecasting – not linked to particular corridors or places, but open to market interpretation of where future infrastructure efficiencies, investments or new services might take best advantage - be worthwhile to make available to freight shippers, operators and investors? The ability to forecast commodity volumes by sector and in aggregate and to make such data available for freight operator and investor scrutiny would appear to be a useful attribute for a state seeking more transformative efficiencies in its freight sector. Freight forecasting already exists, of course, and Tasmania seems to have more comprehensive and accurate freight forecasts than other parts of Australia. But under the ‘predict and provide’ and public funding and ownership model that Tasmania employs (which is little different to how all state, territory and federal governments plan and provide for the freight infrastructure that they still own or control), the forecasts are generally speaking only used to consider staged investments on historical patterns, using historical footprints of what Tasmania’s freight map already looks like. This approach does not permit consideration of more dynamic, stepwise efficiencies in the island’s freight task that might be viable with the application of long-term patient investment from the private sector, or the adoption of new freight innovations, such as higher productivity road freight vehicles and roads that could support them. Giving the freight sector and potential investors access to these sort of forecasts - and being open to what they might propose as a result - is especially an issue for international direct shipping, as has been observed in recognised shipping economics literature: ‘The global freight consolidator (offering linked services to importers and exporters) selects the carrier using his combined blue water freight volumes to achieve the lowest possible unit (TEU/FEU) freight rate and best terms. The port selection in this case is an indirect result of the freight contract transaction between the Global consolidator using economies of scale and the ocean carrier’s willingness to offer long-term contract conditions to lock in the cargo volume’.15

The Bass Strait transhipment trade seems a worthwhile early candidate for such market intelligence to be tested. It is notable that there is no clear information available at present of what the total volume of low-value Tasmanian commodities

11 Tasmanian freight infrastructure systems: Interim Report - 30 June 2013

are that would - in principle - be interested in taking advantage of a lower-price, less frequent transhipment service if it were available (ie on the basis that not everything shipped across Bass Strait needs to travel every day, but this more or less daily service and its associated higher price is really all that is available to all transhippers at present). Providing current and forecast figures for this particular issue might encourage a market entrant to deliver such a service, if they have access to the data to allow a business model to be assessed. This will be a key for influencing greater competition and service diversity in Bass Strait transhipment. The inability to give shippers and investors sight of plausible sustainable volumes is acknowledged as a key risk to port viability: ‘Failure in obtaining the forecast transhipment volumes or in maintaining sufficient (throughput) levels to cover fixed and variable costs is almost entirely irreversible in the short and medium term, with potential critical implications for the financial survival of ports’.16 This seems to be an area where further work and open market information could offer significant value to a freight task which – as outlined in the concurrent examination of the existing supply chain for the FLCT report - at present seems unable to yield significant further growth and efficiency. A strong demand for this lower priced, less frequent service was particually in evidence in discussions with supermarket and retail actors.

Potential Lever? Many port challenges appear to be in Tasmania’s hands to solve, but an apparent aversion to further location rationalisation– that is, less ports (perhaps one) doing far more, more economically, perhaps with more differentiated service levels - is not in keeping with observed trends internationally and it might be a barrier to further efficiency, competition and investment in Tasmania’s freight task. For a relatively modest population with relatively small geographic boundaries, Tasmania has a lot of functioning seaports. Like all seaports, Tasmania’s ports face challenges. But the range of options seemingly considered by Tasmania’s current freight planning seems artificially limited to not include options for aggregation of most volumes and a wider range of services at fewer locations which might offer greater scale economies and service level diversity. Naturally, the benefits of such strategies

would need to be tested and subjected to further analysis, including dynamic simulations of likely costs and benefits and transition costs of the approach; this should include market testing to examine industry demand. Interviews and a review of government policies and decisions to date suggests that an appetite for this approach has not yet been observed in the state port sector. A 2004 survey of the top 20 global container carriers, top 20 leading port authorities and top 3 terminal leading terminal operators17 asked respondents to rank in order of importance the criteria most important to their decision making in choosing a transhipment port (note that transhipment here refers to shipping to the key hub ports such as Singapore for on-shipment globally). Analysis suggests port costs and handling costs are the single largest influence on a global shipper’s decision on port selection: Top 4 port selection criteria

