Research Paper 14 1999-2000

Issues in Rail Reform

Richard Webb
Economics, Commerce and Industrial Relations Group
7 March 2000

Contents

Major Issues

Introduction

Reforms to Rail Transport

Reform Issues

Conclusions

Endnotes

Appendix 1: Report Recommendations

Major Issues

Rail plays a major role in the Australian freight industry, accounting for around one-third of the domestic task. Rail has maintained its market share of freight over the past 25 years, largely by transporting bulk commodities such as minerals. Rail also plays a major role in long-distance and primary products transport, but has lost market share to road in the transport of non-bulk freight.

Rail transport has undergone major reform since the early 1990s. Reforms include changes to the structural arrangements of some State government-owned railways; the corporatisation or privatisation of some operations; steps towards reducing inconsistency in safety regulation and operating standards; the establishment of the Australian Rail Track Corporation to manage access to the interstate track and the implementation of third party access arrangements in a number of jurisdictions. Reform has resulted in, among other things, greater participation by the private sector, increased productivity and competitiveness of rail relative to other transport modes, reductions in freight rates, and increased specialisation in particular freight and passenger markets.

Nevertheless, progress in some areas has been slow and further reform is needed in some areas. As identified by the three reports that this paper reviews-Tracking Australia. An inquiry into the role of rail in the national transport network; Revitalising Rail. The private sector solution; and Progress in Rail Reform-these areas include:

• the need for more comprehensive land transport planning
• additional investment in the interstate track
• better management of and access to the national track
• competitive neutrality between private and government-owned operators
• neutrality in the conditions affecting competition between different transport modes, especially road and rail
• fragmentation of schemes providing access to rail infrastructure, and
• inconsistent operational and safety regimes.

While the reports' recommendations have ramifications for State government-owned and private railways and for the road freight industry, a common feature of the reports is that they see a need for leadership from the Commonwealth and for additional action from the Commonwealth in key areas. These areas include integrated national transport planning; the allocation of Commonwealth investment in road and rail networks on a more rational basis; the upgrading of the national track; an enhanced role for the Australian Rail Track Corporation; road user charges; competitive neutrality between government and private rail operators; and safety regulation and operating standards.

Introduction

The Government has before it three reports containing recommendations for the further reform of rail transport. The reports are:

• Tracking Australia. An inquiry into the role of rail in the national transport network, prepared by the House of Representatives Standing Committee on Communications, Transport and Microeconomic Reform and released in August 1998.(1) This paper refers to the report as Tracking Australia but it is often called the Neville report after the committee chair, Mr Paul Neville MP
• Revitalising Rail. The private sector solution, prepared by the Rail Projects Taskforce and released in May 1999 (herein referred to as the Taskforce but often referred to as the Smorgon report after the chair, Mr J Smorgon AM)(2) and
• Progress in Rail Reform, prepared by the Productivity Commission, the draft of which was published in March 1999.(3) The Government has yet to release the final report.

The focus of the three reports is on the identification of measures to improve the efficiency of the rail freight industry, especially the interstate carriage of non-bulk freight(4), the main area of competition between rail and road, and government measures affecting competition among different transport modes. The reports generally do not address urban public transport, which was the subject of an earlier report by the Industry Commission.(5) While the reports see a major role for the Commonwealth in increasing efficiency, particularly on the interstate (national) track, the reports' recommendations have ramifications for State government-owned railways and for the road freight industry.(6)

This paper reviews the three reports and the main issues they raise, focusing on the implications for the Commonwealth. It should be noted that while the Government has yet to respond officially to the reports, it has taken a number of steps which implement, partly or fully, some of the recommendations.

The Commonwealth's role in rail funding inevitably raises issues of comparative levels of funding of road and rail infrastructure; policy 'neutrality' with respect to road and rail; and cost recovery. These issues are beyond the scope of this paper but it is intended that they will be addressed in future research papers.

Reforms to Rail Transport

Rail plays a major role in the Australian freight industry, accounting for around one-third of the domestic task. Rail has maintained its market share of freight over the past 25 years, largely by transporting bulk commodities such as minerals. Rail also plays a major role in long-distance and primary products transport, but has lost market share to road in the transport of non-bulk freight.

The combination of circumstances the rail freight industry faces is unique to Australia. It includes low population density, long distances, the Federal structure of government, and the fragmentation of administration between rail and competing transport modes (notably road) and within the rail industry. In particular, State responsibility for the ownership and operation of railways has been a key influence on rail policy since colonial times including track gauges and operating standards. As a consequence, it has at times been difficult to advance reform even though Commonwealth and State governments have long recognised the need to improve rail efficiency.

Nonetheless, a number of major reforms have been undertaken in the 1990s. They include:

• changes to the structural arrangements of some State government-owned railways. NSW, e.g., has split the former State Rail Authority into four units on a functional basis (see Box 1 page three)
• diversified ownership and governance arrangements. In Victoria, e.g., V/Line Freight (now Freight Victoria; see Box 2 page three) and V/Line passenger and suburban rail passenger operations have been privatised
• significant progress in reducing inconsistencies in safety regulation and operating standards
• a reduction in employment from nearly 90 000 in 1986 to around 36 000 late in the 1990s
• significant productivity improvements in government-owned railways over the period 1989-90 to 1996-97, although productivity remains below levels in the United States(7)
• the establishment of the Commonwealth-owned Australian Rail Track Corporation to manage access to and infrastructure development of the interstate network, and
• access arrangements have been implemented in a number of jurisdictions.

These reforms have resulted in, among other things, greater participation by the private sector in freight train operations, increased productivity and competitiveness of rail relative to other transport modes, reductions in freight rates, and increased specialisation in particular freight and passenger markets. The Productivity Commission summarises the consequences of reform as follows:

Commonwealth Government Involvement in Reform

The Commonwealth has long been involved in rail operations, maintenance and safety regulation.(9) Through the Australian National Railways Commission (trading as Australian National or AN), which was established in 1978, the Commonwealth provided intrastate and interstate freight services and passenger travel rail services.(10) In 1991, the National Rail Corporation (trading as National Rail or NR), that is jointly owned by the Commonwealth, NSW and Victorian governments, was established primarily to operate rail freight services between the mainland State capital cities on a commercial basis.

