Chapter 2Background and overview
Background and overview
2.1Since Federation there has been Senate committee consideration of the challenges presented by the Bass Strait for both Tasmanians and all Australians. Indeed the first Senate Select Committee, established in 1901, examined steamship services between Tasmania and the mainland.
2.2The Tasmanian Freight Equalisation Scheme (TFESorthescheme) provides freight assistance to eligible businesses that transport certain goods by sea across the Bass Strait, both goods coming into and exported from Tasmania.
2.3The scheme has been operating since 1976,and allows businesses to claim assistance for the expenses of shipping eligible goods. Rates of assistance are based on the cost disadvantage Tasmanian businesses suffer due to the high cost of shipping goods across Bass Strait.
2.4The Commonwealth’s business portal states that:
The Tasmanian Freight Equalisation Scheme provides financial assistance for the costs incurred shipping eligible non-bulk goods by sea.
The scheme aims to provide Tasmanian industries with equal opportunities to compete in other markets, as Tasmanian shippers do not have the option of transporting goods interstate by road or rail.
The amount of assistance is based on the difference between the freight costs of moving the goods by sea and the notional freight costs of moving them by road over the same distance.
2.5The Productivity Commission described the scheme in its 2014 review asfollows:
Tasmania, like mainland Australia, is an island economy. It is serviced by high quality but relatively high cost containerised domestic shipping services. The viability of direct international shipping services is affected by the cost of coastal shipping. Given its reliance on sea transport, Tasmania is particularly affected by inefficiencies embedded in coastal shipping regulation. This regulation should be reviewed and reformed as a matterofpriority.
Tasmania uniquely receives (Federally) subsidised freight services via longstanding arrangements in recognition of the relative cost ‘disadvantage’ of Bass Strait transit. The Tasmanian Freight Equalisation Scheme (TFES), Tasmanian Wheat Freight Scheme (TWFS), and Bass Strait Passenger Vehicle Equalisation Scheme (BSPVES) were designed to partially offset these costs. The term equalisation misleadingly implies ‘full’ compensation for the cost disadvantage but that is not inherent in the design and operation of the schemes. Further, securing ‘true’ equalisation is inevitably apolicychimera.
2.6The Tasmanian Government, in its submission, highlighted the critical importance of the scheme to the Tasmanian economy, stating:
The Scheme materially boosts Tasmania’s gross state product and employment, particularly in many industries located regionally, including in agriculture, forestry, wood and paper products, aquaculture, andminingactivities.
Importantly, the Scheme boosts output across nearly all of the Tasmanian economy and not just among those industries that are direct recipientsofpayments.
Assistance provided by the scheme
2.7The TFES is administered by Services Australia on behalf of the Department of Infrastructure, Transport, Regional Development, Communications and the Arts (thedepartment).
2.8In a submission, the department noted its recognition of ‘the importance of shipping and the efficient transport of goods across Bass Strait to Tasmania’s economy’.Itthat:
In 2023-24 more than $185.2 million was paid to eligible shippers of goods under TFES, representing more than 17,000 claims.
2.9Services Australia’s website outlines five components of the scheme,covering:
Northbound domestic goods, covering goods that are staying on the Australianmainland
Northbound other markets goods, covering goods that are shipped to the Australian mainland and then transported to other markets
Southbound domestic goods, covering Australian goods for manufacturing, mining, agriculture, forestry and fishing businesses
Southbound imported goods, covering imported goods for manufacturing, mining, agriculture, forestry and fishing businesses
Intrastate, covering goods shipped between the mainland of Tasmania and either King Island or the Furneaux Group.
2.10In addition, some assistance is available for certain ‘special categories’: sportspersons; professional entertainers; and brood mares. These are subject toa rangeofconditions.
2.11Sportspersons and professional entertainers must be participating in professional activities with prize money or financial rewards. As these can vary considerably between events and professions, eligibility is determined on a casebycasebasis.
2.12Eligible equipment for sportspersons and professional entertainers pertains ‘all things used directly in an entertainment or sporting event transported by sea between Tasmania and the Australian mainland’, with both legs of the trip completed before claims are submitted.
2.13The scheme also covers some of the transportation costs for eligible Tasmanian-based brood mares and their foals conceived on the mainland. On this, ServicesAustralia states:
Tasmanian based brood mares which are transported to the Australian mainland for servicing and returned to Tasmania, are eligible for assistance on both the northbound and southbound legs of the round trip. Both legs of the round trip must be completed before a claim is submitted.