Weight %

Terminal port costs - handling, storage etc

38.12

Geographical location

35.12

Infrastructures – condition, age, depth etc

16.38

Port Management and Administration

10.38

The important conclusion from this study was that a large part of a port or region’s destiny as an efficient shipping destination and supply chain was in its own hands, but that competition and the provision of contemporary infrastructure was the price paid for remaining relevant. The authors of this study noted the major challenge that this posed to the status quo: ‘The implications (of cost and handling costs at ports being the main conditioners of shipping port selection is significant not only for drawing a medium-term (port) marketing strategy or a long term (port) investment, but also for competition conditions and the industry’s profitability. The suggestion that terminal costs and basic infrastructure (water access etc) are the relevant (shipping) purchase determinants to focus on by ports is eventually painful for port operators and port authorities. The combination points to price competition and investment in increasing port depth as being the only controllable purchase determinants… the confirmation of the importance of these two conditions in transhipment port selection suggests a market where least-cost strategies may have to be applied under the strain to improve basic infrastructure

12 Tasmanian freight infrastructure systems: Interim Report - 30 June 2013

conditions including the all-important depth’. Such conclusive observations from 20 global container carriers, the top 20 leading port authorities and top 3 terminal leading terminal operators (that terminal costs and basic physical infrastructure capabilities are so prominent as decision-drivers) suggests that best practice ports and affected governments will move to pursue aggregated volumes and economies of scale and service diversity in port and supply chains in future.

Potential lever? Tasmania’s supply chains might be more flexible and responsive to new investment and efficiencies than it might first appear. A previous Tasmanian study of relevance has shown that port choice is not a major issue for shippers and this has also been borne out by interview feedback. Furthermore, the influence of purported ‘parochial interests’ has not been observed by this consultancy when the prospect of lower freight costs and greater competition benefits were in prospect (although this is not to say there is not a need for adjustment arrangements for changes that might occur). An early 1990s review of the Tasmanian ‘roll-on-roll’ off Bass Strait freight operations18 concluded that ‘shippers are not particularly committed to a particular port that a shipping company that they select currently uses…when shippers choose a shipping line they or port they base their final choice on a the overall assessment of the supply chain system’. This observation chimes with shipper feedback to this consultancy, where total price, predominantly, as well as service levels (especially for more time-sensitive products) were advanced as the key considerations. On the same basis, several interviews with local governments and regional economic progress groups have borne out everybody’s bottom line interest in more efficient freight outcomes to the customer and the economy: there has been no evidence to this consultancy of parochial interests arguing for their particular infrastructure solution in the event that a demonstrably better freight solution for the customer and economy could be sourced somewhere else on the island. This is not stated to suggest that there might not be legitimate structural adjustment support required as part of changes to the pattern of freight infrastructure on the island.

Potential lever? Competition and the efficiency offered by ports appears to count for more than proximity to the port in shipper’s choosing which port is most important, but where there are not strong competitive distinctions between ports, shippers will tend to send freight to the closest port. As such, a lack of competition between Tasmanian ports could be expected to reinforce a 3 northern port approach which might not serve the freight task or range of freight services most efficiently in future. One aspect of feedback to date has been that any efficiency in aggregating freight to a single port could be offset by creating higher drayage (ie road freight) costs and this might offset the gains of a more distant aggregated port. Unlike the case on the mainland, Tasmania’s ports and freight activity in any event is relatively close together. This of course, as outlined above, would benefit from being modelled and tested, but a highly relevant recent international study on this matter is worth Tasmania’s consideration:

greater scale can induce competition, by offering a greater range of service levels to choose from in the one place. The lack of service differentiation and uniform high price for transhipment has been raised by many shippers interviewed by this consultancy, particularly those with low cost goods that do not have to travel to or from Tasmania daily, but which have no cheaper less frequent service at present. This concern has been put most notably by large supermarket and retail goods importers to Tasmania The Taiwanese study found that it was the level of competition in and between the three ports that would influence shipper preference, as they sought out different price and service levels further afield than their local port. This study found where competition was not significant among ports, shippers will tend to choose the closest ports: the lack of a greater offer of competition elsewhere is likely to maintain the status quo of the three port arrangement. This last point seems to explain a lot about the current static three northern port arrangements in Tasmania, and gestures towards a better alternative.