In line with its policy of removing government from above-rail operations (train operations for freight and passengers using rolling stock), in November 1996, the Howard Government announced the sale of AN and NR. AN's intrastate freight and interstate passenger services were sold to private operators in 1997-98.(11) Protracted negotiations are continuing with the NSW and Victorian governments to enable the sale of all Commonwealth equity in NR.

Australian Rail Track Corporation

The Commonwealth was involved in establishing the national rail infrastructure entity to control and manage access to the interstate rail network (see map in Appendix 2). On 14 November 1997, Commonwealth, State and Territory transport Ministers agreed to establish a national track access body, the Australian Rail Track Corporation (ARTC) to provide a 'one-stop shop' for operators seeking access to the national track to provide interstate services. The ARTC allows interstate operators to negotiate access to the entire interstate network through a single organisation, instead of having to negotiate with multiple authorities.(12) Control of Commonwealth-owned track was transferred from AN to the ARTC, which began operations on 1 July 1998. ARTC now controls around 55 per cent of the interstate track. ARTC owns the interstate track in South Australia and the extensions to Alice Springs and Kalgoorlie, and controls Victoria's interstate track under a five-year lease. The ARTC's ability to provide a one-stop shop for current and potential train operators seeking access to the national interstate standard gauge rail network is being delayed by negotiations between the ARTC, Rail Access Corporation (NSW), Westrail and Queensland Rail for the ARTC to obtain wholesale access agreements with these organisations.

Investment and Feasibility Studies

The Howard Government has committed $250 million over the four years beginning in 1998-99 to upgrade the national track. This is equivalent to around only four per cent of Commonwealth road funding over the same period. On 5 November 1999, the Minister for Transport and Regional Services, the Hon. John Anderson, announced that up to $124 million of the $250 million would be spent on a dedicated freight-only rail line through Sydney. This bottleneck is the single largest constraint on the passage of rail freight on the Melbourne-Sydney-Brisbane corridor. The expenditure of funds is conditional on the States agreeing to the ARTC being a one-stop shop for access to the interstate rail network. The Government's linking of funding for the freight-only line to the ARTC negotiations seems intended to put pressure on NSW, Queensland and Western Australia to reach agreement.

On 28 October 1999, the Prime Minister, the Hon. John Howard, announced that agreement had been reached between the Commonwealth, South Australian and Northern Territory governments to increase their contributions towards the construction of the Alice Springs to Darwin railway. The railway is to be built with $480 million in government contributions and $750 million in private capital. The Commonwealth will cap its contribution at $165 million, with the same amount to be contributed by the Northern Territory government and $150 million by the South Australian government. The Commonwealth intends to transfer control of the line to the successful consortium for 50 years. The proposed line will form part of the national track but won't come under the ARTC. Access would still be subject to National Competition Policy.

A number of projects are competing for expenditure on the national track. The Commonwealth, NSW and ACT governments entered a 'proving up' stage with the preferred company-the Speedrail Group Pty Limited-to develop a high-speed train service between Canberra and Sydney. The three governments have agreed that the project will proceed only if there is no net cost to taxpayers and is commercially viable. Speedrail lodged its submission on 19 November 1999 to the Project Control Group, which the three governments established to assess the project. But according to press reports, the Commonwealth government has baulked at the contribution Speedrail is seeking from the Commonwealth, and cabinet has deferred deciding on what the Commonwealth's position will be until some time this year.(13)

The Commonwealth is contributing $300 000 towards a pre-feasibility study to investigate the proposed inland railway, which would run from Melbourne to Brisbane. The proposal is being developed by Australian Transport and Energy Corridor Limited. The Government has appointed a steering committee to oversee the preliminary work, which will examine the project's technical and commercial viability.

National Operating and Safety Standards

The recognition that different State operational requirements increase costs and are a barrier to new operators led to a series of measures throughout the 1990s to reduce inconsistency in regulations. In 1993, the Australian Transport Council (ATC)-consisting of Federal, State and Territory transport ministers-endorsed A National Approach to Rail Safety Regulation report that recommended, among other things, an Intergovernmental Agreement to achieve consistent national rail safety regulation. The Agreement was signed in 1996. The ATC agreed at the National Rail Summit in September 1997 that a study be undertaken to review safety, technical and operational standards and procedures, focusing on impediments to efficiency in the interstate rail network. An Industry Reference Group (IRG) was established in July 1998 to develop nationally uniform operating requirements and rail standards across State boundaries. These requirements are based on the Maunsell report(14), which Ministers endorsed at the April 1998 meeting of the ATC. A focus of the IRG is to develop national codes of practice and, on 1 October 1999, the IRG released a draft National Codes of Practice for Railways. It is expected that the Codes will be finalised for implementation early in 2000.

The 30 April 1999 meeting of the ATC agreed that an Intergovernmental Agreement should be established as an interim measure to facilitate the implementation of uniform operational requirements and rail standards. The meeting also agreed to establish an independent review of rail safety arrangements, focusing particularly on the interstate system, and including a review of the Intergovernmental Agreement on rail safety.

Transport Planning

A number of steps have been taken towards rationalising transport planning. In December 1994, the National Transport Planning Taskforce presented its report.(15) The former Minister for Transport and Communications, Senator the Hon. Bob Collins, established the Taskforce to undertake a wide ranging review of transport planning, infrastructure investment and related transport matters. Among other things, the Taskforce recommended that:

However, few of the Taskforce's recommendations have been implemented. Most planning now takes place under the auspices of the ATC. At its 14 November 1997 meeting, ATC Ministers agreed on the ATC's strategic plan under which four modal groups-sea, air, rail and road-would be established to focus on key aspects of national transport reform. The 24 April 1998 ATC meeting agreed on the need for an integrated approach to road and rail freight operational and regulatory issues. Ministers requested a report on options for achieving this, including the feasibility of incorporating responsibility for rail into the National Road Transport Commission to create a Land Transport Commission to advise the ATC directly on major issues of national importance. At the 30 April 1999 meeting, ATC Ministers agreed to establish a National Transport Secretariat to advise the ATC directly on major issues of national importance.

