"create greater opportunities for access to agricultural export markets, particularly through rail connection to the Port of Brisbane, as well as the Port of Melbourne, Port Botany and Port Kembla."
In the same report, ARTC stated in response, that Ettomogah Rail Hub was able to offer twice weekly services to Brisbane that are accessible from Shepparton. Our understanding, however, is that they primarily offer on-demand services providing their own traction to Junee or Cootamundra for transhipment through inefficient legacy yards.
When we visited the Riverina region recently, we were informed by industry participants that did have immediate access to mainline rail operator services, that there were four issues that severely restricted rail’s ability to compete with road, and they were:
Price, Frequency, On-Time Running, and Traceability.
The priority issue repeatedly cited by various parties was price.
In this series we have been exploring the nature of markets and competition in Australian transportation services, and between state port authorities. Creating substantial new corridor-based transport infrastructure requires validation of the existing competition and access framework specified for it. Our contention, however, is that the current access and pricing regulatory regime, as detailed below, does not serve basic market participant requirements.
If we are to deliver an alternate concept for a transportation network model than the one in place today, or more correctly an appendage to one specifically applying to the inland, our scenario for contestability & sustainability must also be credible.
For us, if there is any idol to serve for transportation services policy-making, it should be that of the “Competitive Network Model”. Many more market participants may well support that aspiration if they were convinced it would drive commercial opportunities principally derived of aggregate network growth. If ideology is found within components of our proposed Network Model, it had to have earned its way, and it is to be tested at every turn.
So, our founding charter for the inland rail network model includes the pursuit of:
- volume growth
- economically returnable capital investment (ROIC = sustainability)
- affordable innovation
- on-time running
- the lowest feasible unit prices being brought to market.
We agree that the current regime’s feature of separating track from above-rail operator ownership in the shared-use environment supports our Competitive Network Model. However, future network-wide ROIC is more important than that conceived out of the rear-view mirror of an individual participant's presented accounts. Policy, access, and fee making must transparently represent that to participants, and it fails to do so today. There is every chance that network-wide risk-rated funding will respond positively to such a change.
The problematic nature of access, in respect of public-funded infrastructure that delivers only a narrow corridor to private commercial users, is universally recognised. Most also agree that properly structured infrastructure based service offerings should retain market responsive price underpinnings.
In Australia there is a three cornered market regime orientation tussle between supporters of limited competition markets, old state-owned enterprise occupied markets (for those who have trouble with memory and numbers), and the laissez faire open access “fair go” regimen
The instinctive belief in the notion that only contained competition markets are sustainable has long been pervasive in Australian government circles. The raison d’être presented for this is that limited market entrants might not compete themselves to the point of extinction so readily. Another is that they may not trip over each other to the point of degrading service outcomes while utilising a given narrow corridor. More interests of influence personally benefit under this scenario than under the others.
When I worked in Germany, however, I learnt of the employ of concentric inner and outer circles in organisational management applications. This same conceptual basis has long naturally evolved in competitive transport markets. It can be most readily recognised when free competition is derived from a contest between different modes of transport, or between ports; those that encroach into each other’s markets on the edges.
However, the notion of monopolist US regional railways (owners of track, yards, and equipment) responding to market forces is not well understood in Australia. These railways are necessarily responsive to pressures from customers, those that would physically exfiltrate from the railway owner’s region, and into the arms of other railroads better serving their local customers. Australian views are held in spite of the history of tussle between our former colonies for markets. It is affected, however, by the historical lack of labour flexibility, and the lesser industrial owner generated activism here (after protectionism failed). In the US there is also a better innate understanding of the duality of outcomes for the railroad and their major shipper's fortunes.
In the US the regional railroad owners also need to attract long haul inbound intermodal container traffic from ports. In doing so they are able to bring in containers and chassis that will also facilitate exports for their region’s shippers. This creates a powerful price/volume bargaining base for international shipping lines (and customer shippers) that fits neatly into our concentric circle concept. I can attest to this market power after having close watch downstream on the “arb” pricing negotiation (US rail prices to/from inland rail ramps & ports) for shipping line container contracts. In these cases, where many railway companies were employed by an individual shipping line across the US inland, competitive distance-based pricing convergence was expected and often achieved. Unfortunately that same force bringing pricing moderation to bear has largely been absent in the Australian market (it will be less so if our model is successful).