Foals born from eligible brood mares and conceived on the mainland are eligible for assistance on the return journey to Tasmania, provided they are less than 6 months old at the time of shipment. The foal does not need to accompany the mare on the southbound journey.
Tasmanian based brood mares are defined as brood mares that are either bred in Tasmania or have had at least one foal in Tasmania.
2.14In all these areas, the TFES can also extend to the costs of shipping between the main island of Tasmania and King Island or the Furneaux Group.
2.15Regarding the level of support for businesses, the TFES has two ratesofassistance:
Variable Rate, which applies to Northbound and Southbound goods shipped across the Bass Strait, as well as intrastate claims;and
Flat Rate, which applies to Northbound goods intended for markets outside Australia or where the ultimate destination, or goods coming into Tasmania that originated outside Australia.
2.16The full details of the amount of assistance paid, conditions and assessment can be found on Services Australia’s website. However, the department summed up some basic principles underlying assistance for schemeparticipants:
The amount of TFESassistance payable is based on the difference between the freight costs of moving the goods by sea and the notional freight costs of moving them by road over an equivalent distance on mainland Australia, adjusted by a sliding scale based on a median level of disadvantage, to a maximum of $855 per twenty-foot equivalent unit (TEU). The TFES [Ministerial Directions] define sea freight cost disadvantage as the difference between the costs incurred by eligible shippers for sea freight and the cost of moving the same type of goods for an equivalent distance by land transport modes…Calculations of assistance can be complex and have varying parameters which are considered when processing claims...
2.17The department stated that TFES operates under Ministerial Directions (MDs), which apply to all shipments of goods occurring on or after 1 January 2016 and outline the eligibility requirements of rates of assistance for claimants. Itcontinued:
The Secretary of the department is able to make minor changes to the MDs (administrative in nature) and the Minister responsible for the Scheme is able to approve more major changes whichaffect the policy direction oftheScheme. Structural changes to the Scheme that would have significant policy and budget implications require a decision of government.
2.18Regarding the Commonwealth funding of the scheme, the department noted that the department is accountable through TFES through the appropriation of funds through Portfolio Budget Statements,andthat:
TFES is uncapped in terms of the number of claimants or claims that can be made in a financial year and is demand driven, which means that all approved claims for support are paid, even if the allocated budget is exceeded. Where the budget is exceeded, the Australian Government ensures there are enough funds to pay TFES assistance toeligibleclaimants.
2.19The department also outlined some assistance for applicants:
To aid both TFES claimants and claims assessors in Services Australia, the department has developed 11 Information Papers that are published on the department's website. The Information papers are developed under clause 8.3.1 of the TFES [Ministerial Directions (MDs)] and have been prepared to help claimants have a better understanding of TFES policy and the provisions of the TFES MDs, as well as helping to inform Claims Agents and TFES claimants of the obligations under the TFES MDs. Examples of TFES Information papers include topics such as Claims Agents, Conversion Factors, Extension of Time Process, Sportspersons and Professional Entertainers and the Imported Good Component.
Reviews of the scheme
2.20Since its inception in 1976, there has been a number of significant reviews of the TFES over its history. These include both TFES specific reviews, as well as broader investigations into freight. This section provides an overview of those reviews undertaken by the:
Tasmanian Freight Equalisation Scheme Review Authority (the‘NixonReview’)(1998);
Australian National Audit Office (ANAO) (2011);
Productivity Commission (2006 and 2014);
Bureau of Infrastructure and Transport Research Economics (BITRE)(2020and2024).
The ‘Nixon Review’
2.21The 1998 Nixon Review made a number of recommendations on the parameters and operation of the TFES, including that it should be reviewed annually and that the indexation adjustments should be applied, as sea freight disadvantages develop over time. The government agreed to the Nixon Review’s recommendations, and parameter reviews were undertaken annually from1999-2003,and in2006.
Australian National Audit Office audit (2011)
2.22In 2011 the ANAO undertook an audit to assess the department and Human Services’ administration of the scheme, which focussed on three areas, namelythat:
the Scheme is accessible to eligible claimants;
claims are assessed and paid in a transparent, accurate and timely manner;and
programs (including evaluation, reporting and monitoring activities) support the delivery of the Scheme.
2.23Overall, the ANAO found the scheme was administered effectively, but made recommendations for its improvement around: improving the data quality and assessment so that payments could be more accurately assessed; strengthening quality assurance processes; and measures for greater integrity of the payment system to build greater confidence in the system.
