'I BELIEVE, and have always believed, there is room for two big operators, and by that I mean operators that are prepared to provide an Australia-wide service. I am basically talking about Perth all the way through to Cairns here. I'm not talking Alice Springs to Darwin - that's a separate thing in my view.'

Queensland Rail's Chief Executive Officer Bob Scheuber is a man with a mission - and a vision. Where other state governments have been content to privatise their rail freight operations, and in some cases the infrastructure as well, Queensland has gone its own way and been content to allow QR's management to expand its operations nationwide from a financially-solid base of heavy haul coal flows.

At the same time, on-rail competition has been legally mandated at the Commonwealth level - including in Queensland. Addressing the Australian Rail Summit last July, Scheuber pointed to 'an irony that unleashing competition eventually leads to consolidations as a small number of operators attempt to capture scale economies', adding that as a result 'we have only two major national players in this fiercely competitive market'.

'I have made no secret of the fact that we want to cement QR's place as one of these big two, now and in the future'. Last June he was able to complete the acquisition of Australian Rail Group, which operated the 1 067 mm freight network in Western Australia. QR purchased the above-rail operations, and its bid partner Babcock & Brown purchased the infrastructure lease.

The revolution begins

Scheuber pinpoints the formation of the National Rail Corp as the start of the revolution. From 1992 NRC consolidated interstate operations essentially within South Australia, New South Wales and Victoria. This led to the creation of the Australia Rail Track Corp in 1997 as manager of the 1 435 mm interstate tracks linking Brisbane, Sydney, Melbourne, Broken Hill, Adelaide and Kalgoorlie. Today, ARTC also manages NSW infrastructure outside the Sydney metropolitan area.

However, the first privatisation of freight operations on a state railway was announced just eight years ago on February 22 1999 when Victoria leased V/Line Freight and all 1 600 mm gauge track outside Melbourne to RailAmerica for 15 years. Some lines have since been converted to 1 435 mm gauge.

Scheuber refers to this as 'the first round of privatisation', because in September 2004 RailAmerica walked away in the face of legislation requiring it to open its network to competition. 'They sold it a second time, and it was bought by Pacific National', he notes. 'The interesting thing at the time was that Pacific National bought not only the above-rail operation they also bought the track lease which Toll is currently trying to negotiate selling back to the Victorian government. There is a deal on the table for around A$134m which is quite interesting, because Pacific National only paid A$190m for the whole business.'

PN was formed in 2001 when Toll Holdings and Patrick Corp each bought 50% of NRC and FreightCorp, the NSW internal freight operation. It is thus responsible for the majority of interstate traffic as well as internal freight in NSW, Victoria and Tasmania.

Fundamental changes

While the situation may have looked chaotic during the eight-month takeover battle between Toll and Patrick, and the subsequent requirement by the national competition authority (ACCC) for Toll to sell a 50% stake in PN but not to a rail operator, Scheuber believes the underlying change has been dramatic.

'It has been so fundamental in the rail industry in Australia that the only thing you can compare it with is the change from steam to diesel and electric, because it drove a whole range of changes. We've seen that, and it is still happening. It hasn't gone to its final conclusion'.

'When you look at Pacific National you have got to understand it is two parts. It is a bulk haulier, which QR does extensively and on a far bigger scale, and it is interstate freight. People tend to focus on interstate freight. It is by far the smallest part of the market - very small - but that's where the competitive attention is at the present time.'

Would QR have liked to buy a stake in PN, given the chance?

'Not really, because if you look at size QR is by far the biggest bulk railway in Australia, probably over twice the size of Pacific National. So if you look at the industry we've gone from seven state-based rail operators to now two. From the ACCC's point of view, why would you allow one to buy into the other?

'It doesn't make any competitive sense to us, and we wouldn't be interested anyway. Putting it quite bluntly, we want to run our own race. We have got great respect for the people in Toll, but the reality is we are in competition with them'.

This competition is on QR's doorstep, too. Scheuber explained that 'Toll owns a business in Queensland called QRX that decided to give its freight to Pacific National, which became an intermodal operator to selected ports in Queensland. So we lost a reasonably significant size of business in terms of what we had been doing for QRX'.

QR is the coal king

In terms of QR's business as a whole the loss of QRX traffic was rather small. Coal is what brings the revenue in here, and also in NSW.

Scheuber reckons that 'over the last three years about 50% of our coal tonnage in Queensland has been out to tender, and we've been successful in retaining all of that. We have also won substantial coal business, up to around 12 million tonnes a year, in New South Wales'. That has all come from PN, which nevertheless continues to move some 83 million tonnes of coal in NSW and South Australia.

'The big thing for us was to diversify out of our position of being heavily reliant on coal, because basically our tonnages looked like about 164 million of coal in 2005-06 and about 15 million in other bulk commodities. ARG gives us a further 40 million tonnes of bulk - a little coal, a lot of grain, a lot of minerals, and big chances for expansion in Western Australia. So we have become by far the largest bulk operator, over twice the size of PN'.