A review of the Bureau of Air Safety Investigation (BASI)-following similar reviews of the Civil Aviation Safety Authority and Airservices Australia-prompted a reassessment of the structure of the safety investigation functions of the Department of Transport and Regional Services. As a consequence, the Department established a new multi-modal safety body, the Australian Transport Safety Bureau (ATSB), to bring together BASI, the non-regulatory sections of the Federal Office of Road Safety, the Marine Incident Investigation Unit, and a new rail safety unit.

Reform Issues

Progress on rail reform has been variable and in some areas much remains to be done. The following overviews the main areas the reports identify as needing further reform. Many of the issues raised are not new and have been raised in previous reviews, notably by the Industry Commission's 1991 report into rail transport(17) and by the National Transport Planning Taskforce in 1994. Discussions of rail issues can also be found in papers that Professor Philip Laird prepared for the Department of the Parliamentary Library.(18)

National Transport Planning

All three reports advocate that the Commonwealth should play a leading role in developing a national transport strategy. Tracking Australia recommends:

The Taskforce recommends:

Tracking Australia and the Taskforce see more integrated transport modes and a more efficient framework for the assessment of investment as major benefits of an integrated national transport plan, with decisions on government investment in infrastructure and private sector investment made on a more rational basis. The Taskforce notes that:

Tracking Australia advocates that the Commonwealth establishes a National Land Transport Commission to provide:

In addition, the Taskforce wants the Commonwealth to establish a national rail authority to:

National Track Management and Access Arrangements

The main focus of Tracking Australia is the improvement of the national track, access arrangements and operations on the track. This focus is reflected in Tracking Australia's recommendation that:

As noted, the ARTC has only limited control over the network, and operators still have to deal with several track owners. The Taskforce states:

The Taskforce thus recommends:

Moreover, access arrangements differ across jurisdictions and lack transparency, leading to concerns among operators about how access decisions are reached. The Productivity Commission found that:

Further, the National Competition Council (NCC) has not certified as 'effective' the access regimes the States have developed with the exception of NSW.(28) The National Access regime was introduced in 1995 as part of the National Competition Policy. Under the regime, rail operators can request that the NCC recommend that the relevant Minister 'declare' access to the services of a particular infrastructure facility. Operators can accept the terms and conditions of access under the provisions of State-based regimes, which the NCC may, or may not, certify as 'effective'. Private operators have expressed concern about the slowness with which access arrangements are being established.(29)

The Taskforce sees the main features of an enhanced ARTC as being:

Investment

All three reports identify the poor state of the national track as a major barrier to more efficient and competitive rail freight services. Moreover, the disparity in levels of investment in road and rail is marked. According to the Commonwealth Department of Finance and Administration, Commonwealth funding of roads over the past 20 years has been about eight times Commonwealth funding of rail.(31) The rail figure includes subsidies to cover entity deficits as well as expenditure on infrastructure, and when entity deficits are excluded, the disparity in spending on infrastructure is in the order of twenty to one in favour of road. There are many reasons for this disparity. One is that decisions about investment in different transport modes are compartmentalised and fragmented. Another reason is that rail is often seen as nineteenth century technology. Yet another reason lies in the responsiveness of politicians to demands from their constituents for roads that directly affect their lives.

While-as the Productivity Commission notes-analysis of comparative levels of expenditure is not sufficient to establish whether under or over-investment has occurred in the different modes,(32) all three reports concur on the need for increased investment in the interstate track. The Productivity Commission cautiously concludes that:

A consequence of inadequate investment has been to reduce the competitiveness of rail relative to other transport modes:

To rectify the situation, all three reports recommend increased investment in the national track. The Taskforce believes that the existing capital program should be accelerated with an additional capital injection, recommending that:

Tracking Australia recommends that the Commonwealth:

Tracking Australia also want the Commonwealth to provide:

To help put these proposals into perspective, the Productivity Commission refers to the report of the National Transport Planning Taskforce (NTPT), which found:

With respect to rail, the NTPT found that, over the next 20 years:

Investment Evaluation Techniques

Inconsistent evaluation of investments in different transport modes was highlighted as possibly biasing investment towards particular transport modes. The Productivity Commission found that cost-benefit analysis was widely used to evaluate investment in roads but only occasionally for railways, seaports and airports.(40) Financial evaluation was the most common form of investment appraisal used by railways.(41) The Commission found that:

As noted, Tracking Australia advocates that the allocation of funds for rail and road projects on the strict basis of highest benefit-cost ratios, while the Taskforce advocates that funding of road and rail projects be based on their 'relative efficiencies'.

Competition Between Rail and Road

A major issue is the conditions-especially government policies-affecting competition between rail and road.(43) A recurring claim in the reports is that rail is disadvantaged relative to road freight by government polices with respect to taxes-such as diesel excise and stamp duty-investment in infrastructure, and infrastructure use charges such as heavy vehicle road charges. In short, it is claimed that road does not pay its way. Conversely, other participants in the Productivity Commission inquiry argued that rail overall is heavily subsidised compared to the road freight industry.(44) The Commission's review of this issue led it to conclude:

The Commission also concluded that:

Diesel Excise and Heavy Vehicle Road Charges

The excise on diesel fuel has long been a point of contention between the rail and road transport industries. Under current provisions, some off-road users are entitled to receive a rebate on the cost of the excise on diesel used whereas rail operators are not eligible for the rebate. Rail operators claimed that they should be treated similarly to other off-road users, and the Taskforce endorses this claim:

This proposal has been overtaken by the Government's decision, in accordance with its agreement with the Australian Democrats to modify the GST package, to reduce to zero the effective rate of excise on diesel used in rail transport from 1 July 2000.