A recent Taiwanese shipping behavioural analysis study19 analysed questionnaire responses from over 300 shippers and used different decision making analysis to show what motivates shippers to direct shipping preferences across 3 rival ports (Keelung, Kaoshiung and Taichiung), which are located within 230kms of each other on Taiwan’s west coast. This study appears to be of genuine relevance to the northern Tasmanian port situation where Burnie, Devonport and Bell Bay ports are grouped across an almost identical distance and are in many respects near substitutes for each other. Among other things, the authors concluded that is not always the closest port that is the shipper’s preference if competition is present somewhere other than the closest port, even if going somewhere more distant costs extra in transport costs: ‘According to the economic or reasonable principle, if shippers are close to some ports they usually will choose the nearby port to save travel time and cost. However, when there is competition among ports, such as more routes, greater frequencies, port service, port service, etc these factors can influence shippers to choose more distant ports’. This finding is important because it makes the point that a port can be attractive for more reasons than simply aggregation:

13 Tasmanian freight infrastructure systems: Interim Report - 30 June 2013

Next steps This consultancy would welcome feedback from the Freight and Logistics Coordination Team, (or more broadly at FLCT discretion), on the contents of this paper. Market and community feedback in particular on the merit or otherwise of these findings, or in oversights or mistakes in light of a plausible baseline economic forecast now being available to frame such analysis, will be of considerable value to the consultancy in shaping its final report to the client.

References 1. Tasmanian Department of Treasury Structural Change in the Tasmanian Economy Information Paper April 2013 2. Robinson R Port-Oriented Landside Logistics in Australian Ports: A Strategic Framework Maritime Economics and Logistics 2006, 8 (40-59) 3. Slywotzky AJ Value Migration Harvard Business School Press Boston 1996 4. Productivity Commission Review of National Competition Policy Reforms Inquiry No 33 2005 p. xvii

11. Fischer P, Bitzan J and Tolliver D Analysis of Economies of Size and Density for Short Line Railroads North Dakota State University 2001 p. 5 12. Jean-Paul Rodrigue Maritime Transportation: Drivers for the Shipping and Port Industries OECD International Transport Forum 2010 Background Paper 13. UN Economic and Social Commission for Asia and the Pacific Regional Shipping and Port Development Strategies (Container Traffic Forecast) 2005 14. Jean-Paul Rodrigue Op Cit.

5. As agreed by the Council of Australian Governments in the National Ports Strategy and National Land Freight Strategy discussion papers and plans 2011-13 6. Harris RG Economies of Traffic Density in the Rail Freight Industry Bell Journal of Economics 8, 2, 1977 (556-564) 7. Dooley FJ Economies of Size and Density for Short Line Railroads MPC Report No. 91-2 Upper Great Plains Transport Institute North Dakota State University 1991 8. Bureau of Transport and Regional Economics Trainline 1 Statistical Report 2012 p. 30 9. US Transport Research Board Rail Freight Solutions to Roadway Congestion Report 586 US National Cooperative Highway Research Program 2007 ‘Rail and general freight economics’ 10. Babcock, Michael W, Prater, M and Russell, E Long-Term Profitability of Grain Dependent Short Line Railroads in the Midwest Kansas Department of Transportation Report No KSU – 96 – 9 1997

