Glossary
Executive summary
Introduction
Coastal fleet
The coastal freight task

Passenger transport
Navigation Act

Shipping industry reforms

Other reforms

Commonwealth government policy
Independent Review of Australian Shipping
Issues

Conclusions
Endnotes
Appendix 1: Ships in the coastal trades
Appendix 2: Coastal freight loaded by major commodity groups 200001
Appendix 3: Summary of the key proposals of the independent review of Australian shipping
Appendix 4: Legislative requirements that affect Australian coastal shipping
Map: Major coastal freight flows 200102 (tonnes)

List of Tables

Table 1. Australian coastal freight summary 199495 to 200102 (kilotonnes)
Table 2. Coastal freight loaded by major commodity 199697 to 200102
Table 3. Total coastal freight flows 200102 (kilotonnes)
Table 4. Main commodities loaded and discharged in Tasmania: 20012002 (kilotonnes)
Table 5. Cost of Tasmanian freight equalisation scheme ($m)
Table 6. Cost of subsidising the Bass Strait Passenger Vehicle Equalisation Scheme ($000)
Table 7. Single and continuing voyage permits
Table 8. Voyage permits by commodity type 200102
Table 9. Impact of CVPs and SVPs on coastal trade 19992000 and 200001

Glossary

Australian coastal trading fleet: vessels operated by Australian companies and licensed under the Navigation Act 1912 to operate on the Australian coast, that is, they can trade between States and the Northern Territory and intrastate. Includes vessels that carry passengers and cargo but not passengers only.

Bulk cargo: homogeneous, unpacked cargoes that can be poured or dropped, as a liquid or solid, into a ships hold. Bulk cargoes are classified as dry or liquid.

Cabotage: the reservation of the transport of goods or passengers within a country to carriers of that country.

Continuing voyage permit: a permit that the Department of Transport and Regional Services issues allowing a vessel to carry specified cargo between specified ports usually for six months, as an authorised exception to the cabotage policy.

Dry bulk cargo: cargoes such as grain, iron ore and coal.

Liquid bulk cargo: cargoes such as oil, liquefied gas and chemicals.

Non-bulk cargo: cargo that would be damaged if dropped or poured. Non-bulk cargo is classified as shipped in containers or not classified and/or non-containerised. Non-bulk cargo that is not shipped in containers is often described as break-bulk cargo. This includes boxes, pallets or bags loaded directly into the hold of a ship.

Pack type: the way cargo is packaged and moved. It is primarily split between bulk and non-bulk.

Shipowner: a person or firm who owns one or more ships. In practice, the term embraces owners, demise owners, charterers and operators of ships. The shipowner may be a different entity from the employer of crew on board the vessel.

Shipper: a person or company who enters into a contract with a shipping line or shipowner for the carriage of goods.

Single voyage permit: a permit that the Department of Transport and Regional Services issues for a single voyage between designated ports for the carriage of a specified cargo or passengers, as an authorised exception to the cabotage policy.

Twenty foot equivalent unit (teu): the standard used to measure the number of containers. The containers most commonly used are the 6.1 metre (twenty foot) box and the 12.2 meter (forty foot) box. The latter is counted as two teus.

Tonne: one thousand kilograms.

Tonne kilometres: the product of freight carried between two ports and the sea route distance between the two ports.

Executive summary

Coastal shipping is an important component of the national transport task, carrying mostly heavy cargoes over long distances. But the Australian coastal shipping industry faces major challenges. Coastal shippings share of the domestic transport task has fallen from around 40 to 28 per cent (measured in tonne kilometres) over the past 15 years, the number of Australian-registered vessels is declining, and the fleet is ageing. After peaking in the early 1980s, real non-bulk freight rates have fallen. Australian-registered vessels also face challenges to cabotage, the policy of limiting access to a countrys coastal trade to national ship operators or national flag vessels with national crews.

