Re: Coal haul costs in Queensland, was > QR going National. (LONG)

[mauried@commslab.gov.au (Maurie Daly)]

In article <biz7N1Psk9gbdNNbls1hfQpzIzJp@4ax.com> "< Tell >" <telljb@OZozemail.com.au> writes:
>From: "< Tell >" <telljb@OZozemail.com.au>
>Subject: Coal haul costs in Queensland,  was > QR going National.
>Date: Wed, 06 Oct 1999 20:33:13 +0930

>May I quote the following from BHP which is readily
>available on their Web site.

>++++++++++++++++++++++++++++++

>Rail freight charges are also a significant cost in
>Queensland. 
<snip> 

>BHP Coal
>++++++++++++++++++++++++++++

>Cheers.

>----Terry Burton
>Alice Springs NT
><< remove OZ for Email reply.>>


The following are some extracts from the NCCs April 1999 inquiry into the 
Black Coal Industry in Australia.
Section 7.5 deals with the issue of coal transport.
Its a very long section and full of charts and graphs that wont easily display 
on Usenet.
I have tried to extract the relevant sections which deal with the current 
thread.


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Available evidence suggests that after adjusting for differences 
in the operational environment, the productivity of coal rail freight services
in Australia is somewhat lower (by around 20 per cent) than that of
better operations overseas. The prospect of competition in freight-carrying
services has led to some improvements in performance. The
introduction of third party access to rail infrastructure, if pursued
vigorously by the NSW and Queensland Governments and if
supported by fair and transparent access regimes, offers significant
opportunities to remove much of the remaining performance gap. By
introducing competition into rail freight services, access
arrangements are likely to stimulate improved productivity and
efficiency in pricing.


7.2.1 Coal freight rates
Inquiry participants indicated that rail freight rates per ntk for coal in Australia
are very high relative to those paid by mines overseas, particularly in the United
States. MIM stated:
Rail and port charges for export coal in Queensland are internationally
uncompetitive. (sub. 18, p. 1)
Similarly, Exxon argued:
The high cost of transport of black coal in NSW is well known and documented as
being significantly out of step with world’s best practice. (sub. 3, p. 10)

The BIE (1995a) found that for 1993–94 average coal revenue per ntk in NSW
(5.7 cents) was over three times the average for US Class 1 railways (1.8 cents),
while Queensland revenue (4.8 cents) was 2.6 times the US equivalent.

Current freight rates
Data on 85 mines from Barlow Jonker (1997) indicate that average freight rates
per ntk are higher in NSW (6.3 cents) than Queensland (4.8 cents), largely
reflecting the much shorter average haul (Table 7.2).2 For hauls between 100
and 200 km, NSW rates are around 20 per cent higher than Queensland, due to
the shorter average haul length in NSW in this range. The average rates for each
State for distances over 200 kilometres are very similar (see Figure 7.1).
However, there are some wide variations in charges between mines within each
range, partly reflecting rail authorities’ discriminatory pricing policies.


Table 7.2: Weighted average coal rail charges and average
distance carried, 1996 a
cntk Distance (km) $/t
NSW 6.28 112 7.03
Queensland 4.83 248 11.98
Combined b 5.05 174 8.79
a Weighted averages based on tonnes per mine and calculated using 85 mines.
b Weighted average of NSW and Queensland.
Source: Commission estimates derived from Barlow Jonker (1997).

For 1996, Rio Tinto estimated that NSW freight costs per ntk (unadjusted for
different average haul lengths) were 40 per cent higher than in Queensland and
2.2 to 2.8 times US better performance. When the monopoly rent is removed,
Rio Tinto estimated that the NSW freight rate would be 4.6 cents per ntk, which
is still higher than Queensland freight costs of 4 cents per ntk (sub. 22, p. 29).
As noted above, different average haulage distances and operating environments
mean that such unadjusted price comparisons are not valid measures of relative
performance.

Rio Tinto (sub. 22) commented that the corporatisation of QR had brought
about some slow change, but much remained to be done. ARCO argued that
there are some difficulties with QR’s structure due to the lack of independence
of the freight division:

At the micro economic level, progress has certainly been made and there is a
strong working co-operative relationship between the coal industry and QR’s Coal
and Minerals Division. From the coal industry’s perspective however the Coal and
Minerals Division seems to be hamstrung by the current integrated Queensland
Railways structure as well as unrealistic financial objectives placed on Coal and
Minerals Division from Government. (sub. 21, p. 3)


