INTRO: A unique opportunity to restructure Australia’s fragmented and neglected rail network into a profitable industry providing cost-effective, reliable and safe transport will be lost if the federal and state governments fail to create the right framework for private investment

BYLINE: John Kirk


Australasian Railway Association

THERE IS A HIGH level of optimism about the future of rail in Australia. Evidence of this can be found in the strong private sector interest among bidders in the sale of Australian National, the price paid by the successful bidders (A$95·4m), and the number of privately funded rail projects in progress or planned. In addition, three private companies are successfully operating freight trains in the east - west corridor.

Against this background, it is very difficult to provide a frank analysis of the current situation without being accused of talking down the future of the industry, and thus devaluing publicly-owned assets which are up for sale.

It is especially hard for the Director of a relatively new (but very pro-active) industry body - the Australasian Railway Association (see box p698) - to caution against the implicit assumption that the private sector operators can somehow find a way of sorting out fundamental problems such as gross inconsistencies in road and rail infrastructure pricing and funding.

Railway reform can succeed in Australia as it has done in New Zealand, Japan and elsewhere. But the policy framework does have to be right, and in Australia it is seriously defective.

Reform, with or without privatisation, will not work where there is a substantial legacy of under-investment in rail infrastructure, fragmentation of safety and technical standards, and grossly inadequate recovery of external costs (including road provision) from competing road transport.

The business community in Australia has come to understand the potential of rail to conquer the ’tyranny of distance’. Rail is being considered as a key line-haul link in the logistics chain, and some potential buyers of privatised organisations see big opportunities in this sector.

Despite all the uncertainties and dithering at the political level, three private train operators have entered the east - west corridor. Using hired traction, crews and wagons, Specialised Container Transport and TNT Australia are operating between Melbourne and Perth, and Patrick Stevedores between Melbourne and Adelaide.

The question is: how do we persuade our politicians that rail freight is worth taking seriously, and help them to understand what changes are essential for sustained success? Aside from lobbying and campaigning by ARA and other bodies, the federal government has taken two initiatives that may produce policy directions in due course.

First, it has created the National Transport Council to improve the quality of industry advice to the Minister of Transport, John Sharp; Vince Graham, Managing Director of NRC, represents rail. Secondly, it has set up an inquiry into the role of rail in national transport by the House of Representatives Standing Committee on Communications, Transport & Macroeconomic Reform.

A third initiative, taken by the transport ministers through the Australian Transport Council, was to call a Rail Summit in Melbourne on September 10. Although the catalyst was the argument over which line should be built to Darwin (box p697), rail industry leaders were confident that a number of more useful outcomes might be achieved.

Foremost on their shopping list was the establishment of a government funded national rail research body similar to the National Road Transport Commission, which has been very successful in harmonising road regulations and determining reforms that have improved the quality and efficiency of trucking. The other issues included the need for intermodal competitive neutrality, the cost of network access, the role of government in infrastructure investment, and the application of consistent rigorous assessment criteria to all transport investment.

Conflicting objectives

The political structure of Australia, which is a federation of six states and two territories, leads inevitably to a conflict of objectives not only between the federal government in Canberra and the state governments, but also between one state and another.

Land transport is a state responsibility. Australia’s notorious gauge problem - alleviated if not resolved by conversion of the principal interstate routes to standard gauge between 1930 and 1995 - is one of the more visible results.

Less obvious, but highly relevant to the development of a national interstate network open to competing private train operators, are the many complex and differing safety and technical standards evolved by the government railways in each state. These pose a serious barrier to new and existing operators who want to invest in rolling stock and operate with maximum efficiency.

After lengthy negotiations, the Intergovernmental Agreement on Rail Safety came into effect on July 1 1996. This provides for a national system of safety accreditation of owners and operators based on Australian Standard AS4292, although accreditation is still a state rather than a national responsibility. The agreement does not deal with technical standards affecting the registration of rolling stock, nor does it have any impact on the plethora of safe-working and communications systems across the nation.