Coastal shippings most important task is the transport of bulk cargo; in 200102, such cargo accounted for 88 per cent of coastal cargo (measured in kilotonnes). Many of the major users of coastal shipping are themselves ship operators, that is, much of the coastal shipping task is in-house. The Queensland bauxite trade, the carriage of gypsum, sugar, steel products, petroleum products and iron ore are examples where commodities are largely transported in ships operated by the cargo owners. The main commodities transported are iron ore, bauxite, alumina, crude oil and petroleum products. The single biggest component of coastal trade is the shipment of bauxite from Weipa to Gladstone in Queensland. However, the volume of interstate cargo is roughly double that of intrastate cargo with shipments of iron ore from Western Australia and of crude oil and petroleum products from Victoria accounting for much of this trade.

The Tasmania trade accounts for about one-third of the non-bulk coastal shipping task. Since the 1980s, real freight rates to Tasmania have declined although they are still above pre-1976 levels. The Federal government subsidises the Tasmania trade under the Tasmanian Freight Equalisation Scheme and the Tasmanian Wheat Freight Scheme. The purpose of the former is to alleviate the cost disadvantage incurred by shippers of eligible non-bulk goods moved between the mainland and Tasmania by sea rather than other modes, while the purpose of the latter to compensate wheat users for the additional costs associated with shipping wheat to Tasmania. It could be argued that both schemes are inequitable and economically inefficient: they favour selected industries and producers for no apparent economic reasons. More generally, it is not clear why Tasmania should have its transport disadvantage singled out for subsidisation when mainland industries and States also have transport cost disadvantages arising from distance. For example, wheat users in Darwin are disadvantaged by distance from wheat growing areas but are not assisted.

Cabotage, the limiting of access to a countrys coastal trade to national ship operators or national flag vessels with national crews, is a key issue. Cabotage operates through Part VI of the Navigation Act 1912 (the Navigation Act). This Act provides that ships licensed to operate on the coastal trade must, among other things, pay applicable Australian wages. The Act also provides for non-licensed ships to operate when no licensed ship is available or the service that the licensed ship provides is inadequate. A non-licensed ship must have a single voyage permit (SVP) or a continuing voyage permit (CVP) to operate.

Cabotage is basically a form of protection for Australian-registered ships. On economic efficiency grounds, there seems to no valid reason for continuing cabotage. This is particularly the case since protection for most industries has been wound back considerably. Cabotage can increase the cost to users of coastal shipping. Australian-registered ships generally have higher costs than foreign-flagged vessels partly because Australian ships have to comply with various pieces of legislation that foreign ships operating in the coastal trade do not have to meet. This is not to say that the legislation should be repealed: such legislation reflects Australian community standards. But it highlights the difficulties that Australian shipowners face in competing with foreign ships.

Cabotage can be abolished only by repealing the relevant sections of the Navigation Act. But in a notable departure from competition policy as applied elsewhere in the economy, successive governments have been unwilling to introduce foreign competition by repealing cabotage. The Howard Government has sought to reduce the consequences of cabotage by increasing the number of SVPs and CVPs. This liberalisation has benefited some ship users. Still, while the number of permits issued has increased, the majority of cargo is carried by Australian-registered vessels: over the three years ending in 200102, about 13 per cent of coastal trade measured in tonnes and 20 per cent on a tonne kilometre basis was transported under permits.

Reforms to the Australian shipping industry generally, and related activities such as ports and stevedoring, have increased efficiency and reduced the cost of coastal shipping. Crew levels have been reduced and multiskilling introduced. Company employment has replaced the industry roster system, thereby shifting the balance of power against the maritime unions. Still, the cost of Australian-registered ships is generally higher than their foreign-flagged and foreign-crewed competitors partly because Australian-registered ship owners/operators have to pay Australian wages.

The Governments policy towards coastal (and international) shipping is that Australia is a shipper not a shipping nation, that is, that Australia is principally a buyernot a supplierof shipping services. Pursuant to this policy, the Howard Government has privatised the Australian National Line, abolished capital grants and accelerated depreciation for ship purchases, wound back cabotage by liberalising the issue of permits, and supported the replacement of industry with company employment. The Government has also ruled out financial assistance to the Australian industry.