What is recognised, even in Australia, is that coal and ore railways are far more easily optimised when the miners own and control the whole rail operation. However, when it gets messy under shared use access, like it does in the Hunter, there is little public confession of the actual displacement cost created by prioritising passenger services on the line.
We mention the above to signal our approach to access pricing on the Melbourne-Brisbane inland alignment. If it runs on our conceived line access regime, and by its very characteristics it decreases optimal network revenues, and/or network on-time running, then it must pay the displacement cost in higher access fees. Operators running sub-standard equipment, as well as those continuously relying on regular traffic to be idled to give them priority, must pay more. This mechanism also incentivises a situation where a dollar of capital spent on below-track is at least matched by so many cents in above-track capital spending that in practice will mitigate access fees. Grain freight, in particular, must fund investment in rolling stock at modern main line standards (which in any case, inclusive of branch line wagons, is a sound investment - in respect of aggregation strategy - if they were to get their act together).
At Gilead, we are instinctive supporters of anti-trust action as a one-time corrective device when employed in monopoly dominated markets However, in any given market where there is an effective barrier to entry, and a limited number of large-scale participants, in the real world we find activist regulator regimes are ineffective at making a difference in restraining market pricing.
In practice, you do not need to discuss pricing, or even signal pricing to a competitor, if your organisation, and your competitors, are skilled enough to recognise mutual interests, and the limits which the market can bear. We saw evidence of this just this week when US airline executives were dragged before a US Congressional Committee to discuss the simultaneous emergence of bag-less air ticketing. Further in respect of the US, one might compare their express parcel delivery prices with both the US CPI index and oil prices for this millennium, and you could well believe you are confronting the one-and-the-same issue. Yes, contestability is the answer, but only if it can also access the near optimum network generated cost benefit.
We now want to concentrate on the distinct Eastern Australian inland rail market. We are mostly leaving the inter-capital express terminal-to-terminal markets behind us. We have simply noted that they should fully pay their way, on a displacement cost basis, and not otherwise disrupt inland rail operations. This will properly temper & stratify the volume shares of other rail products offered on a speed-versus-economy basis. As we noted earlier in the series, this same feature applies in trucking where the driver hour regime creates a similar equation. So, inter-capital rail is not competing with a single effective trucking transit time, but rather 3 or more, and it must be able to respond in kind. One of those responses is likely to include transhipment via inland yards where inter capital wagons can fill gaps in regionally destined or originating services in order to lower network costs, and hence be offered at lower prices to capital city shippers.
To develop the inland rail network model we must firstly acknowledge many deficiencies. These are found in areas including branch network axle weight restrictions, rolling stock quality, mainline control technology, terminals, rail yards, competition, frequency of services, and most of all the pricing. That is more than a bit for our proposed network model to take on, and nothing will be solved unless the model allows industry to grow its way out of the current problems.
In respect of inter-capital trains on the Melbourne-Brisbane inland rail alignment we can accept that an express train set manifested out of the originating terminal with limited stops to include transhipment to the east-west line axis, and for crew changes/refuelling, is a logical extension of the philosophy by which trucking has successfully operated in this country serving that market. However, we say that it is anti-competitive to transpose that system of manifesting trains from various inland located intermodal terminals.
If one dominant market participant was able to maintain low frequency departure train sets manifested out of a major regional area to a particular single port, and/or continue to clumsily hook up wagons at other terminals en route, our emerging network would not have access to the volume basis required to generate a competitive offer to network wide customers, and be profitable. If our network model is the optimum one for customers running on a $10B publicly funded track, then the market interest would wish us to win that contest of interests before the race to the bottom commences (operating losses).