Some 14 months after it should have come into force on July 1 1996, this agreement has still not been signed by Tasmania and the Northern Territory. Some states have yet to enact their legislation to implement properly the first of the much-needed national reforms. But the National Accreditation Guidelines prepared by the state regulators have already come under fire from the rail industry. Government and private operators large and small are critical of the costs involved in meeting the guidelines which do not conform to AS 4292.

If reaching agreement on purely technical issues such as safety standards is so tortuous, it is hardly surprising that the policy objectives of the governments are seriously out of step.

AN sale in progress

The Federal and Victorian governments are moving rapidly to privatise their rail operations. The announcement of the successful bidders for the three AN business units was expected in early August, but several bidders were called to submit revised offers for further consideration by the Federal Office of Asset Sales. On August 28 the federal transport minister John Sharp announced that AN would be sold to three separate consortia (p703).

The Federal Government has also said that it intends to sell its shares in National Rail Corporation by the end of 1998, a move that is supported by the board and senior management. The other two shareholders, Victoria and New South Wales, are expected to sell their shares too.

Withheld from the sale of AN assets were the standard gauge interstate routes linking South Australia with WA, NSW, Victoria and the NT. It is proposed that these lines will be managed by a federal agency, but until this is established AN’s Track Access unit will continue to manage them and charge access fees to train operators. The unit is directly responsible to the federal transport minister in Canberra.

Negotiations are under way with the relevant states to resolve the issues stalling the creation of a national track access regime. The federal government has made some funding available from July 1 1998 to enable the regime to commence business.

In Victoria, the Public Transport Corporation is being restructured into stand-alone businesses which are destined for sale. Victorian Rail Track Corporation (VicTrack) will maintain and manage access to the non-metropolitan non-electrified infrastructure including the two standard gauge interstate routes from Melbourne to the NSW and South Australian borders.

Originally, the government said it would retain ownership of rail infrastructure, but recent announcements indicate that all assets may in fact be sold.

V/Line Freight Corp is expected to be sold as a train operator in 1998. Competitors will be able to negotiate with VicTrack for access rights, on terms which the establishing legislation merely says must be ’fair and reasonable’. They can also use the Trade Practices Act to obtain access if negotiations are unsuccessful.

There are country passenger services radiating from Melbourne on five routes. Trains on the routes to Warrnambool and Shepparton are already operated by private companies under slightly different arrangements. West Coast Railways and Hoys have seven-year franchises for their respective services, beginning in July and August 1994. WCR owns its own rolling stock, whilst Hoys leases from the PTC. Both pay access fees for the routes between Melbourne and the destinations, and both receive a CSO contribution for state-imposed concession terms. The remaining services operated by the PTC will be put out to tender by the state government as part of the PTC privatisation.

The PTC operates an extensive network of heavy rail and tram/light rail routes covering the built-up zone in and around Melbourne. The electric suburban train service will be split for sale into two networks, and the tramways into two.

Privatisation not universal

Thus far, the governments of Western Australia, Queensland and NSW have not said that they intend to privatise their railways.

Westrail and Queensland Rail remain vertically integrated businesses, and the fact that both are profitable (apart from explicit subsidy for urban and country passenger trains) means that pressure for restructuring is muted.

Nevertheless, both states are setting up open access regimes that should eventually allow new entrants to compete with the government railways. A Queensland Competition Authority is being put in place to administer the open access regime and arbitrate on disputes between QR and new entrants.

Queensland is the only government to have implemented a long term programme of investment in rail infrastructure so as to bring it up to modern standards. In addition to new and upgraded heavy haul lines moving coal to the sea for export, major improvements have been made to the trunk line between Brisbane and Cairns including deviations and electrification throughout south of Rockhampton. However, it should be noted that the QR investment of over A$700m was funded through borrowings to be paid back with interest, unlike the billions of dollars of state grants sunk into road improvements.