The Australian coastal shipping industry faces a number of challenges. They include the liberalisation of the issue of permits, increasing competition from rail in some market segments, and a possible shortage of skilled seafarers. On the other hand, the Governments unwillingness to abolish the cabotage provisions of the Navigation Act 1912 will contain the pressure from the issue of permits. The Australian industry will continue to provide services in areas best suited to transport by ships such as bulk minerals. The quality, reliability and safety of Australian flagged vessels are high by world standards, as are the skills of Australian seafarers. Shipping has environmental benefits in terms of energy consumption. An Australian fleet may also have a role in future defence and national emergency operations as it did in East Timor.

Introduction

Coastal shipping is an important component of the national transport task, carrying mostly heavy cargoes over long distances; in 200001, coastal cargo accounted for almost 30 per cent of the domestic freight task (measured in tonne kilometres)⁽¹⁾ and 16 per cent of the volume of cargo that moved across Australian wharves.⁽²⁾ The cost and efficiency of coastal shipping have important economic consequences affecting, among other things, the profitability of export industries, the viability of mineral processing in Australia, and the cost of transporting goods to and from Tasmania.

The coastal shipping industry has experienced considerable change. Its share of the domestic freight task has fallen from around 40 per cent to 28 per cent over the past 15 years,⁽³⁾ the number of Australian-registered coastal vessels is declining, the fleet is ageing,⁽⁴⁾ the number of Australian-controlled but foreign-flag vessels is increasing, average crew numbers per vessel have halved from over 30 in the early 1980s to around 16, and the number of seafarers has fallen. After peaking in the early 1980s, non-bulk freight rates have fallen in real terms. Australian-registered vessels also face challenges to the policy of cabotagethe limiting of access to a countrys coastal trade to national ship operators or national flag vessels with national crewsresulting from the issue of single and continuing voyage permits. This paper examines these and other major issues surrounding coastal shipping.

Coastal fleet

On 30 June 2002, the coastal fleet comprised 41 vessels of which 37 were Australian-registered and four overseas-registered.⁽⁵⁾ Twenty were bulk carriers, 12 general cargo carriers, and nine were tankers. The bulk carriers transport commodities such as iron ore, coal, bauxite and alumina. Most of the general cargo vessels are engaged in the north Queensland and Tasmania trades, while the tankers are used to transport mainly petroleum products and crude oil. The ports at which these vessels call are located in all the States and the Northern Territory. Vessel names and type, the items they transport, and the ports at which they call are set out in Appendix 1.

Many of the major users of coastal shipping are themselves ship operators, that is, much of the coastal shipping task is in-house. The Queensland bauxite trade, the carriage of gypsum, sugar, steel products, petroleum products and iron ore are examples where commodities are largely transported in ships operated by the cargo owners.

The coastal freight task

Measured in tonnes carried, coastal shipping accounts for only three per cent of the total domestic freight task.⁽⁶⁾ But cargoes transported by sea are generally carried over longer distances than is the case with other modes; in 20001, for example, the average distance was 2010 kilometres per tonne for sea transport compared with 257 kilometres per tonne for rail.⁽⁷⁾ Consequently, sea transports share of the domestic freight task, measured in tonne kilometres, is around nine times higher. The following table shows coastal freight volumes since 199495.⁽⁸⁾

Table 1. Australian coastal freight summary 199495 to 200102 (kilotonnes)

Source: Source: Bureau of Transport and Regional Economics, Australian Sea Freight: 200102, Information Paper 50, January 2004, p. 2. Reasons for the discrepancies between tonnages loaded at ports and discharged at ports are discussed at http://www.btre.gov.au/docs/ip48/note.html#stats

Table 1 shows that volumes moved have fluctuated from year to year but have generally risen since 199495.

Commodities

Coastal shippings most important task is the transport of bulk cargo; in 200102, bulk cargo accounted for 88 per cent of coastal cargo.⁽⁹⁾ Bulk cargoes consist of dry commodities such as coal, bauxite, alumina and iron ore, and wet commodities such as crude oil and refined petroleum products. Non-bulk cargoes are generally higher valued-added goods such as fruit and vegetables, timber, paper, steel slab and processed food. Table 2 shows the major commodities transported since 199697.

