The Business of Australia’s Railways: Proceedings from the Australian Railways Business and Economics Conference, Perth Australia, 20th July 2009

THE BUSINESS OF AUSTRALIA’S RAILWAYS: PROCEEDINGS FROM THE AUSTRALIAN RAILWAYS BUSINESS AND ECONOMICS CONFERENCE, PERTH AUSTRALIA, 20TH JULY, Nick Wills-Johnson, ed., Center for Research in Applied Economics, December 2009

115 Pages Posted: 17 Dec 2009 Last revised: 15 Sep 2010

See all articles by Tim Brennan

Tim Brennan

University of Maryland, Baltimore County - Department of Public Policy; Resources for the Future

Nick Wills-Johnson

DBP

Paul Larsen

affiliation not provided to SSRN

Anusha Mahendran

Curtin University - Centre for Research in Applied Economics

Brett Hughes

C-MARC; Curtin University - Centre for Research in Applied Economics

Jian Wang

affiliation not provided to SSRN

Date Written: December 16, 2009

Abstract

The Australian Railways Business and Economics Conference was held in Perth, Australia, on July 20th 2009, bringing together 30 participants from industry, government and academia. The conference heard from six presenters: Paul Larsen – General Manager, Westnet Rail; Professor Tim Brennan – Professor of Public Policy, University of Maryland Baltimore County; Brett Hughes – Director of Policy, Australasian Railway Association; Jian Wang – Postdoctoral Research Fellow, Faculty of Business & Law, Southern Cross University; Anusha Mahendran – Research Associate, Centre for Labour Market Research, Curtin University; Nick Wills Johnson – Research Fellow, Centre for Research in Applied Economics, Curtin University.

The papers which underpinned these presentations are included in this volume. Paul Larsen and Brett Hughes did not produce papers, but rather gave highly informative industry overviews and, because the perspective of key industry players is crucial for understanding the industry itself, their slides have been included in this volume.

Paul Larsen focuses on the grain lines in Western Australia, a topic which has generated controversy recently because many of the lines require significant investment in order to remain viable, but generate insufficient returns to warrant such investment. The grain rail lines in WA, along with most of the rest of the network in the South West of the State (outside Perth) was privatised almost a decade ago. Westnet is the current operator of these lines, and is the only private, stand-alone below-rail operator in the world. As Paul points out, five million tonnes of grain are shipped on 2500 km of track, and 45 million tonnes are shipped on 2,600 km of track; fully half the network is unviable, earning losses of between $5 and $10 million per annum for Westnet. In such a situation, Westnet is neither willing nor obliged by the terms of its concession to fund the roughly $200 million it would cost to upgrade the grain network. The WA Government, however, has been proclaiming its desire that this occur, and this has been the basis of the controversy.

Part of the problem is that, although half of the network is not viable, its alternatives are even less so when viewed from the perspective of the community as a whole. The alternative is to use B-double trucks, which not only generate significant road-safety issues, but also, according to Paul, cost roughly $300,000 per annum each in road subsidies. In New South Wales, where the grain rail network is even more moribund than in WA, trucking rates have increased by 50 percent in response to the extra demand. A further part of the problem is that, if Westnet were to upgrade the network and charge the farmers the cost of doing so, access charges would double or triple. This would not breach regulatory revenue caps on most lines, but it is likely to render rail unviable for the growers. The solution, as Paul sees it, is for government funding for the track which is commercially unviable. This allows for the farmers to obtain the track they require without the costs exceeding their capacity to pay, and allows the government to save some $350 million on road investment costs that it would otherwise have to outlay in order to accommodate the roughly 300,000 truck movements that a cessation of grain rail services would engender.

Tim Brennan brings considerable breadth to the discussion of the regulation of railways by looking at the US context, and the lessons one can learn from telecommunications and electricity. Both are useful perspectives for the rail industry in Australia; railways in the US have been regulated private businesses for more than 100 years, providing a wealth of historical knowledge to inform the much younger Australian regulatory framework, and other sectors such as electricity and telecommunications often provide templates for regulators when they come to a new industry. The access regimes for rail in Australia are substantially based upon earlier regimes in electricity and telecommunications. Tim discusses the regulatory experiences of telecommunications and electricity, drawing lessons from them for the rail industry. In particular, each (in the US at least) offers a different kind of model, and neither is sufficiently similar to rail to warrant the duplication of their respective models for rail.