Terminals in the inland are often found to be created merely from semi-gifted rail sidings worked with a reach loader. There is no sunk capital basis for such interests to be protected as they stand, if they are found to be disrupting optimal rail network economics. If we were to permit the establishment of dominant manifest generating intermodal terminal in the inland, we would also be, in geographical terms, automatically creating less winners, and more losers among shipper territories served.
On an initial basis, the above would commend ARTC to levy far higher access charges to an operator that would disrupt overall network economic potential by creating manifests at individual yards in cherry locations. Once well established, however, the network model will be able to look after itself at equalised access charge levels. If operating efficiently, transhipment carriers & forwarders will likely be able to offer lower pricing at cherry locations in order to see off any regionally generated single manifest threat.
In our inland Network Model, regional intermodal terminals/rail ramps would manifest to the regional transhipment rail yard, or hook up with those passing services. A local rail shuttle may serve the clustered intermodal terminals near the rail yard. These trains would all terminate at the regional transhipment rail yard. Modern yards are not labour intensive and they can efficiently classify the wagons, and create manifests to all the major ports/capitals to be served either directly, or via other transhipment rail yards.
Although these proposed transhipment rail yards may be commercially interesting to larger existing market participants, they may still need to be solely funded by ARTC. Anti-trust provision should see them always kept out of the hands of an existing port or intermodal operator. Under ATRC ownership, given the fragile state of competition/investment among above rail operations, we would recommend that these yards be leased to independent inland transhipment port operators. These yards should not offer intermodal services within their rail yard focused operations, but rather serve to receive, classify, and manifest transhipment wagons while providing basic multi-user maintenance and fuelling facilities.
In respect of the competition model, strategically located transhipment yards can serve:
- local clusters of intermodal rail ramps and tank/bulk terminals
- larger regional city intermodal terminals
- branch line originating terminals/ramps
- major capital city originated cargo destined to secondary ports (Newcastle/Port Kembla/Adelaide)
- services from major capitals destined to regional locations
- services from major capitals seeking opportunistic pricing to major capitals
The Cluster Hub
One of the indicators for the placement of an intermodal terminal is the meeting points of closed branch lines to the main line. In locating a terminal on such a closed branch line alignment, heavy trucks may be kept out of the particular town at the junction. In some locations these junctions may correspond with operating branch lines. Hence the idea of a cluster of intermodal terminals at these natural junctions, with basic legacy infrastructure already in place; and served by means of local rail freight to a transhipment rail yard.
By means of independent ownership, the new rail yard will facilitate greater competition above-rail. Legacy yards / maintenance facilities for existing above rail operators will likely be maintained due to their proximity to bulk/silo facilities etc. The prospect of transhipment yards over time garnering increasing bulk traffic out of the legacy yards is high.
Due to the limited number of classification tracks deliverable within perceived capital constraints in a low-medium traffic volume yard, contracts for outbound traffic services will need to be awarded on a route basis to above-rail operators by the inland port entity. The inland port’s revenues, however, should be derived solely of handling fees charged to the rail operators.
The prospect of competition combined with independent ownership between several of these inland ports developing on the main north-south line should allow the concentric-circle style of competition (as mentioned earlier) between transhipment yards to emerge. At a later date above-rail operator ownership of the transhipment yards could be considered. Above-rail service contracts in our network model will be awarded by the party originating the cargo as normal. They may choose to take an offer ex terminal/ramp to destination, or contract each leg separately on normal freight forwarding terms.
In respect of a rail yard’s selection of an outbound service provider for a particular manifest destination, their embedded interest in giving consideration to a carrier’s frequencies, inbound volume, and on-time running, coalesces with maximising their projected handling revenues and lowering their operating costs.
In recommending this Network Model, Gilead draws attention to the alignment with the longstanding distributed network model observed with international ocean ports/airports, airlines/ocean carriers, terminals, consolidation warehouses, and freight forwarders. These markets have proven to be highly contestable, with diversity of ownership, and Australian pricing/frequency outcomes are seen as competitive on a global basis.