A major issue in the reports is the charging of road users. The rail industry contends that it is disadvantaged relative to road transport because road users do not pay the full costs of road usage whereas rail has to pay track access fees. Existing arrangements do, however, seek to recover the costs of the use of roads by heavy vehicles. The National Road Transport Commission (NRTC) is responsible for recommending charges imposed on heavy vehicles for their use of roads. In its first determination in 1992, the NRTC recommended a two-part charge. Two-thirds were to be recovered through a fuel-based charge-a notional charge of 18 cents of the diesel excise-and the remaining one-third through annual registration charges (48) All Australian governments had implemented this determination with minor changes by October 1996. The Productivity Commission reviewed the issue of road pricing and recommended:

Tracking Australia recommends that:

As noted the NRTC considers that part of the diesel fuel excise is imposed to recover the cost of road use. But the question arises whether this is indeed a road usage or general-purpose revenue-raising tax. The Department of Finance and Administration submitted to the Productivity Commission that 'the fuel excise is principally a revenue raising measure and that tax receipts are paid into the Consolidated Revenue Fund'.(51) As the Commission notes:

The Commission therefore recommended:

The Diesel and Alternative Fuels Grants Scheme, which will come into effect on 1 July 2000, will partly undermine the aim of recovering through charges the cost of heavy vehicle use of roads. The Scheme's aim is to subsidise regional areas by providing grants for the use of diesel by road transport in such areas. In effect, the grants will reduce the cost of excise paid and hence the first component of the cost recovery charges. Moreover, rail will be disadvantaged relative to road transport in regional areas because of the resulting change in relative costs, the opposite effect to the abolition of diesel excise used in rail operations.

Externalities

Externalities (or external costs and benefits) refer to the consequences of activities that affect others but where those responsible for the activities do not bear the full costs (or receive the full benefits) of the consequences of those activities, resulting in a divergence of private from social costs and benefits. Examples of externalities in transport are the costs of pollution, accidents and congestion.(54)

The rail industry claims that greater use of rail would help Australia meet its greenhouse gases undertakings made at Kyoto, that road transport generates more externalities than rail, and that road transport does not pay the costs of its externalities:

The Productivity Commission reviewed the issue of externalities and concluded that:

In other words, accepting that the diesel excise contains a notional charge for road use, the road use charge is too low and should be higher to take account of externalities.

Research conducted by the Bureau of Transport Economics suggests that full cost recovery would require both modes to pay more to meet the cost of externalities. Rail would, however, not have to pay as much as road, with rail paying an additional 0.054 cents and road 0.484 cents per net tonne kilometre.(57)

Competitive Neutrality Between Private and Government Rail Operators

The principle of competitive neutrality holds that government businesses should not be advantaged or disadvantaged relative to private sector competitors simply by virtue of government ownership.(58) A recurring complaint from private rail operators is that they do not face a 'level playing field' compared to government-owned railways. The Productivity Commission observes:

Contrary to the principle of competitive neutrality, in all States, with the exceptions of NSW and Victoria, rail service providers are 'vertically integrated'; that is, train operators on a network also have control of the network, through ownership or leasing. This means that new operators seeking access to a network have to hire track from the owners of the system against whom the new entrants will compete. Private operators claim that government-owned railways have used their ownership of networks to engage in predatory pricing, limit access to infrastructure, and retain surplus rolling stock to limit competition. Private operators also expressed concern over possible conflicts of interest when a government owns both track access rights and rail operations. Referring to the intention of competition policy that control of infrastructure-principally the rail networks-should be separate from above track operations, the Productivity Commission noted that:

The Taskforce claims that unfair competition from government railways is stifling private investment:

The Taskforce sees privatisation as contributing to eliminating unfair competition:

The Productivity Commission sees an increased commercial focus of railways as:

The Commission sees alternatives to government provision as having an important role to play, and recommends that:

The Productivity Commission summarises the issues of competitive neutrality between private and government operators and competition between rail and road as follows:

Inconsistent Operating and Safety Requirements

All three reports agree that inconsistent operating and safety requirements are a major barrier to more efficient rail operations. Problems include safety accreditation fees that are high and vary among the States, and annual fees that are payable in each jurisdiction even though mutual recognition applies. The Taskforce points out that:

The reports found that inconsistency impedes the entry of new train operators on interstate and intrastate networks, inhibits efficient operations, and disadvantages rail relative to other transport modes. Tracking Australia and the Taskforce found that inconsistency adversely affects private investment. The Taskforce reports:

All three reports call for a national approach to resolve inconsistencies. Tracking Australia, for example, recommends that:

The Taskforce advocates that a national safety regulator be established, with the Commonwealth taking a leadership role.

To deal with the problems of safety accreditation processes-including their length, cost, complexity and inconsistency, and duplication of fees across jurisdictions-the Productivity Commission recommends:

Conclusions

It is clear that much remains to be done to advance the reform of rail (and road) transport and that considerable benefits will accrue from further reform. All three reports see the Commonwealth as playing a key role in moving the reform process ahead to enable railways to boost productivity and competitiveness with other transport modes. The Commonwealth has a key role by way of its investment in the national track. The Commonwealth continues to play an important role in removing inconsistencies in the various State safety regulations and operating standards. And there is a role for the Commonwealth in reforming other areas which affect the rail industry, notably cost recovery in road transport. As noted, the Commonwealth has already implemented some of the reforms that the reports advocate.

But the reform task is complicated by the fact that all three tiers of government influence the development and operation of railways, and much of the responsibility for implementing reform lies with the States. For example, increasing the commercial focus of railways-which the Productivity Commission sees as the key to further productivity gains and to facilitating investment in rail-is the preserve of State governments. And the scope for reform to address the industry's problems is limited. The Productivity Commission observes that:

Under current arrangements, the reform process is partly conducted under the auspices of the Australian Transport Council. However, alternative approaches are possible. For example, in the areas of safety regulation and operating standards, the Productivity Commission notes the following alternative approaches to the Council:

The Government is unlikely to adopt some of the reforms the reports propose. For example, it is unlikely to establish a National Land Transport Commission that would evaluate the relative merits of proposals for Commonwealth investments in rail and road on the basis of highest benefit-cost ratios, as Tracking Australia advocates. The Minister for Transport and Regional Services has indicated that:

Rather, the Minister believes that:

The Minister stated that there are three elements to the Government's approach. They are the introduction of private sector expertise and incentives into the [rail] industry; improved management of the track infrastructure to reduce cost to operators, and to ensure investment decisions are made on a network basis; and improving the consistency of operational and safety regulations between jurisdictions, to reduce impediments to new entrants, and to improve safety.(74)

Some State government decisions seem to run counter to the thrust of the reports. Critics have attacked the Western Australian government's proposal to sell Westrail-including the national track component-as a single entity. Critics charge that the sale would violate the principle that ownership of the track should be separate from operations, and that the ARTC should be responsible for management of the entire national track. The Commonwealth Government has allocated $18 million towards the upgrade of the Westrail interstate track. But this approval is:

Some Commonwealth government decisions-notably to help finance the Alice Springs to Darwin railway-also seem to run counter to the thrust of the reports. This decision has received a mixed reception. While some have welcomed it, others have questioned the project's viability, and whether the funds would not be better spent elsewhere. In particular, some critics believe that upgrading the Melbourne-Sydney-Brisbane corridor of the national track is a more pressing requirement for the expenditure of funds on rail. Critics find support in a 1993 report by the Bureau of Transport and Communication Economics, which concluded that the project would not be viable.(76)

Endnotes

1. The Committee's terms of reference required it to examine, inter alia, how the efficiency of the national rail network can be improved and how the private sector's participation can be increased.
2. The Taskforce's main purpose was 'To evaluate how governments can better facilitate viable major rail investment proposals developed by the private sector'.
3. The Commission's terms of reference are broad, requiring it, inter alia, to identify areas in rail reform where further action is most needed.
4. Non-bulk (or general) freight comprises a diverse range of commodities including steel products, meat and fish, wool, plastic resins, livestock and some agricultural produce.
5. Industry Commission, Urban Transport, report no. 37, 15 February 1994.
6. The interstate track is defined as the track connecting the mainland State capital cities and their ports with connecting lines to Whyalla, Port Kembla, Newcastle, Alice Springs, Westernport and Kwinana.
7. Productivity Commission, op. cit., pp. xiii- xxiv.
8. Productivity Commission, op. cit., p. 53.
9. For an analysis of this involvement see J. Kain, A Spirit of Progress? Assessing Australian Rail Transport Policy, Department of the Parliamentary Library, Research Paper no. 31, 1994-95.
10. A predecessor, which was incorporated into ANR in 1978, was known as Commonwealth Railways. Its major responsibility was for rail links between Port Pirie in South Australia and Alice Springs and Kalgoorlie.
11. A major outstanding issue involves the transfer of AN's Alice Springs-Tarcoola corridor to the ARTC, but the Government has agreed to hand this over to the successful consortium.
12. Eleven operators have access arrangements with the ARTC. They are: Australian Southern Railroad, Countrylink, Freight Victoria, National Rail, Great Southern Railway, Great Northern Rail Services, Patrick Rail, Silverton Tramway, Specialised Container Transport and Toll Rail.
13. Kath Cummins, 'Cabinet blinks at $1bn aid for high-speed train', Australian Financial Review, 15 December 1999.
14. Maunsell Pty. Ltd., Study of Rail Standards and Operational Requirements, 1998.
15. National Transport Planning Taskforce, Building for the Job: A Strategy for Australia's Transport Network, November 1994.
16. National Transport Planning Taskforce, op. cit., recommendation 1.
17. Industry Commission, Rail Transport, report no. 13, 21 August 1991.
18. Rail and Urban Public Transport: Commonwealth Funding and Policy Issues, Research Paper no. 12, 1994, and Australian Intercity Rail Upgrading Options, Background Paper no. 20, 1992.
19. Tracking Australia, op. cit., recommendation 1
20. Taskforce, op. cit., recommendation 1.
21. Taskforce, op. cit., p. 5.
22. Tracking Australia, op. cit., recommendation 13.
23. Taskforce, op. cit., recommendation 3.
24. Tracking Australia, op. cit., recommendation 2.
25. Taskforce, op. cit., p. 16.
26. Taskforce, op. cit., recommendation 11.
27. Productivity Commission, op. cit., p. 148.
28. The Minister for Financial Services and Regulation, the Hon. Joe Hockey, on 15 November 1999, certified the NSW rail access regime, making it the first State rail access regime to be endorsed.
29. Productivity Commission, op. cit., p. 139.
30. Taskforce, op. cit., recommendation 16.
31. Productivity Commission, op. cit., p. 196.
32. Productivity Commission, op. cit., p. 196.
33. Productivity Commission, op. cit., p. 198.
34. Taskforce, op. cit., p. 15.
35. Taskforce, op. cit., recommendations 14 and 15.
36. Tracking Australia, op. cit., recommendation 14.
37. Tracking Australia, op. cit., recommendation 4.
38. National Transport Planning Taskforce, op. cit., p. vii.
39. National Transport Planning Taskforce, op. cit., Commissioned Work Volume 1: BTCE Report, p. viii.
40. Cost-benefit analysis takes account of a wide range of private and social costs and benefits, some of which may not be reflected in monetary transactions, for example, the value to the public of travel time-savings from a new road. It differs from a financial appraisal in that it considers a wider range of costs and benefits of a project.
41. Financial appraisal is a method used to evaluate the viability of a proposed project by assessing the value of net cash flows that result from its implementation.
42. Productivity Commission, op. cit., p. 201.
43. The transport industry uses the term 'competitive neutrality' to describe competition between rail and road. In the context of competition policy, competitive neutrality refers to the terms and conditions under which governments and private enterprises compete to supply goods and services.
44. Urban passenger transport accounts for the bulk of rail subsidies.
45. Productivity Commission, op. cit., p.xxvi.
46. Productivity Commission, op. cit., p.xxx.
47. Taskforce, op. cit., p. 25.
48. In August 1998, the NRTC proposed raising the fuel charge to 20 cents per litre, and recovering the remaining costs by increasing registration charges for some vehicles. The NRTC's final report is expected to be available in the last quarter of 1999.
49. Productivity Commission, op. cit., p. 217.
50. Tracking Australia, op. cit., recommendation 12.
51. Productivity Commission, op. cit., p. 208.
52. Productivity Commission, op. cit., p. 210.
53. Productivity Commission, op. cit., draft recommendation 9.2.
54. The Productivity Commission defines direct external costs to include damage and wear caused to roads and bridges by motor vehicles whereas indirect external costs encompass accident, pollution and congestion costs.
55. Taskforce, op. cit., p. 8.
56. Productivity Commission, op. cit., p. 209.
57. Bureau of Transport Economics, Competitive Neutrality Between Road and Rail, Working Paper 40, September 1999.
58. The principle of competitive neutrality has been adopted by Commonwealth, State and Territory Governments as part of their commitment to the National Competition Policy Reform Package (under Clause 3 of the Competition Principles Agreement). The application of competitive neutrality exposes government business activities to the same types of costs and commercial disciplines as are faced by the private sector, so that government and private businesses compete on a similar footing.
59. Productivity Commission, op. cit., p. xxvi.
60. Productivity Commission, op. cit., p.xxx.
61. Taskforce, op. cit., p. 36.
62. Taskforce, op. cit., p. 36.
63. Productivity Commission, op. cit., p. xxviii.
64. Productivity Commission, op. cit., draft recommendation 6.1.
65. Productivity Commission, op. cit., p. 217.
66. Taskforce, op. cit., p. 39.
67. Taskforce, op. cit., p. 39.
68. Tracking Australia, op. cit., recommendation 3.
69. Productivity Commission, op. cit., draft recommendation 8.1.
70. Productivity Commission, op. cit., p.xxvii.
71. Productivity Commission, op. cit., p.xxxii.
72. Speech to the Ausrail 99 conference, 5 November 1999, p. 4.
73. ibid, p. 4.
74. ibid, pp. 9 and 10.
75. Speech op. cit., p. 16.
76. Bureau of Transport and Communication Economics, A Review of the Alice Springs to Darwin Railway Project, November 1993.