Table 2. Coastal freight loaded by major commodity 199697 to 200102

Source: Bureau of Transport and Regional Economics, Australian Sea Freight: 200102, Information Paper 50, January 2004, p. 5.

Notes: a: excludes crude oil in row above. b: adjusted to balance more closely with discharged input/output tables for all iron ore ports

Examples of commodities shipped are:

Interstate and intrastate trade

The following table shows the volume of intrastate and interstate trade in 200102.

Table 3. Total coastal freight flows 200102 (kilotonnes)

Source: Bureau of Transport and Regional Economics, Australian Sea Freight 200102, Information Paper 50, January 2004, p. 6.

The data in Table 3 show that interstate trade accounted for 62 per cent of coastal trade. Western Australia was the state of origin for most interstate trade, reflecting the importance of that states iron ore and crude oil shipments. NSW was the most important destination with shipments of iron ore from Western Australia and crude oil from Victoria accounting for much of that trade. Table 3 also shows that intrastate trade accounted for 38 per cent of coastal trade. The single biggest component of intrastate trade was shipments of bauxite from Weipa to Gladstone in Queensland.

According to the Bureau of Transport and Regional Economics, trends that have emerged over the past seven years include:

Additional details of interstate and intrastate trade, classified by major commodity group, are in Appendix 2, and the map shows major freight movements.

Tasmania trade

While bulk cargoes dominate mainland trade, the Tasmania trade accounts for about one-third of the non-bulk coastal shipping task.⁽¹¹⁾ In 200102, 6532 kilotonnes were loaded in Tasmania and 5360 kilotonnes discharged.⁽¹²⁾ Table 4 shows the main commodities loaded and discharged.

Table 4. Main commodities loaded and discharged in Tasmania: 20012002 (kilotonnes)

Source: Bureau of Transport and Regional Economics, Australian Sea Freight 200102, Information Paper 50, January 2004, p. 15.
n.e.s: not elsewhere stated

The range of goods shipped to and from Tasmania is more diverse than those shipped around the mainland partly because goods that would be transported by other modes on the mainland have to be shipped and partly because the goods shipped include a range of consumer and intermediate goods.

The Bureau of Transport and Regional Economics has compiled data on real (that is, adjusted for inflation) non-bulk coastal shipping freight rates for the Tasmania trade. The Bureau found:

A number of factors have contributed to the decline in freight rates including Commonwealth government policies that led to the introduction of new ships and cargo technologies, and increased competition. Eight major trading vessels operated by four companies now provide shipping services between Tasmania and the mainland.

Tasmanian freight subsidy schemes

The Federal Government subsidises the mainland-Tasmania trade under two schemes:

According to the Directions by the Minister for Transport and Regional Services that govern the TFES, the Schemes purpose is:

The TFES provides payments to shippers to offset some of the costs of shipping eligible non-bulk goods. The TFES has two components:

Goods shipped as bulk cargo are ineligible for assistance because shipping is deemed to be the least-cost form of transport for such goods. Payments under the TFES are demand-driven and are uncapped. Table 5 shows expenditure under the scheme since 199001.

Table 5. Cost of Tasmanian freight equalisation scheme ($m)

Source: Department of Transport and Regional Services, Tasmanian Freight Equalisation Scheme Statistics, 2003 statistics.
Notes: na: not available. est.: estimated

The purpose of the Tasmanian Wheat Freight Scheme (TWFS) is to compensate Tasmanian wheat users for the additional transport and handling costs (relative to mainland users) associated with shipping wheat to Tasmania. The scheme costs around $1.2 million annually.

In November 2000, the Government commissioned the Centre for International Economics to prepare an issues paper on the scheme.⁽¹⁴⁾ The Government released the paper in July 2001 and sought comment from interested parties. The paper raised a number of questions about the schemes justification. For example, the paper pointed to the selectivity of the TWFS:

Further:

The Government has yet to reveal what it proposes to do with respect to the TWFS and is continuing to fund the scheme while considering its future.