Tim also looks at the interface between antitrust, or competition law, and regulation, noting the exemption US railways have had from antitrust law since its inception in the 19th Century. The exemption means that the Surface Transportation Board, the regulator of rail in the US, sets rates and approve mergers, and that its decisions cannot be challenged under antitrust law. This exemption has been challenged recently and, although the bill was defeated, it is likely that bills to repeal rail’s antitrust exemptions may be brought before Congress in the future. Tim thus looks at whether repealing rail’s exemption from antitrust law would give rise to antitrust liability for rail. He suggests a number of scenarios whereby it might, but suggests that, even where the courts might find breaches of antitrust law on the part of rail, they would likely defer to the regulatory agency (the STB) because the remedies would generally require price controls of some kind that the courts are ill-equipped to impose. The recent Trinko case in telecommunications is cited as an example of where the courts viewed regulation as an adequate substitute for competition law. He also looks at the way in which the removal of an antitrust exemption might provoke some competition between the Department of Justice (one of the competition agencies in the US) and the STB, noting that the dual role of the ACCC as competition agency and industry regulator may mean that such competition occurs within the organisation.

Jian Wang and Michael Charles consider the impacts of the rail industry on the Australian economy by considering them through the lens of input-output analysis. This not only allows them to consider the overall impact of the industry on the national economy, but also to highlight the sectoral decomposition of that impact. In addition, they model the impacts of a modal shift from road to rail. Underpinning their analysis is the Australian Input-Output Table, put together regularly by the ABS.

Jian and Michael find that the total economic impact of the rail industry is roughly $18.5 billion in industrial outputs per annum, as well as generating more than 65,000 jobs and over $4.4 billion of household income. Sectorally, the industry has its greatest impacts in the railway equipment, the metals and metal products and the construction sectors, where direct and indirect effects are dominant. However, the industry also stimulates large public and private services responses such as finance, business and insurance services through indirect and induced spending.

By examining the impacts of a shift from road to rail, the authors look at both a technologically neutral shift of ten percent of final transport demand, and a shift which induces a ten percent productivity improvement to the rail sector. They find that the first shift would have no output effect, but that it would have net positive flow-on household income effect to the economy due to the higher wage structure of the rail sector relative to that of road. The second shift suggests the importance of creating higher-value-added services through innovation and investment, which could lead to larger economic impacts. In both cases, overall employment would fall, as rail workers are generally more efficient than the road freight industry in terms of the labour-output ratios.

Brett Hughes brings a unique, whole-of-industry perspective to the debate, through his position as the Director of Policy at the Australasian Railway Association; the peak industry body in Australia. He focuses on the transport industry in general, particularly in response to the sustainability debate, and upon the challenges faced by rail within this broader debate about transport. He is critical of the transport planning and policy framework, arguing that the best that is being done is only going to get us to multiples of existing problems such as congestion and road-freight movements. Moreover, he highlights an important disconnect between recent data and projections. In particular, historical growth in passenger car use is much steeper and in urban rail use, much shallower than it has been in recent years. Transport planning is yet to reflect these changed realities, which is important if they are not transitory phenomena.

Brett then goes on to look at issues of transport emissions, which would expand to cover two-thirds of overall targeted Australian emissions by 2050 if nothing is done to render the transport sector less carbon-intensive. Most of the problem, as he sees it, is tied to private cars, which are neither efficient nor improving their efficiency significantly. Moreover, he points out some other deleterious externalities associated with high private car use, highlighting in particular the correlation between areas of high mortgage stress and areas on the periphery of cities where residents face long car trips to commute each day. He also points out that many of the problems associated with traffic, particularly congestion, are increasing faster than traffic itself.

Rail, as Brett sees it, has considerable scope to contribute to solving many of these problems. Not only can it remove many cars from the roads in peak commuter periods, but it also much less energy intensive for both passenger and freight traffic. Not surprisingly, he sees rail as an important part of solutions to climate change, but he argues that the current policy framework is poorly constructed to deliver the kinds of policies necessary in this respect. In particular, he highlights numerous market distortions associated with policies pertaining to transport at present, but he also points towards the ingredients for a better, more long-term policy paradigm. In a more concrete sense, he advocates government playing a stronger role in facilitating modal shift from road to rail, which he suggests result in a reduction in emissions of up to one quarter. This would require the development of freight networks which more fully utilise rail as a central link, and urban forms which are more compact and suited to rail passenger transport.