Appendix 1: Report Recommendations

Productivity Commission

Draft Recommendations

Governments should consider the scope for, and assess the benefits and costs of, further private sector involvement (through contracting out, BOOT-type arrangements, franchising or privatisation) as an integral part of their approach to rail reform. (Draft recommendation 6.1)

The pricing and allocation of train schedules should reflect the value that users place on the track. (Draft recommendation 7.1)

A single annual fee for accreditation should be payable only in the jurisdiction of principal activity. (Draft recommendation 8.1)

Changes to safety accreditation and mutual recognition processes for the rail industry should apply the principles of best practice regulation, including Regulatory Impact Statements. (Draft recommendation 8.2)

In developing codes of practice for the rail industry, best practice regulation should be adopted. (Draft recommendation 8.3)

The Commonwealth Government should take leadership role in hastening the removal of regulatory impediments to interstate rail operations. (Draft recommendation 8.4)

Governments should apply a more commercial approach to railways and the provision of road infrastructure. (Draft recommendation 9.1)

The Commonwealth should clarify, and state explicitly, the objectives of the diesel fuel excise. The objectives would determine any adjustments required to the fuel excise and heavy vehicle charges. (Draft recommendation 9.2)

The Commonwealth Government should establish an inquiry into the provision, funding and pricing of roads in Australia. (Draft recommendation 9.3)

Tracking Australia (Neville Report)

Recommendation 1

The committee recommends that the Commonwealth assume the leadership role and consult widely in developing an integrated national transport strategic plan to be published by 1 July 1999.

Recommendation 2

The committee recommends that the Commonwealth, in consultation with the States and Territories, enhance the role of rail in the national transport network by:

• declaring a national track for interstate rail services on the standard gauge network from Brisbane to Perth
• addressing chronic deficiencies in the interstate national track
• adopting agreed national standards for the condition of the national track.

Recommendation 3

The committee recommends that the Commonwealth takes a strategic approach to provide consistency in rail safety standards and practices for the national track.

Recommendation 4

The committee recommends that the Commonwealth provides a specific one-off grant to standardise signalling, radio and telecommunications, and safety operations for the national track.

Recommendation 5

The committee recommends that the Commonwealth in conjunction with the States/Territories and appropriate parties, develop and accredit national qualifications based on consistent curricula and accredited training course available to all rail employees from approved educational centres.

Recommendation 6

The committee recommends that the Commonwealth establish for the national track:

• a rail safety authority
• a rail incident investigation unit

to report directly to the appropriate Commonwealth Minister.

Recommendation 7

The committee recommends that the Commonwealth, in consultation with the States/Territories and appropriate parties, immediately develop a national regulatory framework that promotes operational consistency in:

• accreditation procedures
• operating procedures and standards

across the national track system and associated jurisdictions to ensure effectiveness and efficiency.

Recommendation 8

The committee recommends that the Commonwealth amend Part IIIA of the Trade Practices Act 1974 to provide that, where the designated Minister does not publish on a declaration recommendation referred to him or her by the National Competition Council within sixty days of receiving the recommendation:

• the designated Minister should be taken to have declared the service (rather than the deemed decision to be in the negative), and
• the expiry date of the declaration will be that as recommended by the National Competition Council.

Recommendation 9

The committee recommends that the Australian Transport Council review public liability insurance to ensure more appropriate coverage which reflects the level of risk and responsibility of the owners and operators of public rail infrastructure.

Recommendation 10

The committee recommends that the Commonwealth ensures that the Australian Rail Track Corporation adopts an access regime providing for transparent and accountable pricing. Such a regime should include:

• access pricing based on a two part tariff, comprising a flagfall and a variable component which allocates costs on a user pays basis; and
• posted access pricing by track segment.

Recommendation 11

The committee recommends that the Commonwealth ensures that the Australian Rail Track Corporation secures control and management of the national track, including those sections of the interstate network currently controlled by State authorities.

Recommendation 12

The committee recommends that the Commonwealth develops a more consistent, equitable approach to transport infrastructure charges to ensure competitive neutrality between modes.

Recommendation 13

The committee recommends that the Commonwealth establish a National Land Transport Commission to provide:

• advice to the Government on a national transport plan; and
• recommendations to the Government on the allocation of funds for rail and road projects on the strict basis of highest benefit cost ratios, which address all relevant externalities, such as accidents, congestion, pollution, greenhouse gas emissions and noise.

Further, the Commonwealth give higher priority to land transport infrastructure investment within total budget outlays than is currently the case.

Recommendation 14

The committee recommends that the Commonwealth

• undertake responsibility for investment in the declared national track;
• allocate, in addition to the $250 million committed to the Australian Rail Track Corporation in 1997-98, a further $750 million over three years for investment in the national track to be expended according to priorities developed by the Commonwealth and States/Territories; and
• allocate, on an agreed basis, an additional $2 billion over ten years from 2001 for investment in rail infrastructure of national strategic importance, to be directed primarily to the national track, and with provision for designated tracks of national importance (TONIs).

Recommendation 15

The committee recommends that the Commonwealth, in consultation with the States/Territories and relevant parties, develop a rolling maintenance program, to be funded by the Commonwealth, for the declared national track to agreed national standards.