14 Tasmanian freight infrastructure systems: Interim Report - 30 June 2013

15. Mateus Magala and Adrian Sammons A New Approach to Port Choice Modelling Maritime Economics and Logistics (2008) 10, 9-34 16. Ibid 17. Lirn, TC, Thanapoulou, Beynon MJ and Beresford AKC An Application of Analytical Hierarchy Process on Transhipment Port Selection: a Global Perspective Maritime Economics and Logistics 2004 6 (70-91).Volume and aggregation also have direct relevance to transhipment 18. D’Este GM and Meyrick S Carrier Selection in a Ro/Ro ferry trade: decision factors and attitudes Maritime Policy and Management - Part A, 19 (115-126) 19. An-Shuen Nir, Kuang Lin and Gin Shuh Liang Port choice behaviour from the perspective of the shipper Maritime Policy and Management (2010)

Briefing paper: TERM baseline forecast of the Tasmanian economy to 2049-50 Model construction, parameters, results, ongoing access arrangements August 2013

Juturna Consulting Pty Ltd 0437 146 274 PO BOX 4104 Geelong VIC 3220 juturnaconsulting@gmail.com www.juturna.com.au

Contents

Model construction

Main parameters contained in the TERM model

Model implementation

Results

Access to the model

1. Model construction A version of the TERM model was constructed for DIER by Macroeconomics, a firm that specializes in the use of economic models to shed light on contemporary economic issues. The model contains each statistical division of Tasmania as fully modelled regions. The rest of Australia is aggregated into one fully modelled region. These aggregations were undertaken using software provided as part of the TERM modelling package. The constructed model employs the standard parameter settings contained in the TERM modelling package (see Section 2). Within each of the 5 regions in the model, production of 38 commodities is allowed for. The regions and commodities contained in the model are given in Chart1. Chart 1 Regions and commodities contained in the current application of the TERM Model Model regions Greater Hobart Southern Northern Mersey Lyell

Sheep Grains Beef Cattle Dairy Cattle

Rest of Australia

Other Livestock Other Crops Vegetables Forestry & Logs Sea Fishing Aquaculture Coal

Commodities contained in the model Other Non Ferrous Iron Ores Metals Other Mining Other manufacturing Meat Products Electricity Dairy Products Gas & Water Fruit & Vegetable products Sawmill Products Other Wood Products Pulp & Paper Petroleum Products Alumina Aluminium

Residential Building Other Construction Wholesale Trade Retail Trade Road Freight Road Passenger Rail Transport

Other Transport Other Services Banking & Finance Owner Dwellings Government Administration & Defence

Source: Author.

The initial version of the model was used to undertake preliminary simulations to the year to 2049-50 using a set of baseline assumptions for the Australian economy provided in the TERM modelling framework. The baseline assumptions were altered where necessary to achieve a workable baseline model solution out to the year 2049-50. The simulation results were made available to Tasmanian officials. In the light of comments received a Tasmanian specific set of baseline assumptions were developed and further adjustments to the models data base were made to incorporate advice received from Tasmanian government sectoral experts. The models database was also adjusted to better reflect industry structure in Tasmania in 2011-12.

2. Main parameters contained in the TERM Model The production structure embedded in the TERM model is given in Chart 2. The main parameters in this production structure are detailed in bold next to the relevant component of the model. As depicted in Chart 2 the main parameters contained in the TERM models production structure include: 

The substitution elasticity between different types of labour is 0.35;



The substitution elasticity between primary factors of production is 0.5;



The substitution elasticity between imported intermediate inputs and domestically produced intermediate inputs is 1.5



The substitution elasticity between primary factors and intermediate factors of production is zero



The substitution elasticity between different composite goods used as intermediate inputs is 0.15;



The transformation elasticity between industry outputs used to form commodity outputs is 0.5.

The TERM model also allows for substitution by users of commodities sourced from different Australian regions in the model (Chart 3). Horridge1 provides an example of the production structure used to model these sourcing decisions. The example relates to vegetables produced in three hypothetical regions (North, Middle and South) and for a single user (Households) located in the North region. Horridge notes that the same diagram would apply to other commodities, users and regions. The main parameters in the TERM models sourcing structure are: 

Substitution between road transport from different regions used to transport goods from one region to another region: 0.1 to 0.5

Information on the production structure imbedded in the TERM model was obtained from: Horridge M. 2011, “The TERM model and its data base”, Centre of Policy Studies, Monash University General Paper No. G-219 July

 Substitution elasticity between different types of transport: zero;  Substitution between delivered goods from different regions: 0.2 to 5;  Substitution elasticity between imported household goods and domestically

produced household goods: 2.