Anusha Mahendran focuses on a critical issue for the rail industry in Australia at present; shortages in appropriately skilled workers. The paper is part of a broader project to develop a profile of the industry’s workforce, and emerging critical needs within that workforce. In part, the skills shortage is a legacy of industry reform and rationalisation in the1990s, when the overall workforce was halved, and intakes of new workers slowed considerably. However, the industry still faces ongoing problems in terms of attracting and retaining staff (it is seen as “old economy”), as well as a steady ageing of its workforce.

Industry employment is still concentrated in blue-collar roles such as drivers, machinists and other trades-people, even though these were the groups where reductions in workers was greatest in the period from 1991 to today. The industry is also characterised by people with no formal qualifications (roughly half of total employees) or those with Certificate level qualifications (roughly a third of the total). The age profile of workers between the 1996 and 2006 Census has largely shifted upwards, indicating essentially that the same people working in the industry are still there, and roughly a decade older; there has been limited infusion of new workers. The gender profile of workers is also skewed, particularly in the blue-collar roles, but overall, women make up only 15 percent of the workforce.

The age, education and gender profile of the industry exposes it to considerable risks. Whilst workers are at work, ensuring they remain in good health is likely to be more expensive than for other firms and, as they retire from work, the industry faces the prospect of substantial losses of institutional knowledge. For a time, this could be combated by encouraging later retirement, but ultimately, there is a need to attract younger workers of both genders in order to sustain the industry into the future. This, according to some of the findings presented in Anusha's research, may require some quite fundamental paradigm shifts in the employment structure of the industry, with less hierarchy, less of a “cradle to grave” mentality and greater opportunities for women.

Nick Wills-Johnson develops a cost function for the Australian railways using data covering almost all of the 20th Century, from 1900 to 1992. He examines two functional forms, the translog and the generalised McFadden. The former has been widely used to study railways overseas and the latter has more recently found favour. Neither has been used in the context of Australian railways before. He finds that the translog provides better estimates of the cost structure of Australian railways, though neither does a perfect job. This seems most likely to be a product of the data; data on fixed capital at Australian railways has traditionally not been particularly good.

The models suggest that the separation of freight from passenger services, whilst it might have allowed governments to better target subsidies for loss-making passenger services, is likely to have slightly increased costs. They also suggest considerable economies of density (meaning track was used too lightly) as well as some evidence of economies of scale, meaning the networks could have reduced costs by expanding track and above-rail services.

Keywords: Australia, Railways

JEL Classification: L92, D24

Suggested Citation

Brennan, Tim and Wills-Johnson, Nick and Larsen, Paul and Mahendran, Anusha and Hughes, Brett and Wang, Jian, The Business of Australia’s Railways: Proceedings from the Australian Railways Business and Economics Conference, Perth Australia, 20th July 2009 (December 16, 2009). THE BUSINESS OF AUSTRALIA’S RAILWAYS: PROCEEDINGS FROM THE AUSTRALIAN RAILWAYS BUSINESS AND ECONOMICS CONFERENCE, PERTH AUSTRALIA, 20TH JULY, Nick Wills-Johnson, ed., Center for Research in Applied Economics, December 2009. Available at SSRN: https://ssrn.com/abstract=1524150

Tim Brennan

University of Maryland, Baltimore County - Department of Public Policy ( email )

1000 Hilltop Circle
Baltimore, MD 21250
United States
410-455-3229 (Phone)
410-455-1172 (Fax)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Nick Wills-Johnson (Contact Author)

DBP ( email )

PO Box Z5267
St Georges Terrace
Perth, 6831
Australia

Paul Larsen

affiliation not provided to SSRN ( email )

Anusha Mahendran

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

Brett Hughes

C-MARC ( email )

Curtin University
GPO Box U1987
Bentley, WA 6845
Australia

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

Jian Wang

affiliation not provided to SSRN ( email )

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