Recommendation 16

The committee recommends that the transport committee in the next parliament should review:

• responses by government and industry to the recommendations in this report
• progress in rail performance by government and industry since the Bureau of Industry Economics' reports of 1992-95.

Rail Projects Taskforce. Revitalising Rail

The Taskforce identifies six barriers to more efficient rail transport. The following list these barriers and the associated recommendations.

BARRIER 1

The lack of an integrated, national transport strategy

Recommendation 1

National Transport Strategy

The Commonwealth Government takes the lead in developing an economically-driven National Transport Strategy that will secure a seamless domestic transport system embracing road, rail, sea and air transport, and provide for the entry and exit of people and goods by sea and air at world competitive standards.

Recommendation 2

Balance road/rail funding

The Commonwealth Government develops a framework for assessing the allocation of its funding of road and rail projects on the basis of their relative efficiencies, using agreed and published 'level playing field' criteria.

Recommendation 3

A national rail authority

The Commonwealth, after appropriate negotiations with the other Governments, establishes and funds a national authority to:

• administer the rail elements of the National Transport Strategy
• acquire all national rail corridors and associated infrastructure
• ensure the efficient use of the existing system and its safety of operation, and recommend proposals for enhancement
• ensure that the infrastructure is used to the fullest advantage.

Recommendation 4

Framework for investment

Governments develop an appropriate framework for private and public sector investment that includes efficient taxing and charging regimes and competitive neutrality between government agencies and the private sector.

Recommendation 5

External benefits and costs

External benefits and costs of transport options be evaluated from a national perspective and in a transparent and consistent manner. These external benefits and costs to include those associated with accidents, congestion, pollution, greenhouse gas emissions, noise, reductions in the need for other infrastructure, and impacts on industrial development, employment and regional development.

Recommendation 6

Government support for major projects

The extent and nature of Commonwealth Government support for private sector proposals to develop major new interstate rail links be assessed against their economic, financial and social merit and conformity with the National Transport Strategy.

If the proposal is of strategic or national significance and warrants Commonwealth Government support, there should be greater flexibility to provide that support in the form best suited to project requirements, including direct financial support tailored to cash flow.

Recommendation 7

Inland Rail Bridge

If the feasibility studies being undertaken for the current two 'inland rail bridge' proposals establish that this concept has commercial merit, the Commonwealth should undertake an assessment of the case for government support in line with Recommendation 6.

Recommendation 8

Darwin to Alice Springs rail link

If the current level of government support offered to the private sector is found to be not sufficient for the Darwin to Alice Springs rail link to proceed, the Commonwealth should not commit any significant additional support without first undertaking an assessment in line with Recommendation 6.

Recommendation 9

Potential VHST monopoly

While the Canberra-Sydney Very High Speed Train (VHST) project may represent a significant first step towards meeting Australia's future transport needs, Governments must recognise that it is likely to provide its developer with a technological or developmental monopoly. Governments must equip themselves with the highly specialised expertise required to negotiate appropriate framework agreements for such projects, which involve very long-term issues-particularly concerning technology transfer and intellectual property rights.

Recommendation 10

Canberra-Sydney VHST project not to restrict future options

The Governments involved in the current Canberra-Sydney VHST proposal assess the cost effectiveness of ensuring that the outcome does not restrict future VHST options, particularly possible extension of a service to Melbourne and Brisbane. Specifically, that:

• the design of the route, earthworks and associated infrastructure is consistent with future expansion to a dual track
• the design of the route and associated infrastructure is consistent with the needs of a Sydney-Melbourne VHST service, for example, with regard to signalling, power requirements and passing loops
• any agreement for Canberra-Sydney provides for access to track and associated infrastructure for a Sydney-Melbourne VHST service and does not otherwise restrict entry to and exit from Sydney for other VHST services
• property rights granted to a Canberra-Sydney operator allow for other VHST operators on the corridor
• the technology used will not preclude other operators
• transparent technology licence arrangements are included in any concession agreement and permit future use of the technology on reasonable terms
• the concession agreement does not restrict the use of the VHST corridor for other infrastructure uses or functions
• the agreement is otherwise in conformity with the National Transport Strategy.

Recommendation 11

Further Government involvement in Canberra-Sydney VHST project to cease if it fails to 'prove up'

If the Canberra-Sydney VHST proposal fails to meet criteria established by the respective Governments for the current 'proving up' process, including the 'no net cost to government' requirement, further Commonwealth Government involvement in the project should cease pending the outcome of a broader VHST assessment-see Recommendation 12.

Recommendation 12

A VHST network assessment

If the National Transport Strategy finds a VHST network to be appropriate, the Commonwealth Government, in conjunction with the other Governments concerned, fund a preliminary assessment of the likely costs and benefits of VHST rail links between Melbourne, Canberra, Sydney and Brisbane, and their respective principal airports.

This study to include an assessment of:

• patronage and other components of market demand
• development and operating costs
• external benefits and costs
• access points to Sydney, Melbourne, Canberra and Brisbane
• appropriate concept routes between those cities
• the benefits of multi-purpose infrastructure corridors as part of these concept routes, for information technology/communications, energy, water, emergency services access and additional tracks for heavy rail services
• the impact on development of a second Sydney Airport.

Recommendation 13

Commonwealth to take the lead in a possible VHST network

Subject to a preliminary conclusion that further government support is warranted, the Commonwealth should take the lead to:

• define the project's key parameters
• determine the nature and extent of support each Government is prepared to provide
• determine whether the project should proceed to an expression of interest, tender or other stage in the development process
• enter into detailed agreements with the relevant State and Territory Governments covering all facets of the development and operation of the project, including the bidding process and the possibility of establishing an independent authority to manage the corridor

BARRIER 2

Substandard national track

Recommendation 14

Accelerate existing capital program

The $250 million already committed by the Commonwealth Government to upgrade the national track be brought forward for completion by December 2000 rather than by June 2002.

Recommendation 15

A major additional capital injection

The Commonwealth commits to spending an additional $470 million by June 2002 to bring the national track to a standard where it can provide a competitive and sustainable alternative to road transport.

• funding should be conditional on State Governments cooperating to achieve a number of other vital rail reforms-see Recommendations 16, 17, 27-30.