More generally, with respect to both schemes, the issues paper noted:

In short, it can be argued that both schemes are inequitable and economically inefficient, favouring selected industries for no apparent reason. At an economy-wide level, it is not clear why Tasmania should have its transport disadvantage singled out when mainland States and industries also have transport disadvantages resulting mainly from distance. Consumers and industries in Western Australia, for example, are disadvantaged by their distance from the east coast cities. More generally, it is not clear why any State or industry should be selectively assisted for its transport cost disadvantage. In the circumstances, it could be concluded that the existence of the schemes is attributable to political rather than economic factors.

Passenger transport

The main coastal passenger task is the transport of passengers (and vehicles) across Bass Strait. The Tasmanian government-owned TT-line has two ferries, Spirit of Tasmania I and Spirit of Tasmania II, which operate daily services between Melbourne and Devonport. The Spirit of Tasmania III, provides services between Sydney and Devonport. The ferries also provide roll-on roll-off freight services. In 20012002, TT-line carried 348,435 passengers, 138,429 motor vehicles, and 22,525 twenty foot equivalent units.⁽¹⁷⁾ Southern Shipping operates the Matthew Flinders between Devonport and Port Welshpool via Flinders and Deal Islands. Patrick Shipping operates the Mersey Searoad between Port Melbourne and Grassy, King Island; this service carries only vehicles and passengers must fly between Melbourne and King Island on a commercial airline service.

All of the above services are eligible under the Bass Strait Passenger Vehicle Equalisation Scheme (BSPVES), which came into effect on 1 September 1996. The scheme subsidises the cost of travel by sea for an eligible passenger vehicle and its driver. The Commonwealth subsidises the scheme and Centrelink administers it. The cost of the subsidy is shown in Table 6.

Table 6. Cost of subsidising the Bass Strait Passenger Vehicle Equalisation Scheme ($000)

Source: Department of Transport and Regional Services, Portfolio Budget Statements, various years
Note: data for 200304 estimated

In addition to the Bass Strait services, there are other passenger and freight services serving islands such as Flinders, Kangaroo and Magnetic Islands.

A criticism of the BSPVES is that it distorts consumer behaviour in favour of one transport modeshippingat the expense of another modeaviation. Given that a purpose of the scheme is to attract tourists, it might be more efficient to subsidise fly-drive holidays, that is, fly to Tasmania and hire a car there.

Navigation Act

The Commonwealths power with respect to coastal shipping derives partly from section 98 of the Constitution which states:

Areas of Commonwealth involvement in shipping and navigation include maritime safety and security, the marine cargo liability regime, and the issue of licences to allow vessels to operate on the coastal trade. While a number of Commonwealth Acts govern coastal shipping operations, Part VI of the Navigation Act 1912 which deals with cabotage, directly affects coastal shipping. The purpose of the Act, when promulgated, was to protect Australian shipping from unfair foreign competition and to maintain safety and living standards for Australian seafarers. Part VI was not proclaimed until 1921 so cabotage has applied since then. Around the time of proclamation, concern was expressed about the effects of cabotage on Australias economic development. The Royal Commission on the Navigation Act⁽¹⁸⁾, which reported in August 1924, argued for the repeal of Part VI mainly on the grounds of higher shipping costs that, it concluded, cabotage would impose on coastal shipping services especially the Bass Strait trade and services to Western Australia.

In the Navigation Act, coastal trade is referred to as coasting trade. Subsection 7(1) deems a ship to be engaged in the coasting trade:

Licensing

Ships engaged in coastal trade can be licensed or unlicensed. The Act gives preference to licensed ships but provides for non-licensed ships to operate in the coastal trade in certain circumstances. With respect to the former, the key section is section 288. This requires any ship operating in the coastal trade to be licensed. Although the legislation allows licences to be issued for up to three years, in practice, the Department of Transport and Regional Services issues licences annually at a nominal fee (currently $22). Licences are granted subject to two main conditions:

It is important to note that licences are not limited to Australian registered, owned or crewed ships. A licence may be issued to a ship operating under any flag, regardless of the nationality of the crew or national ownership, provided that it meets these conditions.