New South Wales is the only state to sign a long-term (7-year) CSO agreement. NSW is also investing A$250m a year into capital works and A$500m for routine and periodic maintenance of rail infrastructure. Last year, NSW split its State Rail Authority into four organisations handling passengers, freight, track access and infrastructure maintenance.

The Rail Access Corp manages the infrastructure, outsourcing the actual work of maintenance and construction, and arranges access for train operators within the provisions of the Trade Practices Act. The negotiated price must meet the direct cost and full incremental cost imposed by the operator’s trains, and the rate of return on RAC’s assets must not exceed 14%.

The government-owned Railway Services Authority is the incumbent maintenance contractor for much of RAC’s network. RSA provides construction, maintenance and technical advice to RAC under a series of Deeds of Agreement. Infrastructure maintenance work is now open to competition from the private sector, starting with the East Hills line in the Sydney suburbs.

NSW’s major rail freight operator is now known as FreightCorp, but remains state-owned. It has recently won large long-term contracts to haul coal from the Hunter Valley against threatened private competition, and is launching other innovative freight services for its customers. The residual State Rail Authority remains responsible for country, commuter and urban passenger operations.

Absence of policy

What is clearly evident from both the Commonwealth and Victoria asset sales is the lack of any real transport policy, such as exists in Queensland, for example. Both governments simply want to rid themselves of the troublesome railway as quickly as possible, while generating as much cash as they can from sales.

In the case of AN, the government was extremely happy with the results of the sale, with final bids higher than expected. This was despite some comment from bidders expressing dismay at the short time frame, and many changes to the bidding parameters.

Indeed, comparing the recent privatisation of airports with the sale of AN, some commentators attributed the difference in approach to the government’s lack of understanding of the role of rail in the nation’s transport task.

For example, how can investors judge the prospects for making a return on AN assets when a conflict of objectives exists over track access regimes and private investment in the infrastructure?

Notwithstanding the One Nation programme of 1992-95, which saw Melbourne - Adelaide converted to standard gauge (RG 7.95 p445) and modest improvements to the Melbourne - Brisbane route, the federal government has shown no consistency in funding rail and road investment.

Despite claims by the Federal Minister for Transport that the government’s objective is to make rail more competitive with road, the 1997-98 federal budget allocates A$175m over four years from 1998-99 for main line rail infrastructure upgrading compared to A$1 600m for road spending in just the one financial year. Over the past 20 years the federal government has spent A$1·5bn on rail investment and A$32bn on roads.

Track access debate

The whole question of control and charging for track access is the subject of heated debate, and delicate negotiations began in July with the aim of thrashing out a solution by September 10. At the time of writing two initiatives were being taken, and the Federal Minister of Transport was confident that a national access regime could be established.

The Commonwealth Department of Transport is negotiating with each of the states to establish an agreed position, and at the same time the state access providers are engaged in discussions to try and determine an industry solution. As well as funding and control issues, the state infrastructure providers are looking to improve service to operators through greater uniformity in terms of operation, communications and safe-working practices. The proliferation of accreditation agencies alone has created a barrier to new entrants and imposed a huge cost burden on existing operators.

Track Australia, proposed by the former Labour government, was to have owned and controlled access to the interstate trunk lines (at least) so that operators between the major cities would have only one organisation to deal with. This fading dream is now being revived by access providers, who are discussing a possible ’one stop shop’ for all operators both interstate and intrastate.

The federal government has put forward a number of models for a national track access regime. The model currently favoured by the Federal Departments of Finance and Treasury sees the states retaining ownership of the track, and the Commonwealth providing a centralised ’one-stop shop’ to broker deals between operators and the state access providers. Initially, the eastern states were said to favour this because they have significant intrastate traffic over which they wish to retain control.

The model favoured by Federal Minister for Transport John Sharp would see Commonwealth control over the network through a national authority, but with the states making financial contributions towards the maintenance of the assets.