Chart 2

Production structure in the TERM Model

Source: Reproduced from: Horridge M. 2011, “The TERM model and its data base”, Centre of Policy Studies, Monash University General Paper No. G-219 July

Chart 3

Sourcing mechanisms in the TERM Model

Data source: Reproduced from Horridge, M. 2011 “The TERM model and its data base” Centre of Policy Studies Monash University General Paper No G-219 July p.9

With respect to other features of TERM Horridge2 notes that exports from each region's port to the rest of the world is governed by a constant elasticity of demand export demand function. Household demand is determined by a linear expenditure system and the composition of investment and government demands is exogenous.

3. Model implementation To implement the model a set of forecasts of key macroeconomic variables are developed and imposed on the model. Given these assumptions, the model is then solved for factor and commodity prices that generate equilibriums for the demand and supply of commodities produced in each region specified in the model. Initial runs of the model were undertaken and results were documented in a report to the FLCT. Feedback from the FLCT, DIER and Tasmanian Treasury indicated that the initial forecast were, overall, far too optimistic and growth rates for certain sectors did not appear to reflect real world constraints on the development of these sectors. In particular, the expansion in certain sectors of the sea fishing industry was constrained by production quotas and improved competiveness of foreign wood products producers was constraining the development of the Tasmanian forestry sector. Based on the comments received the baseline assumptions were revised. Baseline assumptions were derived for each year of the simulation period for Tasmania. However, for ease of presentation the first 5 years of assumptions are presented in Chart 4 (overleaf) along with the baseline at ten-year intervals over the simulation period.

Chart 4

Baseline assumptions for Tasmania

Assumptions for Tasmania used in the simulation (% change) Variable

Units

Real Household Consumption

% per year

2011-12 2012-13 2013-14 2014-15 2015-16 2025-26 2035-36 2045-46 2049-50 -1.13

-1.09

2.21

2.22

2.27

1.90

1.95

1.98

Real Government Consumption % per year

2.67

2.00

2.56

2.57

2.63

2.21

2.26

2.29

Real Investment

% per year

4.57

1.00

2.77

2.78

2.85

2.39

2.45

2.48

Real Government investment

% per year

-9.44

2.00

2.59

2.60

2.66

2.23

2.29

2.32

Real Export

% per year

1.92

1.00

1.64

1.69

1.41

1.45

1.47

Real Import

% per year

31.65

3.55

3.27

3.28

3.37

2.82

2.89

2.93

Net trade with rest of Australia %/year

-6.36

4.00

3.48

3.49

3.58

3.00

3.08

3.11

Real GDP

% per year

0.52

-0.75

2.00

2.01

1.65

Population

% per year

0.30

0.40

0.50

0.30

CPI

% per year

2.30

1.50

2.50

Employment

% per year

-1.10

-1.00

0.50

1.00

0.80

0.44

Real Wage

% per year

1.64

0.25

1.49

0.99

1.20

Term of Trade

% per year

0.60

-7.50

-0.75

-1.75

0.00

Exchange Rate

% per year

0.00

Import Price

% per year

1.29

8.11

2.77

3.56

2.56

0.60

0.70

Source: Author.

The Tasmanian baseline was constructed using Tasmanian Treasury forecasts for variables when they were available. Values for other variables up to 2015-16 were then determined having regard to the available Tasmanian Treasury forecasts. Subsequent to 2015-16 macroeconomic aggregates were generally set at their historical level up to 2029-30. For years beyond 2029-30 growth forecasts for macroeconomic variables were lowered by approximately 18 per cent. This adjustment reflects an assessment by the Federal Treasury3 in its Intergenerational report that Australiaâ&#x20AC;&#x2122;s historical growth will slow over the next 40 years due to lower population growth and lower income growth brought about by lower labour productivity growth and a decline lab in Australiaâ&#x20AC;&#x2122;s historically high terms of trade.4 A set of baseline assumptions were also developed for the rest of Australia and are given Chart 5 overleaf.