Section 289 relates to the payment of Australian wages. It states:

The second condition is in section 287 of the Act. This prohibits from the coastal trade a ship that has received in the past 12 months or is receiving or is likely to receive, a subsidy from a foreign country. The purpose of this section is to prevent a ship from using the subsidy to enter the coastal trade by undercutting competitors.

A licensed ship must comply with Part II of the Act, which contains requirements regarding matters such as crew qualifications and numbers, accommodation and wages and conditions.

Continuing and single voyage permits

As noted, the Act provides for non-licensed ships to operate in the coastal trade in certain circumstances. For a non-licensed ship to operate, it must have a coastal trade permit. In essence, permits are issued when no licensed ship is available. Section 286 provides that the Minister may grant permits to unlicensed shipsunconditionally or conditionally when the Minister is satisfied that, in respect of trade between any Australian ports:

A permit issued under these arrangements may be a single voyage permit (SVP) or a continuing voyage permit (CVP):

The Department of Transport and Regional Services has issued a Single Voyage Permit Information Paper and the Minister has issued guidelines for granting licenses and permits.

Unlike ships that operate under licence under Part VI of the Navigation Act, ships operating under permits may be in receipt of a subsidy from a foreign government. Subsection 286(2) provides that a ship using a permit shall not be deemed to be engaging in the coasting trade, that is, it is not treated under the Navigation Act as a licensed vessel.

The permit system is discussed further in the cabotage section at page 21.

Shipping industry reforms

Since the mid 1980s, a number of measures have improved the efficiency of Australian ships engaged in international and coastal trade. The following outlines these reforms.⁽¹⁹⁾

Crawford Report

In 1981, Sir John Crawford produced a report for the Fraser Coalition Government titled Revitalising Australian Shipping. The report recommended the provision of financial incentives for investment in new ships in the forms of accelerated depreciation, the extension of the investment allowance to ships trading overseas, and the abolition of the duty on imported ships. These measures were conditional on reductions in crew numbers. The Crawford recommendations were substantially implemented. Several new ships entered the fleet and there were some reductions in crew sizes although numbers were still above OECD standards.

Maritime Industry Development Committee

In 1985, the Hawke Government established the Maritime Industry Development Committee (MIDC). It recommended the acquisition of new generation ships, multi-skilling of crews, and the abolition of various labour demarcations.⁽²⁰⁾ The Government accepted these recommendations and provided capital assistance for the purchase of vessels under the Ships (Capital Grants) Act 1987. The resulting investment reduced the average age of the Australian shipping fleet to below the average age of the world fleet. Crew numbers were reduced to the levels on most OECD ships. The abolition of demarcation problems was reflected in a fall in the number of ship days lost through crew disputes; in 199293, this number was the lowest in over a decade.

Shipping Reform Task Force and the Shipping Industry Reform Authority

On 11 November 1988, the Hawke Government announced the establishment of the Shipping Reform Task Force. This followed an Industries Assistance Commission report that criticised the industrys efficiency.⁽²¹⁾ On 1 June 1989, the Government announced that it had accepted the thrust of the Task Forces proposals. Key elements were:

With respect to permits, under guidelines issued before 1989, only SVPs were issued. To increase competition in coastal trade, the then Minister for Transport and Communications, the Hon. Ralph Willis, announced that the SVP system would be made more flexible:

The Government established the Shipping Industry Reform Authority (SIRA) to oversee the development and implementation of the program. SIRA was established initially for the three years from 1 July 1989 but its term was extended. By 1994, average crew sizes had been reduced to 18 and multi-skilling had been implemented.

Still, shipping costs remained high. In March 1994, the Bureau of Industry Economics published an analysis of the cost of Australian coastal shipping compared with OECD shipping.⁽²³⁾ The study found that, overall, costs of Australian ships were higher than for ships from New Zealand, Norway, the UK and Germany but were less than the costs of American, Canadian or Japanese ships. The analysis showed that while Australian shipping had lower capital costs than any of the other countries, Australian crew costs were around 25 per cent higher than average even though Australian crews were of a similar size to OECD crews. Further, on 26 March 1996, the Australian Competition and Consumer Commission released a report that found that the costs of coastal shipping were continuing to grow despite smaller crews, government subsidisation of capital expenditure in the forms of capital grants and accelerated depreciation, and government contributions to early retirement.⁽²⁴⁾ In May 1996, the Howard Government abolished the capital grants and accelerated depreciation.