Recommendation 16

Strengthen ARTC

Commonwealth, State and Territory Governments confirm their commitment to the Australian Rail Track Corporation (ARTC) as a 'one-stop shop' to control the national track.

The corporation's main features being:

• Commonwealth Government ownership, with Ministers as shareholders and an independent board
• to control, manage and maintain the national track and associated corridors, taking account of the characteristics of the metropolitan systems with which the national network must interface
• a charter to make commercial decisions within a market environment influenced by government policies and support
• prohibited, by its charter, from owning or providing 'above' rail operations
• an access regime conforming with Competition Policy guidelines
• a long term outlook and expectation of continued operation, particularly the ability to negotiate long term agreements
• required to provide a 3-year business plan to the Commonwealth Government outlining the major features of its operations including its investment plans and resultant commercial implications.

Recommendation 17

The integrity of the national network

To maintain a genuine national network consisting initially of the track joining the mainland State capital cities and their ports, with connecting lines to Whyalla, Port Kembla, Newcastle, Alice Springs, Westernport and Kwinana:

• the New South Wales, Queensland and Western Australian Governments immediately transfer control of their components of the national track to the ARTC
• the Commonwealth should not transfer control of the Tarcoola-Alice Springs component of the national track from the ARTC to a successful bidder for the development of the Alice Springs to Darwin rail link but rather permit access on commercial terms
• the Western Australian Government should not transfer control of the Kalgoorlie-Perth component of the national track to a successful bidder for Westrail
• the ARTC should be consulted if any Government proposes to sell track or land corridors, which may be suitable as components of the national track, particularly in urban areas.

BARRIER 3

A distorted investment environment

Recommendation 18

IBTOS

The current Infrastructure Borrowing Tax Offset Scheme must be restructured or expanded:

• to assist projects that have a potential realisation of beyond 12-18 months
• so that under or over spending in any particular year can be balanced out over the life of the scheme.

Recommendation 19

Business taxation laws

The following legislative approaches should be adopted:

• Section 51AD and Division 16D of the Income Tax Assessment Act should be significantly redrafted to focus on risk acceptance by the private sector rather than control issues
• there should be a statutory time limit of three months on the Australian Taxation Office to provide binding rulings regarding the applicability of Section 51AD and Division 16D
• Taxation Laws Amendment Bill No. 4 1998 should not be passed or re-presented to Parliament until there has been extensive consultation with industry.

Recommendation 20

Business taxation administration

The Australian Tax Office should establish:

• a specific infrastructure facilitation unit to provide timely, non-binding advisory services to private investors in the early stages of developing projects
• an independent advisory panel to improve its understanding of the commercial issues involved in major infrastructure projects.

Recommendation 21

Fuel excise

Rail operators be treated like other 'off road' diesel users for the purposes of fuel taxation.

Track access charges must be the sole means by which operators pay for their use of government-owned rail infrastructure.

Recommendation 22

Competition policy

The Commonwealth Government amend Part IIIA of the Trade Practices Act 1974 or take other steps to improve the mechanisms available to third parties to gain reasonable access to essential infrastructure.

As part of its assessment, the Commonwealth should consider the merits of requiring that where the designated Minister does not publish a decision on a declaration referred by the National Competition Council (NCC) within 60 days:

• the Minister shall be taken to have declared the service (rather than the deemed decision to be in the negative)
• the expiry date of the declaration shall be as recommended by the NCC.

Recommendation 23

Track access

Rail access arrangements acceptable to the NCC should be established within 12 months for all government-owned track.

BARRIER 4

Unhelpful government project development processes

Recommendation 24

Preliminary government assessment

All Governments involved in a prospective project should jointly undertake a preliminary assessment to:

• define its key parameters
• determine the nature and extent of support each Government is prepared to provide-in line with Recommendation 6
• determine whether the project should proceed to an expression of interest, tender or other stage in the development process.

Recommendation 25

Agreement between Governments

Project definition, including the roles of Governments and the private sector, be signed off in reasonable detail at Cabinet level before moving to an expression of interest, tender or other stage in the development process.

For interstate projects, the Commonwealth and any relevant State and Territory Governments enter into a detailed agreement covering all facets of the development and operation of a project, including the bidding process.

Recommendation 26

Risk allocation

Governments and the private sector accept the risks they are best placed to manage or control and risk allocation to be clearly established and publicly stated early in the tender process

• Governments may be better placed to accept risk for such things as land ownership/resumption, security of title, native title, heritage, prior land contamination, changes in specific laws (such as tax), access to existing infrastructure and resolution of community related issues. The private sector may be better placed to accept risk for such things as construction costs, financing risk and patronage.
• Where the private sector is required to take on risk in areas where governments have significant prior knowledge, there should be full disclosure and full opportunity for investigation.
• Investors should also be able to utilise the National Competition Agreement process to obtain binding rulings on whether a proposed investment when completed would constitute 'essential national infrastructure'.

BARRIER 5

Unfair competitive advantages for government operators

Recommendation 27

Privatisation

All Commonwealth and State Government rail freight operators should be privatised.

Bidders for government rail freight operators should have no government ownership or control.

Until privatisation is achieved, rail operators in public ownership must be subject to competition from private operators on a level playing field including equal access to government-assisted transport services.

BARRIER 6

Inconsistent regulations and standards

Recommendation 28

National approach to regulation and standards

Intervention by governments in the rail industry in pursuit of more efficient operations should be assessed on a case-by-case basis. Where a case can be clearly made, a national approach should be adopted in line with the objectives of the National Transport Strategy.

To avoid unnecessary differences and inconsistencies between jurisdictions, there must be a national mechanism for creating and maintaining regulations and standards.

Recommendation 29

National safety regulator

As a useful first step towards a single national rail safety regulator, the Commonwealth take a leadership role in establishing a national rail safety regulator to hold appropriate regulatory control, including accreditation, over ARTC and operators on the national network by December 1999.

Specifically, the regulator will:

• enhance safe operations on the national rail network
• investigate, by a transparent process, any rail accident or incident on the national network
• establish effective interface safety management with relevant State safety regulators
• be prepared to transfer its investigation function to an independent, and possibly multi-modal, agency.

Recommendation 30

Transfer of State safety regulatory functions

The State Governments immediately establish timetables and mechanisms for transferring their rail safety regulatory functions to the national safety regulator.

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