Productivity Commission (2006 and 2014)
2.24The TFES has been reviewed twice by the Productivity Commission, in 2006and2014.
2.25The 2006 Productivity Commission review made the following recommendations, all of which were agreed to by government:
rules for claiming TFES payments should be restructured to minimise adverse incentives, gaming opportunities and overcompensation of freight cost disadvantage;
monitoring, auditing and reporting should be improved;and
parameter reviews should be conducted every three years (rather than annually), and reports should be made publicly available.
2.26The 2014 Productivity Commission review noted that the government had spent more than $2 billion from the inception of the scheme to 2014, with the same amount estimated to be spent over the following 15 years. This evaluation of the scheme found that:
There is no coherent economic rationale for the TFES and it falls well short of what is needed to improve the lagging competitiveness of the Tasmanian economy—which the Commission considers should be the policy imperative. It has a high fiscal cost, eligibility is arbitrary; and the direct recipients are concentrated notwithstanding the unclear incidence of the subsidy. Further, the TFES is inherently complex and leads to unintended consequences.
2.27Additionally,the PC argued that:
[existing subsidies for Tamanian freight] have a high fiscal cost (collectively $2 billion since inception and without change a further $2 billion over the next 15 years)
eligibility for the TFES is arbitrary and the direct recipients are concentrated, with 50 per cent of the total amount claimed going to 10recipients
the incidence of the subsidies (who actually benefits) is not clear given the involvement of a monopoly service provider (TT-Line for passenger vehicle transit) and concerns about the effectiveness of competition between the three shipping lines on the Bass Strait route (non-bulkfreight)
as subsidies they have unintended consequences, including perversely increasing the costs of goods for Tasmanian consumers.
2.28Despite these findings, the Productivity Commission acknowledged that the TFES remained the government’s policy, and so canvassed a number of potential improvements to its design and operation. It made 20recommendations for the Commonwealth and Tasmanian governments (15 and 5 respectively, with several joint recommendations). Some of the recommendations for the Commonwealth were that it should:
proceed with a review of coastal shipping regulation, including cabotage, with a view to achieving the maximum efficiency in coastal shipping services (Recommendation 1);
introduce payment of freight assistance as a flat rate per TEU, and that BITRE should recommend separate dollar per TEU amounts for the Tasmanian mainland, King Island and the Furneaux Group of Islands, following a public consultation process (Recommendation 2);
undertake four-yearly reviews of the scheme through BITRE (Recommendation 3);
respond in a public and timely manner to all reviews of the scheme (Recommendation 4);and
incorporate a number of other recommendations(Recommendations 5-14) to improve and refine the operations of the scheme and related schemes for wheat and passenger vehicles, or to provide participants greater clarity;and
undertake an independent review and evaluation of its programs for Tasmania after a reasonable length of time, including an ‘ex-post assessment of the aggregate benefits and costs of the strategy to date and an assessment of the benefits and costs of any continued Australian Government financial contribution to these programs’(Recommendation 20).
2.29The Productivity Commission also directed recommendations to the Tasmanian Government, including to improve or give greater clarity to users regarding the operation of the TFES and freight and passenger/vehicle services, as well as regarding the pricing policies and viability ofTasPorts.
2.30Recommendation 19 of the review was made to the Joint Commonwealth and Tasmanian Economic Council to:
…initiate a stocktake of existing programs specific to Tasmania as part of its initial work program. Theshould:
cover initiatives established by all levels of government
clarify their nature, intent, timing, scope, governance arrangements and any areas of duplication
assess whether the suite of initiatives represents a coordinated, consistent, targeted, and efficient approach to Tasmania’s economicdevelopment
include the release of a public report in 2015.
The results of the stocktake should contribute to, and inform the development of, an integrated economic development strategy forTasmania.
Bureau of Infrastructure and Transport Research Economics (2020and2024)
2.31The most recent finalised review of TFES was undertaken in 2020 by BITRE. This was the first of an ongoing monitoring process for the Commonwealth announced in 2015, in which the TFES will be reviewed by BITRE every four years. BITRE’s first report under this arrangement stated:
In 2018‐19 $154.3 million was paid under the TFES, covering the equivalent of 210,480 Twenty‐foot Equivalent Units (TEUs) of freight. This was around the same as in 2017‐18, but around 50 per cent higher than four years earlier, largely due to the introduction of the expanded component of the TFES covering goods shipped from Tasmania to the mainland for transhipment.