Shipping Reform Group

On 13 August 1996, the then Minister for Transport and Regional Development, the Hon. John Sharp, established the Shipping Reform Group (SRG). The Groups task was:

The Group, which reported in March 1997, recommended, among other things:

The Government did not respond formally to the SRG recommendations. But the Government liberalised the permit system including dropping the requirement that CVPs be issued only in circumstances that provided long-term benefit to the shipping industry, and by streamlining the administration of the permit system with new ministerial guidelines issued in June 1998. Liberalisation enabled greater participation by foreign flag vessels in coastal trade. Further, company employment was implemented in July 1998, replacing the roster system.⁽²⁸⁾

On 10 December 1998, the Minister for Transport and Regional Services, the Hon. John Anderson, established the Shipping Reform Working Group to:

The Group reported in May 1999. The Minister did not release the report on the grounds that he had pledged that the Groups advice would remain confidential.⁽³⁰⁾ However, a press report claimed that the Group had recommended an annual grant to ensure the international competitiveness of Australian shipping, and had considered the option of mixed foreign and Australian crews on coastal ships.⁽³¹⁾

Other reforms

A number of other reforms have also affected coastal shipping. Major areas of reform are the reforms to ports that State governments have implemented and the waterfront (stevedoring) reforms.

Port reforms

Australian ports have a history of inefficiency characterised by poor work practices and management. This included:

Over the past 30 or so years, ports have undergone major structural changes, in part in response to changing technologies associated with material handling and ship design, for example, containerisation and the increased use of very large bulk carriers and tankers. Reform has also been stimulated by government economic programs such as the national competition policy, which has led to a far greater commercial focus in port operations than was traditionally the case.

Reforms over a number of years have increased port efficiency. In 2002, the Productivity Commission, in its report on the Economic Regulation of Harbour Towage and Related Services, reviewed reforms of port authorities. Reforms have included:

The Commission found that the reforms had contributed to a fall, in real terms, in port authority charges for containerised and bulk ships at major ports, improved average ship turnaround time at container terminals in most jurisdictions, and increased labour productivity.⁽³⁴⁾ The Commission also found that in the harbour towage industry:

Waterfront reform

Over many years, maritime unions were able to obtain working conditions and incomes that were generous compared with those of many other workers. Restrictive work practices were widespread and industrial disputes common. However, waterfront reforms, before but especially since the dispute between Patrick Stevedores and the Maritime Union of Australia in 1998, have improved productivity in cargo handling and ship turnaround times. Stevedoring productivity has increased considerably since 1996. Higher productivity has helped to reduce coastal shipping costs.

Commonwealth government policy

The Governments policy towards coastal (and international) shipping is encapsulated in the notion that Australia is a shipper nation not a shipping nation, that is, that Australia is principally a buyernot a supplierof shipping services.⁽³⁶⁾ On 19 March 1999, the Minister for Transport and Regional Services, the Hon. John Anderson, summarised the Governments policy towards shipping:

On 1 December 1999, the Minister announced that the Government would not provide financial assistance to the Australian shipping industry and subsequently confirmed this policy:

In February 2000, the Australian Shipowners Association decided that it would no longer seek subsidies from the Federal government to ensure the viability of Australian-owned ships engaged in international as well as coastal trade.⁽⁴⁰⁾

However, effective from 1 July 2000, the Government introduced a 100 per cent rebate of the excise on heavy fuel oilthe main source of power for ships engaged in coastal tradeand diesel fuel used in marine transport.⁽⁴¹⁾ This rebate has continued under section 36 of the Energy Grants (Credits) Scheme Act 2003. The rebate eased the cost disadvantage that coastal shipping faces relative to road transport. But the Government also extended the rebate to rail transport, negating to some extent the competitive benefit to coastal shipping.