As Scheuber sees it, 'you've got two big railways in Australia now: you've got Pacific National which is strong in intermodal and has got a good base carrying most of the Hunter Valley coal. You've got QR which has got by far the biggest bulk, and the way we express this if you take out the non-contestable dedicated iron ore railways in Western Australia, we have got 70% of the bulk business in Australia.'

East-west gap

While QR can fairly claim to be a national operator of bulk freight, when it comes to intermodal and non-bulk freight there is a significant gap. Here the two major markets are classified as east-west (from the eastern states to Perth) and north-south (Cairns - Brisbane - Sydney - Melbourne). In the first, rail holds 80% of rail+road business, while in the second road dominates with rail carrying 15% to 20% 'according to which consultants you talk to', says Scheuber.

He explains that 'through ARG we now operate between Melbourne and Adelaide with a container service, but we don't operate between Melbourne and Perth. Pacific National operates between Melbourne and Perth as well as on the east coast between Melbourne and Townsville. The other operator is Specialised Container Transport which runs basically louvred wagons or box wagons'. SCT is 'more of a freight forwarder and PN currently does the hook-and-pull, so they only own the wagons'. SCT has ordered 13 locos which means they will have train crew in future.

'Under the undertakings that Toll has given the ACCC, as well as having to sell 50% of PN it has to make available the equivalent of three trainsets to run east-west between Melbourne and Perth. That places us in a position of following through to see if we can get access to the rolling stock because we would like to operate a service all the way through to Perth. But we know that's going to be dependent on customers being prepared to move from PN to us, so there's been lots of discussion in the industry on how you might put together a second operator. We are still in discussion'.

The East Coast conundrum

Through its subsidiary Interail Australia established in 2002, QR is operating intermodal trains five days a week from Brisbane to Sydney, another five direct to Melbourne and four from Sydney to Melbourne. Despite playing down intermodal volumes relative to coal and other bulk traffic, Scheuber says 'the reason why I think intermodal is important is because we believe that the demand in general freight is going to substantially increase.

'Up the East Coast we think it's going to double over the next 15 to 20 years. We don't believe road is going to be able to carry that, and that's not only our belief, that is the experts' belief because you simply can't build enough roads to do it.

'There are a couple of other things that are driving this move towards freight on rail. One is the greater interest in the environment, and rail is certainly more environmentally friendly. Both rail and road are facing an aging driver population, but we have less reliance on drivers than the road industry has.

'Fuel is about 15% to 20% of our costs depending on the train. It's a lot higher on road, where it can be 50% and more.' And when hauling coal 'about half of our operation is electric, so we in fact don't have the same exposure because we have electric and diesel operation.'

'One of the big issues is what is going to happen about terminals (left). Terminals in Sydney in particular are difficult to get in and out of we operate out of the Yenora terminal and can only use 900 m trains, whereas PN operates 1 500 m trains and of course that's where you get the efficiency. There is difficulty with terminals in Melbourne as well.'

Asked about the poor quality of the single-track East Coast railway between Brisbane and Sydney, which chases contours over hill and dale so relentlessly that a 160 km/h XPT struggles to average 68 km/h, Scheuber exclaims 'Yes, it's terrible! Am I satisfied with the rate of progress? No!

'But I want to clarify that comment. I am not blaming ARTC. I am saying that for years and years there has been a lack of investment by the Australian government in a national rail highway.

The east-west people say to me, look, rail has got 80% what's wrong with you guys north-south?'

'If you go back to the history, there was significant investment in upgrading the east-west railway with concrete sleepers - and you don't have too many curves across the Nullabor - making it a modern railway. Surprise, surprise: rail got a significant market share'.

In contrast, 'there has been very little core or new investment for north-south. You've got antiquated signalling. You've got poor alignment. Now the government is putting in money through ARTC to deal with that: A$1·2bn over two and a half years'.

But is this serious money is relation to the north-south problem? 'Let's be serious about money for track! If you look at QR, we have invested on average for the last 15 years A$0·5bn/year in infrastructure and rolling stock, so we are by far the biggest investor.

'Over the next five years our capital investment will average A$1·2bn per year. Now that's driven off the significant infrastructure investment that the Queensland government is funding in the southeast Queensland passenger upgrade, and also signalling, track and rolling stock upgrades in the coal business.

'So you have to say that while A$1·2bn from the Commonwealth is a great start, it is not addressing the years of neglect. So more money is certainly required to ensure that we have a national rail highway of the same significance as the national road highway'.

In the longer term, what is QR's stance on the proposed inland standard gauge route between Melbourne and Brisbane?

'We are a supporter of the inland standard gauge running between Brisbane and Melbourne because we see that the East Coast railway is simply not going to be able to cope, particularly around Sydney where the growing suburban network is just going to cause a continuing bottleneck.

'It won't get any better, so a railway coming up the western route has got a lot of logic to it. It's a very expensive proposition, but our view is that with support from federal and state governments, at some stage in the future that railway will be built.'