3 The Treasury 2010, Australia to 2050: Future challenges, CanPrint Communications Pty Ltd, April, p.15. 4 GHD used a similar methodology to develop Demand forecasts for DIER. See GHD, Key assumptions underpinning the demand forecasting and economic modelling, Paper provided to Juturna by DIER. 9

Chart 5

Baseline assumptions for the Rest of Australia

Source: Author.

The above baseline assumptions were built into the model and the model solved. Analysis of the results indicated that the model was generating unrealistic expansions in sea fishing, forestry products and the coal industry. The final baseline settled upon was therefore developed by constraining growth in these industries in a further simulation of the model. Expansion in sea fishing was constrained to zero growth and expansion in coal and forestry production was constrained to annual growth on 1 per cent. The targeted growth rates were achieved by endogenising industry productivity factors.

4. Results The base line assumptions built into TERM imply that the Tasmanian economy will grow less rapidly than other regions of Australia (see Figure below). Over the 38- year data projection period Tasmania is modelled to grow at approximately 1.7 per cent per annum compared to the national average growth rate of 2.4 per cent per annum over this period.

Projected GDP, $m. 2011-12 prices 4,000,000

60,000

3,500,000 50,000

40,000

Tasmanian GDP, $m. 2011-12 prices

Australian GDP, $m 2011-12 prices

3,000,000

2,500,000

2,000,000

30,000

1,500,000

20,000

1,000,000 10,000 500,000

0 2012

2017

2022

2027

Rest of Australia

2032 Australia

2037

2042

2047

Tasmania

The reason why the Tasmanian economy grows at a slower rate than the national economy is that the baseline assumptions assume continuation of past growth patterns of the Tasmanian economy. Under these patterns export growth is constrained relative to export growth in the national economy. Consequently, as shown in the graph overleaf, Tasmania experiences much lower growth in exports compared to the Australian economy as a whole.

In addition, the Tasmanian economy continues to be relatively import-intensive with growth in imports being higher than growth in the economy as a whole. Thus, over the period of the simulation the Tasmanian economy becomes less exportorientated and more import-orientated. As such it grows less rapidly than does the national economy (see Figure overleaf).

It is instructive to compare the results obtained in the TERM base case with the results obtained in the Productivity Commission COAG baseline. In the Productivity Commission simulation, the Tasmanian economy was simulated to grow at approximately the same rate as the Australian economy (approximately 2.3 per cent per annum). This growth rate is significantly higher than the 1.7 per cent growth rate detailed in this report.5 We thus conclude that the results generated in a base line analysis are sensitive to the assumed economic environment imposed in the base line simulation. Returning to the model results, we now turn to an analysis of individual commodity results generated in the base line. Reflecting feedback on previous simulation results the current simulation results incorporate constraints on the capacity for expansion in certain sectors. In particular sea fishing output was assumed to maintain existing output levels reflecting quotas and natural resource constraints that inhibit growth in this sector. Similarly, forestry and logging growth was assumed to be constrained due to 5

Productivity Commission 2012, Economy-wide Modelling of Impacts of COAG Reforms: Business Regulation and VET, Supplement to the research report, p.230.

deterioration in the international competiveness of the Tasmanian forestry industry. Reflecting this deterioration, forestry and logging output was constrained to grow by 1 per cent per year over the simulation period. Zero growth in coal production was also imposed reflecting advice received from the Tasmanian Freight and Logistics Coordination Team members that the low quality of Tasmanian coal made it uncompetitive on international markets, taking into account production and transport costs. In contrast, following advice received from the Tasmanian Farmers and Graziers Association, growth targets were imposed on the agricultural sector to ensure a greater expansion in the Agricultural sector than was obtained in the simulation results included in the interim report. These include annual growth rates of: Beef 2.5 % p.a., Sheep 2.5% p. a., Other Livestock 1.5 % p.a., Dairy and Dairy products, 3.5 % p.a., Other crops, 2% p.a., Vegetables, 2% p.a.. In the simulations all sectors of the Tasmanian economy are seen to grow modestly. This reflects the economic environment inherent in the base case assumptions which, amongst other things, imposes modest growth in exports. (see figure below).