7.3.2 Structure appropriate for a competitive environment
The evolution of a more commercial focus for State rail authorities and the
introduction of competition into rail freight services raise questions of the
appropriate structure of rail authorities. In particular, the actual and perceived
relationship between the government-owned provider of the monopoly
infrastructure service and the government-owned freight operator will be crucial
to the emergence of effective competition in rail freight. The Queensland
Mining Council (QMC) argued:
The industry structure within which an access regime operates may be a crucial
factor influencing the regime’s effectiveness. The standard approach is physical
separation of the monopoly and contestable elements of a service in the interests of
ensuring non-discriminatory treatment by the access provider of all established and
prospective access seekers.
This reflects one of the basic presumptions of competition policy — that vertical
integration is inherently anti-competitive and in attempting to establish genuine
contestability the burden of proof should rest with those who would retain
integrated structures.
The coal industry strongly supports a review of rail industry structure in
Queensland. The present configuration — a ring-fenced network access unit within
a fully integrated QR — needs to be examined in respect of its implications for
effective third party access. (sub. 24, pp. 34–35)
As noted above, NSW has separated infrastructure and rail freight and has also
created an independent infrastructure maintenance unit. Structural separation
improves the transparency of the cost of each element of rail services and hence
increases the pressures to improve the efficiency of the rail system. The QMC
commented:

Monopoly encourages complacency, inattention to costs and resistance to
innovation. To the extent that competition is impeded for want of a structure which
better facilitates the entry of third parties, then integration is unequivocally bad for
overall costs. (sub. 24, p. 35)
The Queensland Commission of Audit recommended a break-up of QR:
In order to drive efficiency through competition, Queensland Rail’s track
operations should be separated from rail service operations, which would then be
provided by separate commercial providers. (Queensland Commission of Audit
1996, p. 165)

7.4 Removing implicit royalties and monopoly rent
Coal freight has been subject also to specific reform in the pricing area. This
reform has addressed the use of coal freight rates as an implicit royalty
collection mechanism or as a means of financing losses in other rail freight and
passenger services.
The level of coal royalties is determined by State governments. However, the
means of collecting royalties may have unintended and undesirable impacts on
the efficiency of both rail services and the level of royalty collections. The coal
industry has been particularly critical of both the past use of rail freights as a
taxation mechanism and of the rate of phasing out of this practice. The QMC
observed the deleterious impact of royalty-inflated rail charges in Queensland in
the 1980s:
Rail reform has been and will continue to be a critical determinant of coal industry
development in Queensland. Rail freight concessions introduced from 1984
provided a crucial measure of relief for the industry when the eighties ‘coal boom’
failed to materialise. Although freight rates stayed very high, without the
concessions that were given, many of the mines commissioned in the late seventies
and eighties would have become economically unsustainable.
That said, no new coal mines were then commissioned until after 1989 when
significantly lower freight rates were offered to new projects. Investment in
Queensland coal assets was simply untenable until rail charges were reduced to
something approaching commercial levels. (sub. 24, p. 3)
State governments charge royalties on the extraction of coal (and other
minerals) in order to provide benefits for their communities for the exploitation
of their resources. Because of the high prices for black coal in the 1970s and
early 1980s the NSW and Queensland Governments used the rail freight system
to obtain revenue from coal producers additional to that raised from explicit
royalties. These monopoly rents and de facto royalties as they have been
referred to in NSW and Queensland, respectively, significantly distorted rail
freight pricing and distracted governments from the focus of providing efficient
rail freight services. The revenue from these high charges was appropriated by
governments into general revenue or was used to allow rail authorities to at least
partially fund loss-making services.
The push to improve performance of GBEs over the last decade, together with
the declining fortunes of the coal industry, resulted in governments recognising
that the collection of royalties through the rail freight system was inefficient,
arbitrary and inequitable. The QMC commented on the impact of de facto
royalties based on perceived ability to pay:
The effects of this approach were mainly three. First, there was no predicability in
the system and no relationship between freight rates and the cost related factors


7.5 Introducing competition into rail freight
The use of rail freight charges to collect revenue is one reason why rail costs for
export coal have been excessive. The other key reason for high rail charges is
the existence of some degree of inefficiency in State rail authorities. Section 7.3
noted some changes in the organisational structure of rail authorities which have
helped to improve performance. This section considers the NSW and
Queensland Governments’ response to the introduction of a more competitive
external environment for rail authorities in order to stimulate further efficiency
gains.
As with most economic infrastructure in Australia, rail services have been
provided traditionally by governments, because provision by a single enterprise
was seen as the most cost-effective and in order to meet social objectives for
these services (for example, uniform provision and subsidised pricing). The
competition policy agreement reached by the Commonwealth and State
governments in 1995 recognised that only the network infrastructure portion of
rail services required monopoly provision and that freight carrying services
could be opened up to competition by allowing freight carriers access to rail
infrastructure. However, while the network provider was a monopolist, the
potential existed for it to appropriate most of the benefits of competition. Hence
safeguards were included providing applicants for access to rail infrastructure
with certain rights of appeal to the National Competition Council (NCC).
As with the restructuring of their rail authorities, the NSW and Queensland
Governments initially adopted different approaches to allowing access to rail
infrastructure for coal carriers. NSW developed an access regime which
potentially provided access to rail infrastructure for freighting coal while
Queensland relied on the Competition Policy Reform Act, (s.78) (which does
not bring ‘government coal-carrying services’ under the access arrangements of
the Act until November 2000) to delay access to rail infrastructure for third
parties wishing to transport coal. However, in April 1998, the Queensland
Government indicated that it will no longer rely on the s.78 exemption and will
allow competition in coal freight once an acceptable access regime has been
developed.