Independent Review of Australian Shipping

In December 2001, the Australian Shipowners Association announced a review of Australian shipping covering both international and coastal shipping. Two former Federal Ministers for Transport, the Hon. Peter Morris and the Hon. John Sharp conducted the review. The review, titled the Independent Review of Australian Shipping, reported in September 2003. The Reviews findings and recommendations, insofar as they relate directly to coastal shipping, include:

The Reviews findings and recommendations are set out in full in Appendix 3.

Issues

Cost disadvantage

Australian coastal shipping is generally more costly than foreign-flagged competitors mainly because the cost of crews is higher even though Australian crew levels are now close to the international average. The cost of coastal shipping and the need for efficiency gains have been recurring themes in a number of reports. For example, the study by the Allen Consulting Group, commissioned by the SIRA, found that between January 1988 and November 1991, Australian oil tanker freight rates were about 22 per cent higher than the world rate.⁽⁴²⁾ The Industry Commission, in its report on mining and minerals processing, argued for efficiency gains by increasing the contestability of transport services provided by coastal shipping.⁽⁴³⁾ According to the Minister for Transport and Regional Services, the Hon. J Anderson, in 1999, the cost disadvantage was about $3.5 million annually for a typical large trading vessel. This was comprised of $1 million for capital costs, $2 million for manning costs and about $0.5 million for other operating costs. Changes in exchange rates, reductions in capital premiums on the cost of Australian-specification ships, and improved efficiencies have ameliorated these cost differentials in the five years since 1999. Further, coastal shipping competes to varying degrees with road and rail transport (except in those areas where cargoes are particularly suited to sea transport) and both of these modes have improved efficiency.⁽⁴⁴⁾

Another source of disadvantage for Australian ships is that foreign vessels can sometimes charge freight rates based on marginal coststhe additional costs of a voyage such as extra fuel usedrather than higher average costs (the latter include marginal costs and items such as depreciation). For example, when Australian ships plied the container trade between south-eastern ports and Freemantle, to be profitable, they charged a rate per container that covered average cost. Because opportunities to backload cargo from Western Australia were limited, the rate had to cover the cost of the round trip. In contrast, a foreign ship carrying domestic cargo one way as part of a longer international voyage can carry freight does not have to cover the cost of back loading. More generally, limited opportunities for back loading, especially for specialised carriers, keep upward pressure on freight rates.

The Australian Shipowners Associationwhich represents Australian shipownersclaims that Australian ship operators have to meet legislative requirements that foreign operators do not. Consequently, Australian shipowners are at a cost disadvantage compared to foreign competitors (these requirements and the Australian Shipowners Associations claims are summarised in Appendix 4). It is true that some legislation imposes additional costs that some foreign shippers do not incur. On the other hand, other Australian industries also incur these costs. Further, the legislation also reflects Australian standards which few would argue should be given up. On 13 December 2001, the Minister for Transport and Regional Services, the Hon. John Anderson, noted that:

Cabotage and permits

Cabotage is basically a form of protection for Australian flag ships provided by the Navigation Act 1912.⁽⁴⁶⁾ On economic efficiency grounds, there seems to no valid reason for continuing cabotage.⁽⁴⁷⁾ This is particularly the case since protection for most industries has been wound back considerably. Cabotage increases the cost to users of coastal shipping compared to foreign-flag vessels that are not subject to the wages and other conditions of the Navigation Act 1912.

Abolishing cabotage would have important consequences. A study by Access Economics found:

The study also concluded that 80 per cent of coastal activity would disappear if cabotage were abolished.⁽⁴⁹⁾

Cabotage can be abolished only by repealing the relevant sections of the Navigation Act 1912. In a notable departure from competition policy as applied elsewhere in the economy, the Government has been unwilling to introduce foreign competition by repealing the relevant sections of the legislation. Rather, the Government has sought to reduce the consequences of cabotage by increasing the number of SVPs and CVPs.⁽⁵⁰⁾ The Independent Review of Australian Shipping prepared for the Australian Shipowners Association reported that:

The number of single and continuing voyage permits and tonnages is increasing as shown in Table 7. The commodities carried under permits are shown in Table 8.

Table 7. Single and continuing voyage permits