We now turn to an examination of the regional results generated in the model As detailed previously the model contains 4 regions for Tasmania defined as the areas contained in the four Australian Bureau of Statistics statistical divisions. The regional macroeconomic results are given in the following chart:

These results mirror the macroeconomic results for the Tasmanian economy as a whole. In all regions of Tasmania, growth in exports is relatively low. Thus, even though these regions experience increased investment growth in the non-traded sectors, the low growth in exports drives down overall economic growth in all regions of Tasmania. Commodity results for each region in Tasmania are presented in terms of compound annual growth rates in the graph overleaf:

The most striking feature of this graph is the difference in overall growth rates between most traditional traded goods and non-traded goods. Traditional traded goods such as mining and manufacturers grow more slowly in this simulation than do growth rates in non-traded activities such as electricity gas and water, the â&#x20AC;&#x2DC;otherâ&#x20AC;&#x2122; category of which includes Government administration and housing, and services. The relatively high growth rates for these sectors reflect the overall economic environment imposed in the simulation which involved higher growth rates for real consumption compared to exports. The sectors that displayed the lowest growth in all regions were the forestry and logging sector and fishing and aquaculture sectors. These results reflect the growth constraints imposed in the simulation. Logging was constrained to grow by 1 per cent in all regions and sea fishing was constrained to zero growth. Thus the small

growth observed in the simulation for fishing and aquaculture results purely from growth in aquaculture in the simulations. The model results provide insights on the demand for transport infrastructure. These insights can be gained from examining the growth in road transport in the simulations and also by linking growth in exports and imports to growth in the use of containers in the export and import trade. As shown in the figure below, demand for road freight is simulated to grow modestly over the simulation period. Overall, road freight demand is projected to rise at an annual compound growth rate of 1.9 per cent per year. As the Tasmanian economy is projected to grow at a compound annual growth rate of 1.7 per cent the Tasmanian economy is projected to become slightly more transport intensive over time.

To obtain an estimate of the expected growth in export and import growth of container trade out and into Tasmania data was obtained on the number of containers of Tasmanian origin that were exported from the port of Melbourne. Data was also obtained on the number of containers from overseas that were destined for Tasmania and passed through the port of Melbourne. The container data was provided for broad commodity groups including, agriculture, mining, industrial, automotive, pulp and paper, other manufacturing, retail and other. Data on exports of the commodities and imports of the commodities was extracted from the model and was used to grow the number of containers traded in 2011-12. Data was extracted from the model in terms of exports by commodity and imports by commodity and this data was used to grow forward the recorded level of international container trade into and from Tasmania. These calculations reveal that export container activity is projected to expand from approximately 30,000 TEU equivalents to approximately 50,000 TEU equivalents by 2049-50, as outlined below:

5. Access to the model As agreed with DIER at the start of the current project, Macroeconomics retains ownership of the constructed model. Macroeconomics has agreed to assist with any further work DIER may wish to undertake using the model. The commercial arrangements for such assistance would need to be agreed with Macroeconomics. Stephen Anthony, the Director of Macroeconomics, should be contacted to discuss access to the model. Stephenâ&#x20AC;&#x2122;s contact details are given below. Stephen Anthony Director - Budget & Forecasting, Macroeconomics Macroeconomics Canberra Head Office

Phone: 02 6161 3542

281 Goyder Street Narrabundah ACT 2604

Fax: 02 6169 3042

GPO Box 2483, Canberra ACT 2601

Mobile: 0406 378 242

Stephen.Anthony@macroeconomics.com.au | www.macroeconomics.com.au ACN 128 878 535 ABN 901 2887 8535