7.5.2 Queensland
Initially the Queensland Government indicated that it would delay the
introduction of third party access for coal haulage until November 2000. In the
Draft Report the Commission argued for the early introduction of competition
in coal rail freight, because implicit royalty revenue was being largely removed
as most coal rail contracts were renegotiated. Since the Draft Report, several
developments have signalled a somewhat faster introduction of more
competition in Queensland coal rail freight.
First, from March 1998, a regulation under the Queensland Competition
Authority Act 1997 (QCA Act) provides for third party access to below track
rail services in Queensland. This permits the use of all transport infrastructure
owned by QR for the purpose of providing transportation by rail (except for
interstate services). QR observed:
The Queensland Government is of the view that the Queensland third party access
regime constitutes an effective access regime in accordance with the Competition
Principles Agreement. As such, the Queensland Government will soon be
submitting the access regime with respect to rail services to the National
Competition Council for certification. (sub. DR66, p. 2)
Second, the Queensland Government announced:
... on the 25 April 1998 the removal of the exemption in relation to access to
Government coal carrying services on the Queensland rail network.
(sub. DR61, p. 6)
An application for certification of the Queensland access regime has been made
to the NCC. In view of the NSW experience, this process may involve
significant delays unless the Queensland Government is fully committed to
achieving the benefits of competition in coal rail freight.
Finally, in April 1998, the Queensland Government signed an agreement with
SUDAW Developments Ltd to develop a feasibility study for a privately owned
merchant railway from the Surat Basin coal field to a Queensland export coal
port.
The combined impact of these reforms will potentially introduce competition
within the existing rail network and possibly provide yardstick competition with
a new railway.
If the benefits from the lifting of the moratorium on access to coal rail freight
are to be realised by new entrants, there needs to be an effective mechanism for
operators, other than QR, to gain access to the below track infrastructure. The
Queensland Government has established a legislative framework for access in
rail and other industries under the QCA Act (see Box 7.2). However, an access
regime for rail is not yet in place.

Queensland has not established a separate access authority like the RAC in
NSW, but rather has set up an independent access unit within QR. This unit is
responsible for all dealings (operational and pricing) with third party operators
seeking to gain access to the rail network in Queensland. It will now be
subsumed in the new infrastructure division to be created within QR. This
arrangement raises concerns about transparency and fairness as the coal and
minerals division of QR will be a competitor for third parties seeking to provide
coal freight services. BHP observed:
Despite there being arguments on both sides, there is reason for concern that the
retention of an access body within the control of the current service operator,
without specific and transparent controls, will not result in an unbiased outcome.
(sub. 30, p. 20)
This view was supported by the Queensland Commission of Audit:
Given the incentive that exists for Queensland Rail to discourage competitors from
operating on its network, the effectiveness of the regime will be limited unless it is
enforced by an independent authority. (Queensland Commission of
Audit 1996, p. 162)
As shown by the NSW experience, an access regime will need to be
comprehensive, transparent, clearly equitable to all parties and have appropriate
appeal mechanisms if it is to generate confidence for potential entrants and end
users. The Queensland Commission of Audit argued:
To introduce competitive pressures the very minimum required is a comprehensive
third party access regime implemented across the entirety of the Queensland Rail’s
network. (Queensland Commission of Audit 1996, p. 162)

Early development of an access regime which is detailed and transparent in
dealing with pricing and operational matters and has appeal mechanisms
easily accessible to freight users is necessary to generate the maximum
benefits from the planned introduction of competition into rail freight. This
is particularly so in Queensland where the integrated structure of
Queensland Rail has created industry concerns about the fair treatment of
new entrants into the coal freight market.

Recommendation:
The NSW and Queensland Governments should facilitate the early
establishment of comprehensive rail access regimes that can be certified by
the National Competition Council as effective.
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I wont comment on the above , you can make up your own minds.
But if you are really interested in this sort of thing then get a copy of this 
report and read it in its entirety.
MD

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