The major sticking points to an agreed outcome are: who should fund the ongoing maintenance and upgrading of the network; the passing of control over state infrastructure to the Commonwealth; and access pricing policy. The states want the Commonwealth to pay for interstate rail infrastructure in the same way as they pay for national highways and roads of national importance. The Commonwealth wants the states to contribute.

The eastern states are resisting any form of national control over their corridors, as this would continue the duplication of access agencies. The operation of a small percentage of interstate business could also unduly affect the much larger volume of intrastate activity; the tail wagging the dog! Solutions being proposed include the creation of a board representing access providers to manage track access, and substantial Commonwealth funding to separate the freight and urban passenger networks in Sydney to ease peak-hour congestion.

What is urgently needed is the alignment of financial and managerial responsibility, and of ownership and investment. The operators want a workable and affordable solution. The access providers are trying to find an acceptable solution. The federal government is also trying to find a solution. But until the conflicting objectives and political agenda can be resolved, the conundrum remains.

Private funding sought

The Commonwealth wants to see private investment in rail infrastructure; the transport minister has said many times that rail users must pay for the upgrading and maintenance of the infrastructure they use. This would be fine if road freight operators were required to do the same, but studies show that they are only contributing about a quarter of the amount required. In contrast, although both road and rail operators pay diesel fuel excise, about 60% of the duty paid on loco fuel goes on road improvements.

Private train operators simply cannot compete with truckers on these terms. Some are asking for zero access charges in the Melbourne - Sydney - Brisbane corridor as a way of compensating for the huge investment which is going into parallel highways, which are constantly being improved at public expense.

No responsible investor would put money into rail infrastructure on this basis, especially as a large part of the interstate network has been neglected for decades and is incapable of being operated efficiently because speeds are low and many passing loops too short.

Also, the private sector is unlikely to invest in state-based railways. What they want is an integrated national trunk network owned and managed by one central authority, whether publicly or privately controlled. This is the conundrum for government.

Developing a national policy

The absence at the federal level of any coherent policy to develop a commercial rail freight industry that can compete effectively with road and win back not just tonnage but market share is a very serious deficiency.

A business environment survey by the OECD’s Economic Intelligence Unit, published in May, ranked Australia 12th out of 58 countries, but the quality and extensiveness of rail infrastructure was in the lowest tier of indicators (2 out of 5) along with strikes, skill shortages and restrictive labour laws.

Despite this handicap, rail managed to haul 100 billion net tonne-km in 1994-95, which is 56% of the combined road and rail freight task outside urban areas. Admittedly, a high proportion of this is accounted for by heavy haul operations in Queensland and Western Australia which in general have not lacked private or public investment.

But the remarkable transformation of privately owned, unsubsidised and vertically integrated railways in the USA from near bankruptcy in the 1970s to highly effective competition with road for general freight in the 1990s shows what key legislative and policy changes can achieve. o

CAPTION: National Rail is taking delivery of 120 new NR class diesels from A Goninan & Co in Perth and Newcastle. Two NRs and a Clyde-EMD DL class tackle the steep curves and sharp grades in northern SA with a 1·5 km long Perth - Sydney superfreighter

CAPTION: NSW Freight Corp uses Canadian-built 90 class diesels under a Clyde-EMD power-by-the-hour contract for its lucrative Hunter Valley coal operations, which may soon be challenged by private competitors

CAPTION: Australian National’s Leigh Creek coal business accounted for about one-third of its South Australian revenue, but instead of including it in the sell-off, ownership was transferred to South Australia power company Optima Energy, significantly reducing the sale value

CAPTION: Australia’s first privatised country passenger service links Melbourne and Warrnambool in Victoria; West Coast Railway’s ’WestCoaster’ is headed by an overhauled 40-year-old EMD S class diesel

CAPTION: National Rail has introduced double-stack operation on the Trans-Australia route across the Nullarbor. Originating in Melbourne, the new 5-pack wagons on this Perth-bound superfreighter were ’doubled up’ in Adelaide for the 110 km/h trunk haul

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