Approximately 90 per cent of total TEUs in 2018‐19 were shipped to or from Victoria, with the next most common state, New South Wales.
Simplot Australia Pty Ltd topped the list of claimants with $19.04 million for 23,979 TEUs, followed by Norske Skog Boyer Mill with $10.83 million for17,367TEUs.
Claims were made for 178 commodity groups. The top three commodity groupswere‘Vegetables–frozen/processed/prepared’(33,236TEUs), ‘Newsprint’ (16,424TEUs) and ‘Wood–processed’ (13,073TEUs).
40 per cent of TEUs shipped under the TFES in 2018‐19 were in the broad commodity class ‘Food products beverages tobacco textiles apparel leather products.’The next largest broad commodity class was‘Agriculture, forestry and fishery products’, accounting for 20 per cent of TEUs.
The median time between shipment and payment of the TFES assistance was 119 days and the maximum was 585 days. BITRE understands the latter was due to an invoicing error related to the claim.
Pre‐TFES assistance freight rates have risen over the last three years, with nominal rates growing at 1.3 per cent per annum. With the TFES assistance covering the majority of the costs, this has resulted in the nominal post‐assistance rate per TEU growing at 2.2 per cent per annum over the threeyears.
2.32BITRE also provided an overview of recent changes, including:
In 2015, following the Productivity Commission’s(2014) report, the Australian Government announced the expansion of the TFES to provide assistance from 1 January 2016 to goods transhipped at ports on themainland.
Another important change to improve the operation of the Scheme in 2015 was to reduce the period for claiming TFES assistance from two years to six months after the date of shipment.
On 1 October 2019, the rate of assistance for high density goods increased to 100 per cent, claim processing time was reduced from 35 to 30 days, and interest began to be applied to late claim payments (after 30 days).
2.33In November 2024, BITRE published a consultation draft of the Tasmanian Freight Equalisation Scheme Monitoring Report 2024, which presents the results of the second four-yearly review of the scheme, covering the four years to 2022-23.
2.34The 2024 consultation draft provides an update on the scheme as follows:
For shipments in 2022-23 $181.9 million was paid under the TFES, covering the equivalent of 232,520 Twenty-foot Equivalent Units (TEUs) of freight, a volume 11 per cent higher than four years earlier.
86 per cent of total TEUs in 2022-23 were shipped to or from Victoria, with the next most common state New South Wales.
Claims were made for 197 commodity classes over the four yearperiod. Thetop three commodity classes were ‘Vegetables – frozen/processed/prepared’ (34,974TEUs), ‘Wood – processed’ (17,242TEUs) and ‘Newsprint’ (16,607 TEUs).
40 per cent of TEUs shipped under the TFES in 2022-23 were in the broad commodity category ‘Food products, beverages, tobacco, textiles, apparel, leather products.’The next largest broad commodity class was ‘Agriculture, forestry and fishery products’, accounting for 20 per cent ofTEUs.
In 2022-23, the average time between shipment and payment of the TFES assistance, weighted by TEUs, was 94 days and the maximum was 608 days.This was a reduction from an average of 109 days in 2018-19. In 2022 the average processing time for Services Australia was 10 days.
Pre-TFES assistance freight rates have risen over the last four years, with nominal rates growing at 5.7 per cent per annum.With assistance growing relatively slowly as an increasing proportion of claims are reaching the maximum payable under the scheme, and given that the assistance covers the majority of costs, this has resulted in the nominal post-assistance rate per TEU growing at 12.3 per cent per annum over the threeyears.
2.35In the 2024 consultation draft, BITRE also provided an overview of recent changes, including:
On 1 October 2019, the rate of assistance for high density goods increased to 100 per cent, claim processing time was reduced from 35 to 30 days, and interest began to be applied to late claim payments (after 30 days).
From July12021,southbound imported goods became eligible for TFES assistance where there is no Australian equivalentgood.
On 19July2024, Senator the Hon Carol Brown [Assistant Minister for Infrastructure and Transport], extended TFES eligibility of fodder donated from mainland Australia to drought-affected King Island farmers by charitable organisations under the Scheme. These amendments are in place for shipments made retrospectively from 1 May 2024 to 30 June 2025 and will be assessed in early 2025 to ensure they are achieving the intendedpurpose.
2.36The following chapter sets out the key issues arising from evidence totheinquiry.