• CAPTION: Bob Scheuber joined QR as Deputy Chief Executive in 1995 and became CEO in December 2000. Two years ago he was elected Chairman of the Australasian Railway Association's Executive Committee
• CAPTION: Haulage of coal from central Queensland to ports provides the solid financial base from which QR is able to expand. Forecasts for 2009-10 range from 200 to 250 million tonnes
• CAPTION: Since 2005 QR has successfully bid for 12 million tonnes/year of coal previously hauled by Pacific National from the Hunter Valley mines in NSW, buying nine 5000 class locos and 74 wagons grossing 120 tonnes
• CAPTION: Over the next 20 years the state government plans to invest A$6.6bn on expanding the passenger railway in southeast Queensland, extending it south to Coolangatta on the NSW border, north to Maroochydore and west to Springfield
• GRAPH: Over the next five years QR's capital spending will average A$1·2bn/year, as the capacity to haul more coal is created and passenger services in southeast Queensland are expanded
• CAPTION: QR acquired Melbourne-based CRT Group in June 2005, an important step in creating an integrated rail-based logistics service for nationwide customers

The Battle for Acacia Ridge

Intermodal freight requires access to terminals, and this is still a sore point at QR. 'In 1995 when the National Competition Policy was put in place there was this decision that needed to be made in respect of rail operations. What did you declare? Where was the monopoly?'

There were two tests, Bob Scheuber explained: 'national significance' and 'could it be reasonably and economically duplicated?' That covered track alright but 'everyone missed terminals, so terminals have never been declared in Australia. Now what we're finding is the pinch point is actually the terminal.'

The interstate terminal at Acacia Ridge in Brisbane's southern suburbs is the standard gauge gateway to Queensland. 'We had a monthly lease arrangement with National Rail Corp. When NRC with FreightCorp was being put up for sale we made it quite clear that QR owned the terminal. NRC had been given a concessional rental arrangement so they weren't even paying a commercial rent'. When PN took over from NRC in 2001, 'we wanted to increase that to a commercial rental, but we also wanted to run interstate trains. We started first of all in May 2004 between Brisbane and Melbourne, and added Sydney in July 2004. QR runs them in its own right through a subsidiary called Interail Australia.

'So we had a situation where we have started running interstate trains, we own an interstate terminal in Queensland [but] we didn't actually operate through it. And the reason was that Pacific National said the terminal was at maximum capacity. So what happened when PN was formed? We said we want a commercial arrangement, we own the terminal, we want to operate through that terminal.

'PN said no, the terminal's full, no-one else can operate through it. And we said that's not good enough. We are going to operate. So in May 2004 we served them with a notice to evict, but at the same time we also gave them a notice which said we were prepared for them to continue to operate the terminal for 12 months while we worked things through.

'Needless to say PN didn't see it that way, and very soon after in July they instituted legal action and actually took us to court. Justice Jacobson gave his decision in February 2006 which was a comprehensive win for QR.

'PN didn't challenge it, so in September 2006 we started to operate trains through our own terminal and, surprise, surprise, there is capacity there!'

To demonstrate neutrality at Acacia Ridge 'we actually encouraged P&O to come in and operate the terminal. We have got a separate operator in there to make sure that everyone gets a fair go.'

That worked OK so 'we are looking at other terminals around Australia and hoping to use the same model.'

Vertical integration: good or bad?

At present, Australia is a curious mix. Track and trains are under common management in Queensland, Victoria, Tasmania, between Tarcoola and Darwin, and on the electrified commuter networks around Sydney and Melbourne. Infrastructure is managed separately in Western Australia, South Australia and New South Wales, and on the 1 435 mm gauge interstate lines in Victoria.

Richard Hope asked Bob Scheuber which he preferred. 'I'm an unashamed, passionate believer in the integration of railways', he replied firmly, 'but we do run our below-rail and above-rail businesses separately because we need to do that under national competition policy.

'I am one of the few people, with my Chief Operating Officer and the Board, that can see information relative to both below-rail and above-rail. But my way of dealing with that is I don't see any competitive information, because I just think that's acting within the spirit.

'So you can have the process that we have in place to make sure that third parties seeking access to QR are not disadvantaged, but for me, I simply don't get that information.

'One example I always quote in respect of the benefits of integration. Because we do both, I have people coming to me and saying "build me a railway as cheaply as possible". I say fine, we are happy to do that, we just don't want to operate on it thanks very much, because it will just follow the contours as railways used to be built, and not worry too much about the curves and the grades.

'What I say to all of our customers is this: consider whole-life operating costs. Although you can save capital up front, you then find that instead of having two locomotives on a 6 000 tonne train you've got three or four, so your operating costs go through the roof. There is a direct relationship between the track and above-rail, and I think where people have separated them out it's because they are driven by other issues.

'I say to our customers, we are happy to provide either below-rail or above-rail or a combination of both, but understand that we will advise you on that relationship. Other people don't necessarily do that, because if they are just doing the above-rail part, then if the track is rubbish their price will reflect this, and they don't care.

'But if you are a rail person looking at efficiency between the modes, then I do care because what I want to do is supply an operation to my customer which is cost-effective and efficient, and that means understanding the connection between the two. When you take that connection apart, then you get some stupid actions happening.'